The Importance of Auditing Your Association Finances
Performing an audit of your association’s finances is crucial to keeping your HOA running smoothly. It can definitely be stressful and expensive but it will protect your association in the long run. Here’s what you need to know about the HOA audit process.
What is an Audit?
As you probably already know, an audit is a comprehensive look at all your association’s financial statements. If your Florida association has a total revenue of $500,000 or more, you are required by state law to conduct an audit every year. Most other states also require an annual audit for associations. Audits can be done internally or externally. Most types of businesses perform them each year because it’s a good business product.
An audit will also probably be required by your association’s bylaws. The requirements won’t necessarily be every year if you’re in a state that doesn’t require HOA audits or if your association doesn’t quite make the revenue requirement for an annual audit. For example, some bylaws may require an audit every three years. Leaving room in the budget for an annual audit is vital.
There are also certain circumstances in which you should conduct an audit for your association outside of the one you might have on the schedule each year. These include:
- If your COA has received a large amount of money such as through an insurance payout or settlement
- If you have reason to think someone is embezzling or committing fraud with association funds
- If there has been a board recall where a member was forced to resign
- If your association is experiencing financial complications
No matter the circumstance behind the audit, a certified public accountant (CPA) will be in charge of conducting it according to Generally Accepted Accounting Practices (GAAP). Some accountants will use other frameworks as well.
Audits vs. Financial Reviews
Some people have the misconception that a financial audit is just another word for a financial review. But the two are actually different processes and will yield different outcomes. A review is just a basic assessment of your HOA’s finances. The goal is to ensure that your accounting records are accurate. Like with an audit, a CPA will conduct the process but they will only compare what’s in your financial statements to what’s in your budgets and past years’ statements. There is no in-depth analysis.
On the other hand, an audit has a much broader scope to determine your association’s financial health. There’s greater analysis, more documents involved, and the process is more time-consuming than a review. Because an audit is much more thorough, a review is by no means a substitute for one. Audits are also more expensive than reviews. If you’re planning for a full audit, it’s safe to budget for $4000 to $6000.
The Benefits of an Annual HOA Audit
Outside of compliance, there are still plenty of valuable reasons why your HOA or COA can benefit from an audit. An audit is a form of accountability, especially for the treasurer and the HOA manager who usually have the most access to HOA funds. It helps prevent fraud and theft in your HOA. It also protects your association from financial mismanagement.
There are also benefits for the unit owners. When unit owners in your association know that an audit is happening regularly, it gives them some peace of mind. Nobody wants to live in an association that isn’t properly managing its finances. In fact, sometimes homeowners may actually go to the board and demand an audit if they are concerned about how finances are being managed. If this happens with your association, it will be in your best interest to complete the audit.
Your HOA won’t have the same management in place forever. An annual audit provides valuable information that a new board of directors may need to get the full picture of an association’s financial health (or lack thereof). An audit lets them know any financial issues the association could be dealing with or that an association’s finances have been well maintained.
What You Need for an Association Audit
Although you won’t be personally responsible for conducting the audit, it’s always a good idea to know what’s happening with your association. Your association will be responsible for setting a deadline for the audit and the objectives of the process.
While the specific documents involved in an audit may vary a little from one association to the next, you can expect to have to supply your tax returns, budgets, insurance policies, bank statements, paid invoices, 1099s for contractors, vendor contracts, and investment info. If a document is a financial statement, it should probably play a role.
The Results of Your Audit
Of course, you hope that the results of your audit are positive, but you may discover some financial problems in need of correcting. It’s pretty common to discover issues with your contracts such as overbudgeting for them or continuing to budget for ones that have expired. You could also discover your current insurance coverage is inadequate.
In the worst-case scenario, you could find out you have a problem with fraud, theft, or even embezzlement. This could even include inappropriate use of petty cash.
Once you have the results of the audit, your HOA or COA will have to determine what should be done with the information. If the results include any issues, you’ll probably need to change some practices. If the results are positive, you may not need to make any adjustments. By continuing those financial practices, you will be able to maintain an association that is financially healthy.
Protect Association Finances with an Annual Audit and LM Funding’s Services
The bottom line is an audit protects your association’s finances. Another way you can protect your association’s finances is by utilizing LM Funding’s Services. Because we turn your delinquencies into cash, you’ll no longer be forced to pay collection-related legal fees. We protect your bottom line so your association can keep thriving!
For more information on our services, get in touch with LM Funding today by calling (866) 235-5001 or emailing us at firstname.lastname@example.org