An HOA auditor plays a critical role in protecting the financial health of a community association. Boards rely on accurate financial reporting to make sound decisions, maintain reserves, and earn the trust of homeowners. Choosing the right professional is integral, as the association needs someone who understands association accounting, state requirements, and the unique challenges HOAs face.
What is an HOA Auditor?
An HOA auditor is a professional, independent Certified Public Accountant (CPA) who performs in-depth examinations of an association’s financial records, internal controls, and bank statements. The purpose of an audit is to ensure accuracy, compliance with GAAP, and the prevention of fraud. Between an HOA audit, a financial review, and a compilation, an audit offers the highest level of assurance.
Typical HOA Audit Requirements
Requirements can vary depending on state laws, the governing documents, and the size of the association. Some communities must complete an HOA financial audit every year, while others may only need a review or compilation. Boards should understand what their bylaws and state statutes require before selecting an auditor. Knowing these requirements can help ensure compliance and avoid unnecessary expenses.
Are HOA Audits Mandatory?
Whether an association is required to perform an audit depends on two factors: state laws and the governing documents. A select few states mandate audits each year, but the majority remain silent on the matter. In D.C., there is currently no law that requires associations to conduct audits.
That said, the association’s CC&Rs and bylaws may contain audit requirements and guidelines. Some bylaws require it outright, while others require it only if the association reaches a certain revenue threshold or budget.
Frequency of Audits
State laws and the association’s governing documents should also outline how often audits should be conducted. In general, it is a good idea to perform an HOA annual audit. Annual examinations help ensure that all financial records are accurate and prepare the community for the next year.
That said, some associations do a full audit every two to three years, opting for a simple review in between. Audits can be very expensive, especially for complex or larger associations, so this approach helps save on costs. Of course, the board should adjust the frequency based on the association’s needs.
The Importance of Choosing the Right HOA Auditor
Selecting the right auditor is just as important as selecting any vendor. The board should put the same amount of care and attention to detail as HOA auditors are responsible for ensuring financial accuracy.
An incompetent or poor auditor may not catch errors or identify fraud. They may also not be well-versed in best practices and GAAP requirements. Audits must align with state requirements and the governing documents, and choosing a bad auditor may put the association at risk of noncompliance.
Additionally, it is part of the auditor’s job to provide an opinion on the financial statements. A substandard HOA auditor may not capture the full scope of the association’s finances, leading to poor judgment or bad recommendations.
How to Choose an HOA Auditor
When picking an auditor, they should not be the same person or firm that performs the association’s daily accounting. They also shouldn’t have access to or manage the funds. Segregation of duties ensures transparency, combats fraud, and results in an unbiased evaluation.
1. Identify Needs and Scope
First, board members must determine if their governing documents require a full audit, a review, or a compilation. The CC&Rs and bylaws should also specify how frequently audits must be conducted.
Even if it’s not required, audits are a valuable financial tool in any board’s arsenal. They help ensure accuracy and transparency, leading to more confidence in making decisions based on financial reports. It also builds trust within the community.
2. Search and Vet Candidates
To find the right auditor, boards can search online or ask for recommendations from other local communities. Many industry organizations also have directories consisting of auditors or specialists.
Board members should look for a firm or independent auditor who specializes in HOAs. Associations have different needs that general business accounting may not address. The auditor must also be a neutral third party without any conflicts of interest or ties to the community.
Don’t forget to check their credentials, too. It’s important to verify that they have the necessary certifications with the state board. Boards should also ask for a peer review report.
3. Evaluate RFPs
Board members should then draft a request for proposal (RFP) to standardize the submissions. When reviewing proposals, the board must take into account the following:
- Fees. Check the fee structure and look for fixed-rate pricing to avoid surprises.
- Experience. The lowest price isn’t always the best choice. It can signal inexperience. Make sure to prioritize expertise.
- Timeline. Ask for a timeline and what they require of the board. They should be able to deliver the report by the board’s deadline.
4. Interview Prospects
Sitting down with candidates enables the board to gauge them at a more personal level. This helps the board see if they are a good fit in terms of personality, work ethic, and values.
Good interview questions to ask include:
- How many HOAs are currently part of the auditor’s client portfolio?
- Does the auditor have working knowledge of the relevant state HOA laws?
- Is the firm experienced in handling both IRS Form 1120 and Form 1120-H filings?
- What background does the auditor have in evaluating and analyzing reserve funds?
- Is a recent peer review report available for the board to review?
- How does the firm handle communication, and who will act as the main contact for the association?
5. Sign the Contract
The final step is to formally appoint the auditor at a meeting. They can then sign an engagement letter or contract, which outlines the scope of work, responsibilities, fees, and timeline. Of course, before signing, the board should have a lawyer review it.
Can I Request an Audit of My HOA?
In general, homeowners can petition the board to perform an audit of the association’s finances. The exact requirements and procedures will depend on state laws and the governing documents.
In D.C., condo association audits may be triggered by a request from unit owners. According to Section 42–1903.14, unless the bylaws specify a lower percentage, owners who collectively hold at least 33 1/3 percent of the voting power may make this request. The condo board would then need to have its books audited by an independent professional.
A Helping Hand
Considering the role of an HOA auditor, board members should approach the selection and vetting process with a keen and thorough eye. Oftentimes, hiring an HOA management company is the way to go, as these companies already come with pre-vetted vendors.
TNWLC offers financial management services to community associations in Washington, DC. Call us today at (202) 483-8282 or contact us online to get started!
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