HOA board members and managers play a huge role in ensuring financial transparency and accountability within homeowners associations (HOA). 

… and as an HOA board member or manager, one of the most effective tools at your disposal is conducting regular HOA audits.

This comprehensive guide will walk you through the essential steps of performing an HOA audit. Whether you are an experienced board member or a newly appointed manager, this guide will equip you with the knowledge and resources necessary to conduct successful audits.

Importance of HOA Audits 

Why are HOA audits so important? 

Well, they are important for maintaining the financial health and integrity of your community. Conducting audits, helps you ensure that your association’s financial records and operations are accurate, compliant, and transparent.

While on the topic of financial transparency, audits provide reassurance to HOA members that their dues and assessments are being handled with the utmost care and accountability. 

Audits also protect against potential fraud or mismanagement, promoting trust and confidence among homeowners.

Remember, as an HOA board member or manager, you hold the power to foster financial transparency and accountability within your association. 

Who Conducts HOA Audits?

Now that you understand the importance of conducting audits, let’s discuss who is responsible for conducting them. 

These audits are carried out by two primary entities: the HOA board (internal audits) and Certified Public Accountants (CPAs) or auditors (external audits).

Internal Audits: Conducted by the HOA Board

Internal audits are made by the HOA board members themselves. 

This process allows the board to closely evaluate their financial transactions, and make sure that all records are accurate and align with their financial statements. 

An internal audit gives the board an opportunity to identify and correct any financial discrepancies or irregularities in a timely manner. 

However, it is worth mentioning that internal audits may overlook certain issues due to biases. The board members may be so involved in the operations that they may not identify potential errors or fraudulent activities.

External Audits: Conducted by a CPA or Auditor

To stop potential biases from happening and ensure a thorough, objective review of the financial records, external audits are most recommended. 

External audits are conducted by independent CPAs or professional auditors. These experts bring a fresh, unbiased perspective to the financial review process, and overlook the HOA’s records for any signs of mismanagement, fraud, or non-compliance.

The results of an external audit can give  HOA members confidence in the association’s financial management, fostering trust within the community.

In the next section, we’ll discuss everything that you need to conduct this audit.

HOA Audit Checklist

In order to prepare yourself for a financial audit, you should gather many documents from the preceding year. 

Having these documents is very important because they will provide you and your HOA management with a clearer understanding of the organization’s current status.

Needed Documents

All HOAs must possess a specific collection of papers known as “ governing documents.”

These documents simply outline the rights of the HOA according to the law. They also establish the rules and regulations that all HOA members are obligated to follow. 

The governing documents consist of several components, below, we will discuss these documents in order of importance.

Federal / State Law

At the top of the pyramid, we have federal and state laws—no surprises there! 

Just like everyone else, HOAs have to play by the rules set forth by these laws.

It’s pretty straightforward: the Federal Law takes the lead, followed by the State Law, and then the local laws that apply to your specific area.

If an HOA decides to go against the law, it could cause a major clash between the organization and the community it serves. 

Let’s say, for example, the HOA starts discriminating based on religion or gender, which is a direct violation of the Fair Housing Act… it’s going to stir up conflict and potential litigation. 

So, it’s important for HOAs to stay on the right side of the law and avoid any unnecessary headaches.

Declaration of Covenants, Conditions, and Restrictions (CC Rs)

This declaration provides an extensive overview of both the homeowners’ rights and the specific roles assigned to each individual member within the HOA organization.

Articles of Incorporation

In an HOA, the articles of incorporation serve as the main source of information about the association. These documents contain details such as:

•  The HOA’s name
• Its declaration as a non-profit organization
• The individuals authorized to govern within the HOA.

In addition to this, the articles of incorporation also provide information about eligible voters and specify the individuals authorized to assume leadership roles within the HOA.

HOA Bylaws

The final document on our list is the HOA bylaws. 

The purpose of these bylaws is to outline how the HOA is managed by its members. They also define the organizational structure that the HOA will adopt within the community. 

These bylaws are very important, as they describe how the actions and decisions of the HOA board members impact the entire community. 

Once you have gathered all these documents and arranged them in the proper order, you can move on to the remaining documents, which lay on the financial side, let’s discuss these next. 

Financial Records

Moving forward on your HOA audit, you should obtain a comprehensive set of the organization’s financial records. In many cases, HOAs undergo multiple financial audits throughout the year, which simplifies the process of gathering these documents.

The HOA’s financial records play a crucial role in assessing the overall financial well-being of the organization.

Taxes

One of the most important things that a CPA or auditor will examine when conducting a financial audit is the HOA’s taxes. 

Since taxes are required to be filed before a certain deadline, usually April 15th, most organizations choose to file their taxes ahead of time in order to have them ready for the annual audit.

One of the things that an auditor must review within the taxes is whether or not all of the accounting reflects accurate records of the HOA’s spending, annual budget, revenue, and tax return. They must also review and ensure that all appropriate documents and forms, like form 1120 H, have been filled out and submitted correctly.

Once all of the financial records are in place, you can move on to the next set of documents that you will need for your HOA audit.

Meetings

The last important thing that must be done when performing an audit is to plan out the annual meetings. 

Since there are so many factors to these meetings, it is crucial to keep an updated record of all of them and make sure that the whole association is aware of what is going on.

Now that you understand the needed materials for an HOA audit, let’s discuss how to conduct one, step-by-step. 

How to Conduct an HOA Audit 

Performing an HOA audit doesn’t have to be an overwhelming task. Let’s break down the process into clear and manageable steps, so you can ensure a smooth and effective audit! 

Step 1: Opening Meeting and Introduction

Begin the audit process with an opening meeting. 

This meeting serves as an opportunity to introduce the audit team to the HOA board members and managers. During this meeting, you should:  

• Establish clear communication channels
• Discuss the audit objectives
• Outline the timeline and expectations

Step 2: Reviewing Financial Statements and Records

In this step, carefully review the HOA’s financial statements and records. 

Analyze the balance sheet, income statement, cash flow statement, and any other relevant financial documents. 

Focus on accuracy, completeness, and adherence to accounting standards.

Step 3: Testing Internal Controls and Processes

Evaluate the internal controls and processes in place within the HOA. 

Test the effectiveness of financial controls, such as the segregation of duties, authorization procedures, and documentation practices. 

Identify any weaknesses or areas for improvement and be completely transparent. 

Step 4: Analyzing Revenue and Expenses

Thoroughly examine the HOA’s revenue and expenses. 

In this step, you should compare actual figures with budgeted amounts to identify any discrepancies or irregularities. Look for any unusual trends or significant deviations that require further investigation.

Step 5: Reviewing Contracts and Vendor Relationships

Assess the contracts and vendor relationships maintained by the HOA. 

Review the terms and conditions, pricing agreements, and performance records. Ensure compliance with contract terms and evaluate the value provided by vendors.

Step 6: Assessing Reserve Funds and Budget Allocations

In this step, you will evaluate the HOA’s reserve funds and budget allocations. 

Verify that the reserves are adequately funded and utilized in accordance with the association’s governing documents. 

Assess the appropriateness of budget allocations and identify any potential financial risks.

Step 7: Documenting Findings and Recommendations

Document your findings, observations, and recommendations throughout the audit process and maintain clear and organized records of your assessments, supporting evidence, and suggestions for improvement. This documentation will serve as a valuable resource for the HOA’s future financial management.

Step 8: Closing Meeting and Final Report

Conclude the audit with a closing meeting. 

Present the audit findings, recommendations, and any necessary corrective actions to the HOA board members and managers. Emphasize the importance of implementing the suggested improvements for enhanced financial transparency and accountability.

In the final report, summarize the audit process, key findings, and recommendations in a clear and concise manner. Provide actionable insights that can guide the HOA’s financial decision-making and contribute to its long-term success.

It is worth mentioning that hiring an independent auditor for your HOA audit brings numerous advantages, including unbiased and objective evaluations. The expertise and objectivity of an independent auditor can instill confidence in the audit process and the accuracy of the results, so keep this in mind when you have to conduct your next audit!

Bottom Line 

In conclusion, conducting an HOA audit is not an easy task, but after reading this article, you are one step closer to embarking on this journey. 

Need more resources? 

DoorLoop has got you covered on all property management and real estate needs. Check out our HOA audit checklist to further your research on conducting an HOA audit and our resources page for an endless list of real estate and property management resources!

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