If you are on the board of your HOA, you may already have been confronted with the question of whether or not to have an HOA audit performed. Because there are three different services provided by CPA firms, it can be confusing to know which of the three to choose. Here is how to determine the right CPA service for your HOA.
When Are Audits Important?
Some states actually require HOAs to complete an annual audit. In this case, it is extremely important for your HOA to comply with this law on a yearly basis. However, even if your state does not require an audit, many association bylaws still necessitate these services. In many cases, your bylaws will specify exactly which CPA service is required.
Why Are Audits Important?
An audit of HOA finances is when a third party compiles the financial information of the year and uses this information to form a professional opinion regarding the accuracy of financial records as well as confirmation that the finances match the financial statements. These services can be important for communities as it provides evidence that the association’s board is acting in a way that is consistent with their fiduciary responsibilities.
What are the Three CPA Services?
There are three different services supplied by CPA firms. The use of any or all three can vary depending upon the size of your association. The three types are listed below:
A compilation is the least involved form of service that a CPA provides. During a compilation, the CPA firm does not establish an opinion regarding financial accuracy. Instead, the firm supplies a compilation of financial statements and reports in order to concisely represent the management of the finances. This can be helpful for smaller communities with less complex expenditure.
A review is a step up from a compilation, and provides lower level assurances as to the conformity of the year’s finances by speaking with the client and providing analysis of the information provided by the financial statement. The review provides limited assurance, but does not delve into accounting records.
An audit is the highest form of assurance that a CPA provides. It requires detailed and extensive work by the CPA firm. The aim is to provide evidence that the financial statements are accurate in every respect and that no misstatements exist. As such the auditor spends time thoroughly understanding the association and tests the financial statements using the accounting documents.
Determining Which is Right For Your Association
As stated before, the first thing your board should do is to check local and state laws to determine if an audit is a necessity. Next, review the governing documents to see if any instructions are given on this subject. If there are no specific regulations, your board is free to decide which of the three is right. Many smaller associations feel comfortable with a yearly review. However, if your community has experienced recent changes, it is a good idea to have an audit performed.
Whether or not to perform a yearly audit can be a point of contention within the board. Understanding the purpose of each service can help your board to make the best decision for the community.