Should HOAs have an ‘audit’ or ‘review’?

This week’s column was written by my colleague Courtney LaLone. Courtney is a CPA with the accounting firm of LBA Haynes Strand, PLLC, and his practice focuses on community associations.

Q: Are there any guidelines in regard to the size of the community or the size of the budget to help determine whether a homeowners’ association (HOA) should do an audit instead of a review? Our community has annual revenues of about $300,000. We are currently having an accountant review our records and the board is divided on whether we should have an audit performed. We have a management company that collects our dues and manages the disbursements, and an officer signs off on all disbursements that are not routine recurring items.

A: If you are a board member of a homeowners’ association, chances are you have had the discussion of whether to have an “audit” or a “review” of the financial statements. Almost all HOA boards mull over the two options.

In North Carolina, a planned community is not required by the N.C. Planned Community Act to have the association’s books and records compiled, reviewed, or audited. The law only mandates that an association make an annual income and expense statement and balance sheet available to all lot owners at no charge within 75 days after the close of the fiscal year.

The bylaws of many associations specify either an audit or a review of the annual financial statements by an independent certified public accountant, and boards should follow their association’s bylaws when it comes to the level of assurances related to the year-end financial statements.

It is important to understand the differences between the levels of assurance a CPA can provide when it comes to the financial statements. An audit is the highest level of assurance an independent CPA can provide for a set of financial statements.

At the end of an audit, the CPA will issue an opinion over the financial statements. This is the purpose of the audit. No CPA can provide this opinion without following the required audit procedures as outlined by the industry’s regulatory body. The audit to the association’s board can provide evidence of the board’s fiduciary responsibilities relative to the financial statements and financial process of the association.

It can also provide comfort to the members that the financial statements are free of material misstatement. An audit opinion will never say the that financial statements are free of fraud, stealing, or misappropriation of assets. An audit’s purpose is to opine on the financial statements and whether those statements are free of material misstatement.

Another option is to have an independent CPA perform a review. A review is far less in scope than an audit. When providing a review, a CPA is only giving limited assurance over the financial statements.

In some cases, however, a review can be very effective for an association depending on its size, scale, and complexity. While an audit will include looking over vendor invoices, cleared checks, and tracing and vouching transactions, a review will consist solely of inquiry and analytical procedures. For example: multiplying the number of homeowners subject to paying dues by the annual dues and then comparing this total to the actual annual results. Any difference can then be reviewed and discussed.

Choosing between an audit and a review can precipitate a lengthy board discussion. There are no established guidelines that would tell a board to do an audit “if this” or a review “if that.” The best answer will be discovered by better understanding the needs and purpose for the external financials, following the bylaws, and discussing with a CPA firm that performs these services for HOAs.

Note: If you’re wondering about HOAs and taxes, please see this earlier column.

This column was originally published in the Charlotte Observer on April 1, 2015. © All rights reserved.

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