What You Need to Know About Financial Reviews

At the end of each year, the HOA board works on many financial reviews and documents. For example, they work on a budget for the next year. They also work on financial statements for the owners and more. Boards also decide at this time whether to carry out a financial compilation, review, or audit. Each type of evaluation can be helpful. And some combinations should be done regularly. If the HOA board is having a change in leadership, or there is a financial concern, an audit might be best. But a very small organization with fewer assets might only need a compilation. Staying on top of the financials will prevent any mistakes from snowballing year to year. 

If you wonder whether your HOA really needs any kind of financial examination, here are a few examples of problems one CPA has found over the course of his career: 

·     A property manager had stolen $200,000 from the association’s checking account;

·     A board had failed to keep a contract up-to-date and was paying $2,000 a month when the contract was for $600 a month; and 

·     The HOA’s insurance policy covered 100 homes while the association had grown to 500.

The boards didn’t know about any of these problems until the CPA went over the books. Some of the problems had been going on for years. Basic accounting tests would have found these problems sooner.

Check Your Requirements First

Whether you decide to do a financial compilation, review, or audit, simply depends on a few factors. First, does your state law dictate that a specific type of accounting takes place? And/or does it dictate how often? Some states require all HOA boards to complete a financial audit every year, for instance. Or, some states mandate different reviews depending on the size of the HOA. You first want to make sure you’re following the law with how you do your end-of-the-year financial examination.  

If your state doesn’t mandate the type of assessment the board must do, then your HOA bylaws might. Many associations’ bylaws specify whether an audit or review must be done. Checking bylaws for any requirements should be your second stop when figuring out whether an audit or review is best. Even if some financial assessment is required, this is the minimum requirement. Your board can always decide to do another assessment in addition to the one required by state law or bylaws. 

Differences Between A Compilation, Review, and Audit

If there aren’t any requirements on the type of examination your financials need, the board will have to decide whether it should be a compilation, review, or an audit. Each board will have to determine what’s right for them. And they will need to look at the complexity of their financial records, size of the community, cost, and whether there are specific concerns. Your CPA could offer guidance as well. There aren’t any established checklists on which circumstances dictate the best option. 

There are three levels of financial examination that can be done for an HOA. First, a compilation is the most basic. Next, a review adds a bit more certainty. And, finally, an audit is very thorough. Each procedure has guidelines from the American Institute of Certified Public Accountants(AICPA) to make sure there’s consistency among CPAs. 

Levels of Financial Reviews

To carry out a compilation, a CPA reviews the financial records. They will look for any obvious errors, but won’t look for completion or accuracy. A compilation doesn’t require an independent CPA. It also doesn’t promise any assurance of the records’ accuracy. 

Then, a review needs to be conducted by an independent CPA. They’ll use basic accounting procedures. By doing so, they will make sure the money is being managed correctly. They also will provide some level of assurance that financials meet the accounting used by the association. And that there are no material mistakes. One example of this analysis is they may compare how many dues-paying homeowners there are to the actual dues total in the records. Then, any difference will need to be reviewed and discussed. 

Finally, an audit is the most in-depth look at the organization’s finances from the previous year. A CPA analyzes the books, records, and meeting minutes. Also, they will independently confirm that the information is correct. The CPA will give the highest level of assurance for the audit. 

In conclusion, the compilation takes the least amount of time. It is also the least expensive, followed by the review, and the audit. The cost could be something to consider when determining what is best for your HOA as well. 

More Information on Financial Reviews

As described above, a financial review falls between a compilation and an audit in-depth of analysis, cost, and assurance by the CPA. It can be a good agreement between a full-out audit and something as simple as a compilation. For instance, some HOA boards do a review every year and an audit every five years. Your board can discuss the pros and cons, but it’s likely you’ll run a review at some point. 

Finally, your board and CPA should agree ahead of time which areas should be prioritized. They should also agree which areas are the most likely to have errors. For example, Cash in and out, the budget, checking, other account balances, insurance, or other areas. 

And once you’ve finished your evaluation, sharing the information with homeowners can be a good way to continue to build trust and community.