An HOA audit is an important financial tool with many benefits. While it is not always required, association boards would be wise to utilize them anyway. This audit can protect the association’s finances, ensure accuracy, and identify gaps in internal processes.
What is an HOA Audit?
A homeowners association audit is an in-depth examination of an HOA’s financial records, conducted independently by a Certified Public Accountant (CPA). The process involves verifying the accuracy of financial statements, ensuring compliance with laws and the governing documents, and checking for signs of fraud or mismanagement.
The purpose of an audit is to provide high-level assurance that an association’s financial reports are accurate and comply with Generally Accepted Accounting Principles (GAAP). Apart from the reports themselves, an auditor reviews the association’s bank statements, income, expenses, reserve funds, and internal controls. They may also contact debtors and creditors to confirm balances.
Is an HOA Financial Audit Required?
Whether or not an association must perform an audit depends on state laws and the governing documents. Here are the HOA audit requirements in Illinois per association type.
For Condominiums
A condo association financial audit is not required under Illinois law. Board members must refer to their CC&Rs and bylaws to confirm if an audit is mandatory and how often to conduct one.
For HOAs
Under 765 ILCS 160/1-45, an HOA board must do one of the following:
- Provide a detailed financial breakdown, including itemized expenses, amounts collected, reserve contributions, and surplus or deficit, or
- Provide a consolidated annual independent audit report of all association funds.
In practice, this means that an audit is mandatory if the board doesn’t choose the first option. Otherwise, the board may opt to provide a detailed financial report instead of an audit.
That said, the governing documents should contain further guidance. While state laws may not mandate one, the CC&Rs and bylaws of an HOA may require boards to conduct an audit every few years or so.
The Benefits of an HOA Finances Audit
An HOA audit is not always required, but it can add real value for the board and the community. Here are the key benefits of an audit.
1. Improves Financial Accuracy
An independent audit reviews the association’s books and records. It can help confirm that the association recorded its income and expenses correctly, thereby making the financial statements accurate and reliable. If there are any errors or discrepancies, an HOA financial reports audit will catch them.
2. Detects Fraud or Misuse of Funds
Audits include checks on internal controls and financial processes. This can help the board identify suspicious transactions, reduce the risk of embezzlement, and strengthen accountability. Even the presence of an audit can discourage misconduct.
3. Builds Trust With Owners
Transparency matters in HOA communities. When the board completes an audit, owners feel more confident in how the board handles money. This can result in fewer disputes over finances.
4. Supports Better Budgeting and Planning
An HOA financial statements audit gives the board a reliable starting point for creating future budgets. The board can make more informed decisions and adjust reserve contributions with accuracy.
5. Helps With Loans and Insurance
Lenders and insurers often look at an association’s financial health. An audit can help improve the HOA’s credibility when applying for loans, refinancing mortgages for owners, and securing insurance policies.
6. Ensures Compliance With Governing Documents
Some associations are required to conduct audits as per their CC&Rs and bylaws. Completing an audit keeps the board in compliance and limits liability.
7. Identifies Weak Internal Controls
Auditors often provide recommendations in their report. These recommendations can help the board improve its financial procedures and reduce exposure to risks. An audit can pinpoint any gaps in current controls.
Alternatives to an HOA Audit
An audit offers the highest level of assurance. It’s the most thorough type of financial examination and scrutiny. That said, it’s not always a feasible option for associations, especially when funds are limited.
Fortunately, there are alternatives to a full audit, including:
- Financial Review. Unlike an audit, a review is more limited. It offers a moderate level of assurance. With this, the CPA performs analytical procedures and inquiries without testing transactions or verifying balances in detail.
- Compilation. This is the most basic level, offering the lowest level of assurance. A compilation is exactly what it sounds like. The CPA simply organizes financial data into statements, with no testing or verification involved.
Audits are best for larger associations or communities with complex finances. It’s also the best course of action if the community is riddled with fraud concerns or owner distrust.
On the other hand, financial reviews are best suited for mid-sized associations. Boards that want oversight without spending too much on the service should go for this option.
Finally, compilations are more often used by small associations. These are communities that only need formal financial statements. That said, even small communities can suffer financial problems, so an audit may be necessary every few years.
How Much Does an HOA Audit Cost?
Audit costs can depend on the location of the association and the level of service involved. For most associations, a standard audit costs around $4,000 to $6,000. Larger or more complex communities are looking at $4,500 to $7,500+ per audit.
In higher-cost areas like Chicago, audit fees tend to land on the more expensive end of the spectrum. Small communities may pay $2,000 to $4,000 for audits, while mid-sized communities may pay $4,000 to $6,000. On the other hand, large or complex communities should expect to pay $7,500 to $10,000 or more.
Other factors can also influence the cost of the audit. These include:
- Number of units
- Volume of financial transactions
- Complexity of reserves and accounts
- Quality of bookkeeping
- Location and CPA rates
More complexity means more testing, which increases cost. Cleaner books also cost less to audit because the auditor won’t have to spend extra time organizing transactions.
If cost is a major concern, boards might want to go for a financial review ($1,500 to $5,000) or a compilation ($500 to $2,000) instead. These are cheaper options, but they provide less assurance.
Condo Board’s Financial Disclosure Responsibilities
Condo board members must act as fiduciaries and make decisions that are in the best interest of the association. Maintaining transparency when it comes to budget decisions and spending is a requirement of any association board.
Here in Chicago, the Illinois Condominium Property Act (ICPA) stipulates broad rules and regulations for condo associations. Individual association bylaws may have more specific requirements. Always check the association’s covenants, conditions, and restrictions (CC&Rs) to review the financial reporting requirements for the condo association.
At the state level, the Illinois Department of Financial and Professional Regulation (IDFPR) governs the rights and responsibilities of association board members. It stipulates that each year, the board of managers must provide all condo association unit owners with an itemized accounting of the common expenses for the preceding year.
The itemization must indicate which portions were for reserves, capital expenditure, repairs, and real estate taxes. It must also show any amounts collected as part of a special assessment and calculate the net excess or deficit of income over expenditures plus reserves.
Best Left to the Pros
An HOA audit clearly plays a key role in the accuracy and success of an association’s financial operations. Board members should not attempt to perform an audit themselves. Instead, they should hire a third-party professional, such as a CPA or an HOA management company.
First Community Management offers expert financial services to condos and HOAs in Chicago and beyond. Get in touch with us today!