Conducting an audit is an excellent way to confirm the financial health of your community. An audit can also highlight areas of financial risk, such as budget issues, reporting mistakes, or even fraud. Whether highlighted in covenants, required by statutes, or driven by proactive financial management procedures, most associations start thinking about their audits in the 4th quarter.
Contemplating an audit tends to raise a lot of questions from board members and property managers. What is it? Do we need one? How do we prepare? This article will help answer some of your questions and give you a head start in your annual financial reporting process.
What is an audit?
An audit is the most comprehensive examination of accounts and other items that support a community association’s financial statements. It’s objective and conducted by an independent CPA following specific guidelines created by the AICPA, our governing body. Industry experience certainly helps here, as community associations are very different from traditional corporations.
During an audit, we’ll examine a wide variety of items, including the annual budget, bank accounts, vendor contracts, reserve accounts, accounts receivable/payable, and other transactional records. While time consuming (for us), this helps identify financial risk – the likelihood that something is going, or could go, wrong.
Do we need an audit?
Many community associations are required to conduct an annual audit, or at least some sort of financial review.
Here are some examples:
- Covenants. Requirements are often listed in the association covenants, so it’s important for board members and property managers to have a working knowledge of those documents.
- Statutes. Some states, like Florida, have statutes that require audits or other financial reporting procedures based on the association’s annual revenue. Although there are also waiver provisions, is that really good financial governance?
- Lender. If an association has a loan, the lender will often require an audit.
If there are no covenant or statutory requirements, consider conducting an audit or similar procedure every 2-3 years.
Are there other times to consider an audit?
While most people perceive an audit’s primary purpose as uncovering financial issues, it can also be used to confirm an association’s sound financial procedures and health. Here are a few milestones where an audit may be valuable:
- Developer turnover
- Major board membership change
- New management company
- Any time the board questions the association’s financial management
How do we prepare for an audit?
Thanks to modern technology, CPAs can conduct most of the audit procedures through the association management tool, like CINC, TOPS, Vantaca, etc. While the property manager and a board member (like the treasurer) should be available for questions, your role should be minimal as long as association records are accurate and current.
What is my financial responsibility as a board member or property manager?
Board members have a fiduciary duty to look out for the financial best interests of their community associations. Even without laws or covenants requiring audits or audit alternatives, these procedures are the best way to confirm that your community association is fiscally well-managed and financially healthy. If there are risks or, in rare situations, fraud, an audit will help the association react and resolve any issues.
Where can I get help?
Our CPAs have decades of community association experience, and we would be happy to answer questions or conduct an audit. If you would like to learn more about audits (or audit alternatives) for your association, please give us a call.