HOA directors have a duty to periodically conduct HOA finance reviews and also do detailed financial audits of the associations financial statements and accounts. A review of association finances entails reviewing all bank statements and check registers to track where the associations funds are being deposited, transferred or used. Additionally, directors should verify all transfers from the associations operating account to its reserve account and confirm that the amounts transferred are consistent with the amounts that were budgeted for the various line items. Subject to more stringent requirements set forth in state statutes or the associations governing documents, the directors review of association bank accounts requires: (i) the preparation of a reconciliation of the operating and reserve accounts on a quarterly basis; (ii) a comparison of the current years actual reserve revenues and expenses against the current years budgeted amounts performed quarterly; (iii) a review of the latest bank statements and cancelled checks for operating and reserve accounts; (iv) the preparation of an income and expense statement for all operating and reserve accounts prepared on a quarterly basis; and (v) the annual preparation of a reserve study.
State laws and/or the governing documents for associations also generally require the directors to conduct financial audits on an annual basis. A financial audit is an independent review of an HOAs financial statements and accounts by an independent party, such as a certified public accountant (CPA). The purpose of such an audit is to determine the accuracy of an associations financial statement. When an audit is required, the CPA performs an extensive examination of the associations financial records to confirm that they comply with generally accepted accounting principles that have been established by the American Institute of CPAs. The audit process is intended to provide a reasonable level of assurance that the associations financial records are materially correct. Upon completion of the audit, the CPA will provide the association with a written report of the associations financial condition, commonly known as a financial statement, along with one of the following four alternative written opinions concerning his or her findings: (i) an unqualified opinion that the association has properly followed all accounting rules in the maintaining of its books and that the associations financial reports are an accurate representation of its financial condition; (ii) a qualified opinion which means that there were one or more specified limitations that prevented the auditor from issuing an unqualified opinion; (iii) a disclaimer based on the auditors inability to gather certain relevant facts that were necessary to express an opinion regarding the associations financial condition; and (iv) an adverse opinion indicating that the associations financial statements are not in keeping with the applicable standards.
The financial statement prepared by the associations CPA will reflect the associations assets and liabilities along with other items that could impact the finances of the association, such as pending litigation which could have an unfavorable outcome for the association. The CPAs report on the associations financial condition should be distributed to all association members following receipt by the association.
If state laws or governing documents dont require a full audit, a financial review will be required. A financial review is not as comprehensive as an audit and involves a more limited inquiry by a CPA that is also conducted in accordance with generally accepted standards established by the American Institute of CPAs. The CPA who conducts the review then provides limited assurance that the associations financial statement is materially correct.
The performance of periodic financial reviews and the completion of audits and reviews provides the association with multiple benefits including the identification of potential fraud, misappropriation or mismanagement of the associations funds. In addition, the review process enables the detection and identification of problem areas that can be addressed before they become major issues that can cause significant financial injury to the association.