Florida is home to thousands of HOAs and community associations. Each one has separate audit and reporting requirements. It is not one size fits all.
In this post, we are going to take a close look at the specific HOA audit requirements in the state of Florida. We will specifically address the standard procedures performed, compliance issues, and costs. Let’s get started!Easy Navigation
- What are the Florida HOA audit requirements?
- Understanding the HOA audit process
- How Does it Work?
- Who Completes An HOA Audit?
- Aren’t Audits and Reviews the Same Thing?
- What Should an Association Choose?
- What’s the Cost?
- Bottom line
What are the Florida HOA audit requirements?
Florida does not require an audit of all HOA’s. The type of financial reporting can be specified in the bylaws. But the state can require specific financial reporting depending on the total annual revenues of the HOA. The requirements are specifically detailed in the Florida Homeowners’ Association Act under Section 720.303(7).
- An HOA with annual revenues over $500,000.00 is required to have audited financial statements.
- An HOA with revenues of between $300,000 and $500,000 is required to have reviewed financial statements.
- HOAs with annual revenues of between $150,000 and $300,000 is required to have compiled financial statements.
- Associations with revenues less than $150,000 are required to prepare a report of cash receipts (revenues) and expenditures.
But there is some good news. Regardless of the revenues of the HOA, the membership itself can vote to waive the state-required reporting by a majority vote. This vote can be made in person or by proxy.
Members can also petition the board to increase the required level of financial reporting as long as 20% of the members petition. This can be done for any year. The HOA must then call a special meeting. Upon a majority vote in the HOA, the members can require a higher level of financial reporting.
Also, the board has the right to demand a higher level financial report than the minimum required by the Florida statute. The Florida Condominium Act has similar reporting requirements and maintains the same revenue thresholds.
Understanding the HOA Audit process
Think of an HOA audit as a closer look at an association’s financials. It’s a way for all board members to get on board. It gives everyone a chance to ensure all transactions are recorded properly and all variances are accounted for.
An audit may (or may not) turn up mistakes. It looks closely at all financial statements, annual assessments, vendor contracts, and payments. It also looks at the association’s reserves.
Think of it as a way to reassure board members the financials are good or an opportunity to realize what’s not so good and fix it. It can identify fraudulent activity and inadvertent errors that have an impact on the association’s budget.
How Does it Work?
A licensed CPA conducts the HOA audit. He/she reviews all financial statements including the balance sheets, profit and loss statement, and cash flow statements. It’s a thorough process that reviews all data and procedures and thoroughly analyzes it.
When a CPA performs an HOA audit, it’s his/her statement that the risk of error is low. CPAs use the Generally Accepted Accounting Practices to review the statements and conduct the audit. Using the GAAP, CPAs can confidently say that the statements are free from error.
CPAs complete the audit with a report stating his/her opinion on the status of the association’s financial statements. If there are errors or weaknesses discovered, the CPA must report them.
Who Completes a Florida HOA Audit?
A CPA conducts the HOA audit, but don’t rely on just any CPA. It should be a CPA with extensive experience in HOA audits.
Since a CPA firm must put their name on the report, it’s risky for them to conduct HOA audits and not all firms will do it. The high litigation risk makes the cost non-competitive. Most Florida firms just won’t do it.
If you find a CPA willing to do the audit, they must be independent and do the following:
- Assess the association’s internal operations and determine its fraud risk
- Assess all management and analytical procedures
- Verify all substantiation procedures
What do They Do?
We already discussed how in-depth the HOA audit is, but here are some of the tests included:
- Fluctuation analysis – The CPA will look at prior years’ financial statements and compare them to this year. They will look for variances in the numbers and determine what other procedures or inquiries must be done to accept the numbers.
- Bank reconciliations – Otherwise known as a bank confirmation, the CPA will make sure the bank accounts are reconciled by communicating with the bank.
- Insurance – The CPA will assess the HOA’s insurance ensuring it’s adequate and includes liability, property and casualty, and bonding.
- Cash receipts – This process overlooks all incoming and outgoing cash, including vendor payments.
- Reserve fund – The CPA will ensure the reserve fund exists, is properly overseen and reserve studies have been completed.
After the audit, the CPA will create a report that states the financial statements are free from material error.
Aren’t Audits and Reviews the Same Thing?
Audits, reviews, and compilations aren’t the same. The services for each vary greatly, as we describe below.
A review is a step below the audit. It doesn’t look as deeply into the statements and procedures as an audit.
CPAs look mostly at the analytical procedures and performs tests to determine the accounting records are accurate. The procedures conducted are on a much smaller scale than an audit and CPAs typically don’t talk to any third parties including the bank.
If a CPA finds errors, he/she may ask questions and do a slightly deeper dive into the information, but it doesn’t provide the same level of assurance as an audit.
What Should an Association Choose?
Many people would assume the audit is the right choice, but not always. If you’re worried about fraud or violating the bylaws, then an audit may be right. An audit is also the right choice if the bylaws require it. It also depends on the size of the association. Smaller Florida associations have a lower risk of fraud and even mistakes, so an audit may not be worth the cost and complications.
Other reasons to consider an audit include:
- It’s required by the state
- Someone identifies internal control issues
- There’s suspicion of inadequate or excessive reserves
- There is disaccord between board members and the association
- New board members are coming on
- New management is taking over
- There weren’t proper bank reconciliations
What’s the Cost?
An HOA audit can cost from $1,000 up to $10,000, but on average they cost $2,000 – $4,000. They are more expensive than a basic tax return but sometimes are worth the peace of mind they provide. But costs can vary widely in Florida compared to other states.
The cost of a Florida HOA audit may seem steep, but it provides board members with peace of mind. It can uncover any fraudulent or inadvertent mistakes, and make sure an association is running properly.
We’re all programmed to fear the word audit, but an HOA audit is a great way to make sure an association is on track financially. An HOA audit assesses an association’s financial status and addresses any serious issues.
An audit is an inside look from an outsider on how the association is run financially. It can identify issues and provide suggestions on how to fix the issues. While you don’t need an audit every year, paying for one every couple of years is in the association’s best interest. It keeps everyone honest and the association running at its peak performance.