I get it. Many board members complain about the cost of an HOA audit. It can be expensive, especially for small associations.
In this post, we will take a quick look at the cost of HOA audits and we will also offer up some tips so you can lower the fee.Simple Navigation
- Determine why you need an audit
- How much does an HOA audit cost?
- Why do audits cost so much?
- The audit process
- 5 tips to lower your audit fees
Determine why you need an audit
Before you start examining audit fee schedules, ask yourself why the HOA even needs an audit in the first place. Some boards just like to have an audit completely annually so that they have comfort over the financials.
But most audits are completed because they are required. It is usually a state mandate or required pursuant to the association’s bylaws. Here are some of the common reasons for an annual audit.
Bylaws. Even if your state doesn’t require an audit, some HOA bylaws do. It is up to the board to follow the bylaws and covenants. This is especially critical when it comes to financial and compliance matters.
New management company. Audits can assist a board or HOA management company when they takeover a community. They can help obtain comfort that the prior management company classified everything accurately and they are getting a clean start.
Assurance. Many HOAs will engage a less costly “compilation” or “review” engagement. But an audit will provide a much higher level of comfort and provide a higher level of assurance for the HOA. An audit will also look at the internal control process and financial reporting processes.
Board requirements. Fraud and embezzlement are rare, but they do happen. It especially can occur in small HOAs where there are limited internal controls and no segregation of duties. Most large HOA management companies have adequate controls in place. Audits can promote accountability for management companies and board members. They can assist at reviewing controls so that any asset misappropriation is prevented from starting in the first place.
How Much Does an HOA Audit Cost?
There is no doubt that the extensive audit procedures come at a price. For a complete audit, an HOA should budget between $2,000 to $7,000. But of course, it depends on the size of the HOA, the state it is located in and whether there is exempt income or other unusual activity.
Here are a few audit fees that we have seen recently:
- 48 unit association in Texas = $2,300
- 487 units in Florida = $4,200
- 235 mixed use units in Delaware = $5,250
- 1,048 lots in S. Dakota = $3,650
- 247 units in Arizona = $2,800
There is no “one size fits all” when it comes to HOA audit fees. Because each association has unique characteristics and operates in a different compliance framework.
Also, we see higher fees in states with a higher cost of living. These states often have more extensive compliance issues. So an HOA audit for an association in New York City, San Francisco or Chicago will usually cost a bit more than cities like Dallas, Phoenix or Las Vegas.
When an audit is required by the association’s bylaws or state law, budgeting for the expense is necessary and should be included as an integral part of the financial plan.
While each HOA is different, the board should understand that an audit may be critical to the community’s financial stability.
Why do audits cost so much?
The reason that audits are so expensive is because of the process that the CPA requires. CPAs have specific techniques that they have to follow.
You also have to understand that CPAs take on a lot of responsibility when it comes to an audit. Even though fraud is not directly uncovered during an audit, the board and often assume that it is part of the process. So if the CPA fails to uncover the fraud, it is often considered their fault and can be dragged into a lawsuit.
As a result of the higher risk, the CPA must carry costly insurance and have sound audit policies and procedures. These items can carry a hefty price tag.
The audit process
Although extensive, an audit will help identify and correct potential financial statement risks within the HOA. A CPA will conduct an extensive examination of many documents. The management company will have to assist will pulling the following information together:
- Bank statements and reconciliations
- Board minutes
- Investment information
- Copies of management contracts
- Support for paid invoices
- Insurance coverage analysis
- Budgets and variance analysis
- HOA assessments and receivables review
- Reserve studies
- Copies of material vendor contracts
- Litigation reserves and exposure
- 1099s and W2s
5 tips to lower your audit bill
Here are five ways to lower your audit fees:
- Make sure you get multiple bids. Remember that because of legal liability and limited expertise, many CPAs will not perform audits. So it can be hard to locate a good. However, many management companies have quality firms that they work with and they can often offer up a referral.
- Ensure there are no accounting adjustments. When the financials are clean and require no audit adjustments there is no reason for any additional time spent by the CPA. This prevents cost overruns.
- Prepare the actual audit report. Many HOAs don’t realize that they can actually prepare the audit report for the CPA firm to review. Of course, the CPA has to approve the report and actually sign it. But the report disclosures can be prepared by the HOA. Assuming they have adequate personnel to complete the report, the CPA firm can provide it to the HOA in draft form.
- Document processes upfront. The HOA can complete and document a full assessment of the HOA’s financial policies and procedures. This can also include the control environment. This will save the CPA firm time and lower overall costs.
- Lower the scope to a review or compilation. We have discussed that a review and compilation have fewer testing requirements. So check to make sure if an audit is actually required. You may find that a lower scope engagement is necessary and your fees will be substantially reduced.
Audits serve a very important purpose. They help hold the association and the management company accountable for sound financial policies and procedures.
But we know they can be costly. Take a close look at why your association needs (or desires) an audit. It may be that you feel comfortable avoiding the audit process entirely. But if it is required by your state or the association bylaws then you have no choice.
So if you have decided to hire a CPA firm to complete an audit, make sure that your accounting is in great shape and that you can prepare orderly and clean financial statements upfront. This will facilitate a smooth audit and keep the cost down.