HOA audit vs review: Differences, requirements, and more

Monday March 20, 2017

HOA audit vs review: Your in-depth guide

HOA audit vs reviewIs your association considering a financial audit or review, but aren’t sure how or where to begin? Michael Mullen, of Michael P. Mullen, CPA, explains the difference between the two, outlines the legal requirements per the Minnesota Common Interest Ownership Act (MCIOA) and clarifies the responsibilities between a property management company and a Board.
 

Financial Audit

An audit is the highest level of financial statement service that only a CPA can perform. It provides the expression of an opinion as to whether the financial statements are fairly presented in all material respects. The work performed includes, but is not limited to: the inspection of invoices, canceled checks, bank statements and the general ledger to determine that transactions were properly recorded - that monies were properly collected and deposited and that checks to vendors were supported by an invoice. We evaluate the internal control structure of the Association to determine whether weaknesses exist. An audit can also include the procedures performed during a review.
 

Financial Review

A review is the second highest level of financial statement service that, again, only a CPA can perform. It provides limited assurance as to whether the financial statements require any material modification. The work performed includes, but is not limited to: analytical procedures such as comparing current year actual revenue and expense balances to the budgeted amounts, comparing current year actual to prior year actual, and analyzing material fluctuations to determine if the explanation is reasonable. We reconcile account balances to the corresponding subsidiary ledger, but we do not look into the detail as this would be an audit procedure.

In summary, an audit requires many more procedures than a review and also provides an opinion versus a limited level of assurance; as a result, audits cost more than reviews. Most associations will have an audit every three years, at a minimum. Associations also elect to have an audit instead of a review in the event that any of the following 11 situations occur:
  1. Documents require audit
     
  2. Change in management company
     
  3. Turnover from developer
     
  4. Significant change of Board members
     
  5. Large insurance claim
     
  6. Lawsuit
     
  7. Large reserve expenses
     
  8. Special assessment
     
  9. Association has a loan payable
     
  10. Association sold property
     
  11. Association has investments that fluctuate on market value

Are HOA audits and reviews required?

Reviews and Audits help to fulfill the Board’s fiduciary responsibility to its members, which is of utmost importance. The Board is charged with governance of the Association, as is its management company; an independent audit or review can help ensure transparency. However, there are many reasons why it is important that a community association has a CPA firm conduct an independent annual review or audit of the Association’s financial statements.
  1. It may be statutorily imposed.

    a. Associations governed by the Minnesota Common Interest Ownership Act (MCIOA) are required, at a minimum, to conduct a review of the financial statements at the end of every fiscal year. Additional requirements may be stipulated in the association’s Declaration. As outlined below, Minnesota Statute §515B.3- 121 requires that all associations hire an independent licensed CPA to review the association’s financial statements.
     
  2. It may be required by the Association’s governing documents.

  3. With either a review or audit, some form of assurance is rendered on the Association’s financial statements.

    a. The objective of a review is to obtain limited assurance that there are no material modifications that should be made to the financial statements in order for them to be inconformity with accounting principles generally accepted in the USA.

    b. The objective of an audit is the expression of an opinion about whether the financial statements are fairly presented, in all material respects, in conformity with US generally accepted accounting principles. An audit is the highest level of assurance that only a CPA can provide.

515B.3-121 ACCOUNTING CONTROLS

(a) Subject to any additional or greater requirements set forth in the declaration or bylaws, a review of the association's financial statements shall be made at the end of the association's fiscal year, unless prior to 60 days after the end of that fiscal year, at a meeting or by mailed ballot, unit owners, other than declarant or its affiliates, of units to which at least 30 percent of the votes in the association are allocated vote to waive the review requirement for that fiscal year. A waiver vote shall not apply to more than one fiscal year, and shall not affect the board's authority to cause a review or audit to be made. The reviewed financial statements shall be delivered to all members of the association within 180 days after the end of the association's fiscal year.

(b) The review shall be made by a licensed, independent certified public accountant. A licensed, independent certified public accountant means an accountant who (i) is not an employee of the declarant or its affiliates, (ii) is professionally independent of the control of the declarant or its affiliates, (iii) is licensed in accordance with chapter 326A, and (iv) satisfies the tests for independence as promulgated by the American Institute of Certified Public Accountants.

(c) Where the financial statements are prepared by an independent certified public accountant, they shall be prepared in accordance with generally accepted accounting principles as established from time to time by the American Institute of Certified Public Accountants, and shall be reviewed in accordance with standards for accounting and review services. In such case, the financial statements shall be presented on the full accrual basis using an accounting format that separates operating activity from replacement reserve activity.

This article was written by: 
Michael Mullen
Michael P. Mullen, CPA
 
Monday March 20, 2017