An HOA review can help communities assess their financial health and prepare for future expenses. Financial planning is crucial for HOAs, as it supports stability and long-term maintenance. For this reason, HOA boards must regularly evaluate their records through a financial review. In essence, a proper review is not only smart but also essential.
What is an HOA Review?
An HOA review is a formal examination of the association’s financial records. This process usually includes an evaluation of income, expenses, bank statements, and financial statements. The goal of a review is to confirm the accuracy of these records and identify any irregularities that may exist. A review also gives the board a better understanding of the HOA’s financial standing. This will help guide their decisions related to budgeting, spending, and long-term financial planning.
Unlike a full audit, a review has a more limited scope. It is also less expensive and not as detailed, but it can still offer valuable insights. The HOA board or an outside accountant typically performs this review. While not always required by law, it is best practice for an HOA board to conduct regular reviews.
HOA Audit vs Financial Review
Some people might think that a review and an audit are the same, but they are not. An HOA audit tends to be more detailed. It involves verification of financial data through documentation and testing. Moreover, it is usually conducted by a Certified Public Accountant (CPA).
A financial review, on the other hand, is usually more focused on analysis than investigation. This process identifies trends, verifies reasonableness, and ensures that the reports are accurate and comprehensible. A review does not guarantee the complete accuracy of financial data, but it does enable boards to be more confident in the information.
Due to the complexities and costs, many HOAs opt for annual reviews and conduct audits only for major events or legal compliance purposes.
Reasons to Get an HOA Review
Proper HOA financial reporting plays a critical role in the success of every community. A review provides excellent support for this by giving the board a clear view of where the HOA stands financially. Below are some of the most important reasons to perform a review.
Statutory Requirement
Some states require annual or periodic financial reviews. For instance, California Civil Code Section 5500 requires a board review of the association’s finances. This includes monthly reviews of the operating and reserve accounts, as well as revenues and expenses, and account statements. The law may also dictate who performs the review and how the board must share the results with homeowners.
In addition to state laws, an HOA’s governing documents may also impose a review requirement. Boards must follow these rules to remain compliant and avoid liability. Even in the absence of such a requirement, both in the governing documents and state law, boards would be wise to conduct a review to ensure transparency and accuracy.
Forecasting Future Needs
A financial HOA review can help the board plan for upcoming expenses. It can shed light on the association’s spending patterns and can also support accurate budgeting. A review turns up insightful data and results. Boards can then use this data to prepare for future inflation, maintenance, and other recurring costs.
Reserve Fund Assessment
The review can also assess the health of the association’s reserve fund. This fund is meant for significant repairs and replacements. A thorough review of the HOA’s finances will show whether the current reserve balance aligns with long-term needs. If reserves fall below the required balance, the board can decide to increase dues or levy special assessments.
Transparency and Accountability
Regular reviews of the association’s financial records can go a long way in enhancing financial transparency. These reviews can demonstrate the board’s commitment to ethical practices and sound decision-making. Homeowners are also more likely to trust a board that performs frequent reviews and clearly communicates the results.
Red Flags an HOA Review can Uncover
One of the greatest benefits of an HOA review is its ability to expose potential issues early. Here are the most common red flags that a review can identify.
1. Overspending
A review might reveal that the HOA is consistently going over its budget. This will put pressure on future finances and may lead to special assessments or large increases in dues. If the board can identify this early on, it will allow them enough time to correct the situation.
2. Discrepancies in Dues Collection
Boards are responsible for tracking owner payments and following up on any unpaid dues. An HOA review can highlight gaps in collection procedures or pinpoint reporting errors. These issues can result in a cash flow issue, which might delay projects or defer maintenance.
3. Irregularities in Vendor Payments
An HOA review can catch any duplicate or unauthorized payments. It can also verify that vendors are charging the correct amounts and adhering to contract terms. This will help protect the HOA from overbilling or fraud.
4. Fund Mismanagement
Improper transfers, undocumented expenses, and missing funds can all reveal themselves during a review. In more serious cases, reviews may also uncover signs of fraud or embezzlement. When the board catches these problems early, it can take corrective action and prevent major losses.
How Much is an HOA Financial Review?
The cost of a financial review can vary depending on the size and complexity of the HOA. A small association with fewer transactions might pay between $1,000 and $2,500. On the other hand, larger communities may spend $3,000 to $5,000 or more.
There are a number of factors that can influence the cost of a review, including but not limited to:
- Volume of records
- Number of bank accounts
- Level of outside professional involvement
Reviews performed by licensed accountants tend to cost more than if the board were to handle them internally. Still, most HOAs consider this a worthwhile investment, as professional reviews are more reliable and accurate, especially if the board has no prior experience in conducting one.
When and How Often to Conduct an HOA Review
Regular reviews are necessary for any community association. Some HOAs conduct quarterly or semi-annual reviews, but the frequency ultimately depends on the association’s needs. Additionally, state laws and the HOA’s governing documents might also have a say in the matter.
Timing is also important. A review should occur after the fiscal year ends, as this is when all transactions are typically recorded. This ensures a complete and accurate picture for the HOA. Boards should also perform a review after leadership changes, large expenses, or new assessments.
Getting Professional Help
A proper HOA review can help associations protect their financial health and meet future needs. It also builds homeowner trust and prevents problems down the line. If an HOA can’t perform a review internally, hiring an HOA management company can be of great service.
Elite Management Services offers comprehensive HOA accounting services to communities. Call us today at (855) 238-8488 or email us at help@emspm.com to get started!
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