Understanding HOA Financial Audits

If you've attended your HOA's annual meeting or reviewed your Association's financial statements, you may have heard someone mention a financial audit.

For many homeowners, the word audit immediately sounds like something must be wrong.

Is money missing?

Did someone find a problem?

Is the Association being investigated?

Not necessarily.

A financial audit can simply be part of an Association's regular financial reporting process.

And here's something many homeowners may not realize:

Not every Florida HOA is required to have an annual financial audit.

Depending on the Association's annual revenues and other circumstances, Florida law requires different levels of financial reporting.

So what's the difference between an audit, a review, a compilation, and a report of cash receipts and expenditures?

Let's take a closer look.

What Is a Financial Audit?

A financial audit is an independent examination of an Association's financial statements performed by a Certified Public Accountant (CPA).

The CPA performs auditing procedures and examines financial information to determine whether the financial statements are fairly presented under the applicable financial-reporting standards.

At the end of the process, the CPA issues an auditor's report.

An audit provides a high level of independent assurance about the financial statements, but it is important to understand what an audit doesn't do.

An audit doesn't guarantee that every mistake or instance of fraud will be discovered.

Auditors use testing, sampling, professional judgment, and other procedures to obtain reasonable assurance about the financial statements.

So an audit provides meaningful independent oversight, but it isn't a guarantee that every possible problem will be found.

Does Every Florida HOA Need an Audit?

No.

Florida's HOA financial-reporting requirements are found in Florida Statute §720.303(7), “Financial Reporting.” This section explains the different levels of annual financial reporting, the revenue thresholds that generally determine which level applies, and the deadlines for preparing and providing the annual financial report to homeowners.

Want to read the law yourself?  Visit the official Florida Legislature's statute page for §720.303 and scroll to subsection (7), FINANCIAL REPORTING.

HOA Financial Reporting Under the current requirements:

$500,000 or more in annual revenues

Audited financial statements.

$300,000 to less than $500,000

Reviewed financial statements.

$150,000 to less than $300,000

Compiled financial statements.

Less than $150,000

A report of cash receipts and expenditures.

There is also an important additional requirement: an Association with at least 1,000 parcels must prepare audited financial statements regardless of its annual revenues.

So when a homeowner asks:

“My friend's HOA gets an audit every year. Why doesn't ours?”

The answer may simply be that the two Associations have different revenues, sizes, or financial-reporting requirements.

Florida law also contains provisions that may allow or require a different level of reporting under certain circumstances, so the revenue thresholds aren't always the end of the inquiry.

What's the Difference Between the Four?

These accounting terms can sound much more complicated than they need to.

Here's the basic idea.

Audited Financial Statements

An audit provides the highest level of assurance of these four reporting levels.

A CPA performs audit procedures, examines evidence, tests financial information, and ultimately provides an opinion concerning whether the financial statements are fairly presented under the applicable financial-reporting framework.

Reviewed Financial Statements

A review provides less assurance than an audit.

The accountant generally performs analytical procedures and inquiries rather than the more extensive testing performed during an audit.

Compiled Financial Statements

With a compilation, an accountant assists in presenting the Association's financial information in the form of financial statements.

But the accountant doesn't provide assurance about that financial information.

That's an important difference.

Report of Cash Receipts and Expenditures

This is the most basic of the four reporting levels.

It reports money received and money spent during the year using the classifications required by Florida law.

Which level applies depends on the Association and the requirements of Florida law.

Does an Audit Mean Everything Is Financially Healthy?

No.

This is an important distinction.

An audit addresses the Association's financial statements. It doesn't necessarily tell you that the Association has enough money for everything it may face in the future.

An Association can have audited financial statements and still be dealing with:

limited cash,

large upcoming repairs,

inadequate reserves,

increasing insurance costs,

or other financial pressures.

So the existence of an audit shouldn't automatically be interpreted to mean:

“Everything is financially fine.”

Those are two different questions.

Does an Audit Look for Fraud?

An audit considers risks that could result in material misstatements in the financial statements, including risks involving fraud.

But a financial-statement audit isn't the same thing as a forensic investigation specifically designed to investigate suspected fraud.

That's an important distinction for homeowners.

If an Association has a specific concern involving missing money, theft, or suspected fraudulent activity, a different type of investigation may be appropriate.

Why Should Homeowners Care About the Annual Financial Report?

The annual financial report gives homeowners another view of the Association's finances.

Think about it this way:

The budget tells you what the Association planned financially.

The annual financial report helps show you what actually happened.

Homeowners can look at revenues and expenses, significant account balances, liabilities, and reserves when applicable.

Comparing financial information from one year to another can  also help identify significant changes.

And don't overlook the notes accompanying financial statements.

Sometimes those notes help explain numbers that don't tell the whole story by themselves.

When Should Homeowners Receive the Annual Financial Report?

Florida law establishes deadlines for HOA financial reporting.

Generally, the Association must prepare and complete the financial report within 90 days after the end of the fiscal year, unless an annual date is provided in the bylaws.

Within 21 days after the final financial report is completed or received from the third party preparing it, but no later than 120 days after the end of the fiscal year or other date provided in the bylaws, the Association must provide members with the report or written notice that a copy is available upon request at no charge.

In other words, the annual financial report isn't simply something prepared for the Board and placed in a file.

It's information members are entitled to receive or be told is available to them.

What Should I Look for When I Read It?

You don't need to become an accountant.

Start with the bigger picture.

Has the Association's financial position changed significantly since the previous year?

Were there unusually large expenses?

How much cash does the Association have?

What do the statements show about reserves, if the Association maintains them?

Are there significant liabilities?

What do the notes explain?

And if there's an independent CPA report, what does that report actually say?

If something isn't clear, ask questions.

Financial reports become much more useful when homeowners actually read them.

The Budget and the Annual Financial Report Tell Different Stories

This is an important difference.

The Board prepares the annual budget looking forward.

It estimates expenses such as insurance, landscaping, management, utilities, maintenance, and repairs and determines how much revenue the Association expects to need.

The annual financial report looks backward.

It shows what happened financially during the year.

One helps explain where the Association planned to go.

The other helps show where it actually went.

Understanding both gives homeowners a much better picture of their Association's finances.

The Bottom Line

A financial audit doesn't automatically mean something is wrong with your HOA.

And not every Florida HOA is required to have one.

Florida law establishes different levels of financial reporting depending on the Association's revenues and, in some circumstances, other factors. Those reporting levels range from a report of cash receipts and expenditures to audited financial statements.

Whatever level applies to your Association, the annual financial report can be a valuable tool for understanding its finances.

You don't have to master every accounting term.

Start with the bigger picture.

Read the report.

Read the notes.

Ask questions when something doesn't make sense.

And remember:

The budget tells you where the Association planned to go.

The annual financial report helps show you where it actually went.

You don't have to learn everything today.

Knowledge builds confident homeowners.

Engaged homeowners build stronger communities.

Let's keep the conversation going.

Florida HOA Spotlight™ — Helping Homeowners Understand Their Communities... One Conversation at a Time.