HOA financial oversight is one of the most important but least understood board responsibilities. How confident are you that the association's financial statements are accurate? That funds haven't been misappropriated? That the reserve fund is properly segregated? An independent financial examination answers these questions — but there are three levels, and knowing which one your state and CC&Rs require can save the association significant money.
Three Levels of Financial Examination
| Level | What the CPA Does | Assurance Provided | Typical Cost |
|---|---|---|---|
| Audit | Tests transactions, confirms balances, reviews internal controls | Highest — "reasonable assurance" the statements are correct | $2,000–$5,000+ |
| Review | Analytical procedures and inquiries; no transaction testing | Limited assurance — nothing came to attention that causes concern | $800–$2,000 |
| Compilation | Formats financial data provided by management into statements | None — CPA makes no assurance about accuracy | $300–$800 |
State Requirements: When Is an Audit Mandatory?
California (Civ. Code § 5012) requires a review for associations with annual revenues between $75,000 and $250,000, and an audit for associations over $250,000. Florida Chapter 718 (condos) requires audits for associations with annual revenues over $500,000 and reviews for those between $100,000 and $500,000. Florida Chapter 720 (HOAs) requires a compilation, review, or audit based on budget size. Nevada, Colorado, and most UCIOA states require financial reports but leave the examination level to the governing documents.
What the CC&Rs May Require
Many CC&Rs drafted in the 1990s–2000s require an annual audit regardless of state law — which may be more than necessary (and more expensive) for smaller associations. If your CC&Rs require an audit and your association has annual revenues under $75,000, a formal amendment may allow a less expensive review instead. Consult an attorney before downgrading your financial examination level.
How to Read an Audit Report
The key section of an HOA audit report is the independent auditor's opinion letter. An "unqualified" (clean) opinion means the CPA found the financial statements are fairly presented. A "qualified" opinion means the CPA found an issue but completed the audit. An "adverse" opinion means the financial statements are materially misstated. Any opinion other than unqualified should trigger immediate board action and potentially owner disclosure.
Reserve Fund: Auditor's Special Focus
Auditors pay special attention to the reserve fund because it is the area most vulnerable to misappropriation and accounting errors. The auditor will verify: that reserve funds are held in a segregated account; that the balance matches the reserve study's recommended amount; and that withdrawals from the reserve fund were properly authorized and documented.
Disclaimer: Financial examination requirements vary by state and association size. This guide is for general informational purposes only. Consult a licensed CPA experienced in HOA accounting and a licensed attorney for advice specific to your association.
This article is for general informational and educational purposes only. It does not constitute legal advice. HOA laws vary by state, and your association's specific CC&Rs and bylaws may create additional requirements. Always consult a licensed attorney in your state before taking legal or enforcement action. Full disclaimer →