How to Navigate an HOA Audit

Besides being useful and necessary, a scheduled HOA audit is a best practice. If you do business on behalf of your HOA, for example, you manage its NJ Condo Association Insurance contracts, you’ll find audits helpful to your job. Transparently sharing audit results with community members builds trust and goodwill. A comprehensive audit is a reliable way to detect possible financial irregularities and other challenging issues facing an association.

Audits Are Not Optional

A Covenants, Conditions & Restrictions (CC&R) document is a contractual agreement between the board and HOA community members. A typical CC&R will include provisions for financial auditing of the HOA’s books. Audits are part of doing HOA business, and NJ law requires them. Larger communities with gross annual receipts of $100,000 or greater must have a Certified Public Accountant (CPA) perform a yearly audit. Communities with less than $100,000 are on a three-year cycle for audits. In addition to statutory requirements, association by-laws most often demand audits on a regular schedule.

Failure to Perform Required Audits Creates Loss Exposure 

Board positions, legal protection, and insurance coverage are at risk, as are penalties when a prescribed audit fails to happen. Board member actions or inactions such as failure to conduct an audit resulting in losses to residents can cause the board to be accountable for the losses. A Directors & Officers (D&O) policy as part of the NJ Condo Association Insurance program can protect by helping to pay D&O insured expenses and losses.

What Type of Documents Are Necessary for an HOA Audit?

The best way to prepare for an HOA audit is to gather and organize copies of all necessary documentation before starting. Process Street offers an in-depth HOA audit checklist worthy of your time to review. An independent CPA will conduct an HOA audit by performing a comprehensive and impartial examination of necessary and requested documents. 

At a minimum, your audit preparation should include the following list of documents compiled and organized to ensure a thorough and straightforward auditing process:

• Bank statements complete with deposit slips, canceled checks, and notices.
• Association records, including Board Meeting Minutes.
• Paid and open invoices.
• Condo insurance coverage reports.
• Current and recent past budget documents.
• Investment documentation.
• Vendor and related contracts.
• Current budget and next year’s estimate.
• Tax records and forms, including reserve fund 1099s.
• Projections for assessments of required financing for both ongoing and known future projects, including engineering studies.
   

The Value of Recordkeeping

A well-run association will follow the guidelines for maintaining financial records from the 

American Institute of Certified Public Accountants. It will stress the importance of consistent, continuing procedures to maintain its financial records. Audits by nature are expensive and time-consuming. By keeping records up-to-date and organized, the association can shave time and money from the auditing process. Correctly maintained records are even more valuable in instances of less frequent audits on multi-year cycles. 

The Downside of Disorganization

Errors happen, and illegal acts transpire primarily in the dark. Whether an error, omission or criminal act, many problems that haunt HOA boards occur because no one knows about or pays attention to them. The lack of keeping prioritized and systematized current records creates the potential for unforeseen and unwanted problems. 

Employees and board members with account access can divert funds for illegal purposes. Contracts and budgets are living documents that must be kept current. Uncontrolled construction contracts can cause exorbitant cost overruns when no one is paying attention. Vendors may be servicing the association with outdated agreements that leave them and the association at risk. Insurance policies renewed without updating to reflect current conditions can lead to devastating uninsured losses. Unchecked petty cash can be a source of intentional or accidental misuse.

Having a team of experienced professionals will help your association stay on top of budgets, recordkeeping, audits, and more. Since insurance touches nearly every aspect of managing an HOA, it is advisable to work with an agency that has extensive experience creating comprehensive NJ Condo Association Insurance Programs. Dickstein Agency’s condo insurance experts are ready to share their knowledge and expertise. They work to help condo association executives make smart, informed decisions that lead to complete coverage at competitive prices.

About Dickstein Associates Agency

Dickstein Associates Agency has distinguished itself as a leading provider of personal and business insurance in the tri-state area for over 55 years. We pride ourselves on being advocates for our clients and providing them with quality and affordable coverages. As Trusted Choice™ independent insurance agency, we partner with various national and regional carriers, allowing for flexible and unbiased coverage for each client’s unique circumstances. For more information on how you can leverage all of your insurance to work best for you, and how we can secure the best insurance in the marketplace based on your specific needs and business objectives, contact us today at (800) 862-6662.