The topic of HOA audit vs review vs compilation is often a source of confusion for board members. Each option serves a different purpose and offers a different level of financial assurance. Choosing the right one depends on the association’s size, budget, and governing documents.
HOA Audit vs Review vs Compilation: What’s the Difference?
Financial reports help boards understand the association’s financial health. An audit, review, and compilation all serve this goal, but each does so at a different level of detail. Knowing how they differ can allow boards to match the service to their actual needs.
What is an HOA Audit?
An HOA audit provides the highest level of financial assurance. A Certified Public Accountant (CPA) examines the association’s financial statements and supporting records in detail. The accountant verifies balances, tests transactions, and evaluates internal controls.
During an audit, the accountant confirms bank balances directly with financial institutions. They also review invoices, contracts, reserve accounts, and income from dues. This process will help identify errors, misstatements, or signs of fraud.
Audits require significant time and documentation. Boards must provide access to financial records, governing documents, and prior reports. The final audit report also includes an opinion stating whether the financial statements present an accurate picture of the association’s finances.
Large associations often rely on audits because of their complexity. Communities with higher budgets, shared structures, or increased risk exposure can benefit from this level of review.
What is an HOA Review?
An HOA review offers moderate financial assurance. A CPA analyzes financial statements using inquiry and analytical procedures. The accountant does not test transactions or confirm balances directly.
Instead, the accountant asks management questions and compares current financial data with prior years. They look for unusual trends or inconsistencies that may require clarification. This approach provides confidence that the financial statements make sense overall.
Reviews cost less than audits because they require fewer procedures. They also take less time to complete. Many mid-sized associations choose reviews when an audit feels excessive, but basic reporting feels insufficient.
A review report states that the accountant did not find material issues based on the procedures performed. It does not provide the same level of certainty as an audit.
What is an HOA Compilation?
An HOA compilation represents the most basic financial service. A CPA prepares financial statements from the association’s financial information. The accountant does not verify accuracy or perform analysis.
The HOA compilation report clearly states that the accountant offers no assurance. They rely entirely on information from the board or management. This option works best for small associations with simple finances.
Compilations can help present financial data in a professional format. Lenders, owners, or vendors may request this format. Because compilations require the least work, they also cost the least.
HOA Audit vs Review vs Compilation: State Requirements
State laws rarely require one specific financial service for all associations. Requirements often depend on the association’s size, budget, or governing documents. Boards must review state statutes carefully.
Illinois law does not require every association to obtain an audit, review, or compilation. The Illinois Common Interest Community Association Act focuses on transparency and access to records. It requires associations to provide financial information to owners upon request.
The governing documents often play a larger role than state law. The CC&Rs and bylaws, in particular, may require an annual audit or review. Some documents allow boards to choose the level of service each year.
Boards must follow their governing documents even when state law remains silent. Failure to do so can create disputes with owners and expose the board to liability.
Who Should Conduct an HOA Audit?
An HOA audit should be performed only by a qualified third-party professional, specifically a CPA with experience in community associations. Board members should never attempt to audit their own association. This approach creates conflicts of interest.
Professional accountants are also the best option because they stay up to date on accounting standards and regulatory changes. They can also provide valuable insights that board members cannot.
Additionally, hiring a third-party professional can help build trust with homeowners. Owners feel more confident when an independent expert reviews association finances.
HOA Audit vs Review vs Compilation: Costs and Fees
Costs can vary based on association size, complexity, and location. Communities with larger budgets or more complex facilities involve more work, so they will likely face a higher price tag. That said, each service carries a different price point.
An HOA audit often costs between $3,000 and $8,000. Since this is the most extensive, it’s also the most expensive. Meanwhile, an HOA review usually ranges from $1,500 to $4,000. Since there are fewer procedures involved, there’s also a smaller demand for labor or time. Finally, an HOA compilation often costs between $500 and $1,500. Smaller associations often choose this option due to budget constraints.
The Benefits of Financial Services for HOAs
Many companies offer financial services to community associations. Instead of relying on their own devices, boards would be wise to employ financial services for the following reasons:
- Improved Financial Transparency. Professional reports offer a clearer, more consistent view of an association’s finances. Owners can understand where money is coming from and how the association is spending it.
- Better Decision-Making. When financial data is accurate and reliable, board members can make smarter budget and reserve decisions.
- Fraud Prevention and Detection. Audits and reviews help identify irregularities early. This helps discourage the misuse of funds and protects the association.
- Enhanced Credibility With Lenders. Banks often require audited or reviewed financial statements. Associations can increase their chances of securing loans or refinancing and getting favorable terms.
- Support for Board Transitions. Clear financial records help new board members better understand the association’s financial position.
- Compliance With Governing Documents. Financial services can help boards meet document requirements, reducing legal liability.
All Things Considered
Choosing between an HOA audit vs review vs compilation will depend on the association’s size, complexity, and governing documents. Each option serves a specific purpose and offers a different level of assurance. Boards should weigh costs, risks, and expectations before making a decision.
Hillcrest offers HOA management services to communities in Chicago. Call us today at 630-627-3303 or contact us online to request a proposal!
RELATED ARTICLES:
- Self-Management vs HOA Management Company For Small HOA Communities
- Your Guide To HOA Tax Returns And Tax Filing In Illinois
- What Happens To HOAs When They Miss Annual Report Filing?
