As a board member or a resident of community associations, it’s important to know the differences between internal vs. external auditing. The financial performance and transparency of your homeowner’s association (HOA) are crucial for a well-functioning community. In this article, we will discuss the differences between internal and external auditing and how to determine which option is best for your HOA.
External Auditing: A Closer Look
An external HOA audit is an independent evaluation of your association’s financial records and accounting practices. It is conducted by a certified public accountant (CPA) who is not affiliated with your HOA. The CPA will review the financial statements, transactions, and internal controls to determine if they are accurate, complete, and in accordance with generally accepted accounting principles (GAAP). If your HOA is required to undergo an external audit by state law or the governing documents, it must be completed by a licensed CPA to ensure objectivity and integrity.
Internal Auditing: A Self-Assessment Approach
In contrast to an external audit, internal auditing is the process of reviewing and assessing an organization’s financial records, processes, and internal controls from within. It is typically conducted by the HOA’s accounting department or management company. Internal audits provide a detailed analysis of the organization’s financial performance and internal operations, identifying any potential areas of advancement or opportunities for growth.
Which Audit is Right for Your HOA?
To determine which auditing process is best suited for your association, consider the following factors:
- Size of the HOA: Smaller associations with fewer financial transactions or more straightforward operations may find that internal auditing provides sufficient oversight and management. However, larger organizations with complex financial transactions and numerous vendors may benefit from the added expertise of an external audit.
- Requirements and Regulations: Some states or governing documents may require HOAs to undergo external audits, especially for those above a certain size or financial complexity. Be sure to review any applicable regulations or requirements that might govern your association.
- Access to Accounting Professionals: If your HOA has experienced accounting staff or access to outside professionals, an internal audit can be a cost-effective method to review financial records and operations. However, if the HOA lacks the expertise necessary to perform a thorough internal audit, opting for an external audit can provide peace of mind and assurance of accurate financial reporting.
- Transparency and Trust: For organizations that may have experienced financial discrepancies or lack of trust among the members, an external audit can provide a higher level of transparency and confidence in the financial reporting process. An objective evaluation by an independent auditor can help restore and maintain trust among members and board directors.
- Costs: External audits typically require a higher cost due to the expertise and time commitment of the CPA. On the other hand, internal audits can be performed by existing staff or management companies at a lower cost. Consider your HOA’s budget when determining which option is more financially feasible.
Both internal and external auditing have their benefits and drawbacks, but ultimately, the decision will depend on the unique needs and circumstances of your HOA. It’s essential to regularly review and evaluate financial processes and controls, regardless of which auditing approach is chosen. By ensuring accurate financial reporting and transparency, you can help maintain a healthy and successful community for all members. So, make sure to choose the right option for the HOA audit that best fits your association’s needs and goals. Remember, the ultimate goal of any audit is to protect the interests of the HOA and its members, so choose wisely.