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If you have been involved in community association management for any length of time, you have probably encountered a community that needs an audit. Audits can make people nervous. We all fear the dreaded "IRS audit", and no one likes the prospect of someone else looking over their shoulder! Yet audits are beneficial in many ways, and one of the biggest negatives, the expense, can be mitigated with a little planning.
Why an audit? Your association may be required to have an audit, either through the governing documents or by state statute. Even if there is no specific requirement, it is good business practice for most any association to undergo a periodic examination of its financial position and related documentation and procedures - whether annually or every two or three years.
What is an audit anyway? An audit is a verification of the accuracy of an entity's reported financial activity through an examination of its financial records, policies and procedures. An audit is performed by an independent Certified Public Accountant, who, in a clean opinion, will provide assurance that the stated financial position of the entity is free from any material misstatement and that the results of operations are fairly stated.
How much does an audit cost? They're not cheap. A public accounting firm may charge anywhere from one hundred dollars per hour up to three or four hundred dollars per hour, depending on the number and qualifications of the persons involved.. Many factors affect the expense of an audit, and these are but a few of the questions to consider:
Are the records organized and easily understandable? Time is money for an auditor. Extra time spent organizing an association's records into an understandable format will ultimately cost the association more money in audit fees, if not the first year, then certainly in successive years. One of the biggest variables in the cost of an audit is the organization, quality and format of the record-keeping.
Has the entity been audited annually every year? If an auditor is examining an association for the first time, he will have to spend some amount of time gaining an understanding of the association's policies and procedures, its processes for recording and reporting accounting transactions, and its system of internal controls. The auditor will take this fact into account in his proposal for a first year audit. In successive years, the auditor will have many of these facts documented, and can evaluate those facets of the association much more quickly.
Has the association's audit committee expressed concern over a specific area? Emphasis on specific areas that would not ordinarily need additional testing will require more of an auditor's time. Take caution, though, because this is not an area to try to save money. Any concerns by a member of the board or audit committee should be relayed to the auditor at the beginning of his examination. An audit is not designed to definitively assure that an association is free from any fraudulent activity or other malfeasance. Such events do occur, though, and an auditor can best serve an association by having all the information he needs to conduct his evaluation.
Does the association have a large number of transactions? Among many other tests, the auditor will examine the entire billing and collection process on a select number of customer invoices (e.g., assessments, utility billing) and also the vendor payment process. Obviously, larger associations will have more of everything - owners, vendors, and consequently, more transactions. That means more transactions to test and more of the auditor's time.Does the association have several balance sheet accounts that will require testing? In addition to the balance of all outstanding loans to the association, the auditor will confirm through independent sources the balance of all cash and investment accounts. The more accounts there are, the more time an auditor will need.
Does the association have any employees, and are they paid through a payroll service? Many associations do not have employees, but for those that do, auditors are generally familiar with the common payroll services and their reporting formats. Payroll that is processed "in-house" may require more extensive testing.
Is there some guideline for how much to pay for an audit? Because there are so many variables that affect the price of an audit, there is no general rule of thumb on audit pricing. The audit committee should get at least two or three bids, and if they are not all comparable, then each firm should be questioned about how they arrived at their bid. You may also compare your bids to the audit expense for other associations of similar size and composition - but remember that many variables exist even in similar sized associations that can affect the audit price.
Even though audits can be expensive, they are still a valuable tool in the financial management of an association. With a little careful planning though, you can directly impact the cost of that audit. And one final tip: at the conclusion of an audit, be sure to ask the auditor what you could do better to reduce their time next year. They'll be happy to share that information - it makes their job easier!
