The annual meeting is quickly approaching (Feb 20, 7PM) and this annual meeting brings something new. Besides the typical agenda which you should have received via mail, the board will also be requesting an advisory vote on performing an audit.
Why does a board conduct an advisory vote? A board conducts an advisory vote when they are interested in hearing membership opinion to help guide them on a future decision.
Is an advisory vote binding? No an advisory vote is not binding.
What is the issue I will be voting on? The issue at hand is whether to have the HOA’s Financial Statements audited by an outside CPA firm. In assessing this need, inquiries were made as to the cost and it was estimated to be $10,000 to $16,000.
What background should I have before I vote? There are three levels of financial statement services provided by CPA firms:
- The first level is a compilation. A compilation simply assists management in preparing the financial statements without undertaking to provide any assurance that there are no material modifications that should be made to the financial statements.
- The second level is a review. A review engagement is conducted to provide limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the financial reporting framework.
- The highest level is an audit. The purpose of having an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are prepared in accordance with the proper financial reporting framework. An audit enhances the degree of confidence that intended users can place in the financial statements.
The auditor obtains reasonable assurance about whether the financial statements as a whole are free from material misstatement, and whether the misstatements are from error or fraud. However, because auditors do not examine every transaction and event, there is no guarantee that all material misstatements, whether caused by error or fraud, will be detected. In addition, the audit process will also assess internal processes and controls and issue a report regarding any weaknesses or deficiencies.
Currently our financial statements are compiled once a year by our CPA firm. Arizona statute requires an HOA have a compilation, review, or audit be performed by a CPA annually.
What Actions has the board taken to reduce the need for an audit?
During 2016, the Board has made financial transparency a priority. Below are listed some of the changes that have been made to increase transparency and to strengthen internal controls.
- The board increased transparency by putting all monthly financial reports online for homeowners to view.
- The treasurer moved to the bill.com payment system, which ensures all bills are approved by two board members and HOA checks are no longer used.
- The finance committee documented all key financial processes and posted them on web for homeowners to see. The financial processes include important checkpoints and safeguards that formerly were not documented and may or may not have been followed.
- The board approved new purchasing guidelines that detail procedures for selecting vendors and require periodic re-bidding for work done by long-term contractors.
- The board had all financial processes reviewed by a volunteer homeowner who is also a CPA.
- The investment policy was updated.
The Board is committed in 2017 to addressing issues raised in the review of financial processes.
Do other Fairfield HOAs perform audits? Generally not. Of the HOAs that the Board has talked with only one has an audit and the others have compilations performed. [updated 2/15/17]
What are the pros and cons of performing an audit?
PROS: An audit will provide the highest level of assurance that the financial statements are free from material misstatements. An audit will also assess the organization’s internal controls and report on any deficiencies or weaknesses. An audit will provide the greatest level of confidence.
CONS: An audit does not examine every transaction and cannot guarantee the detection of fraud. An audit is costly and time consuming
How will the vote be formulated? You will be asked to vote Yes (show of hands) if you believe the board should spend $10,000-$16,000 in the audit. You will be asked to vote No (show of hands) if you do not believe the board should spend money on this at this time.
If I don’t attend the meeting, do I get to vote? No. Only those who show up in person will vote on this issue. This is an advisory vote that the Board will consider in making a future decision. If you feel strongly on this issue and are unable to attend the meeting in person, you may contact the secretary to register your position.
How would an audit be financed? If the board decides to pursue an audit, it will be paid for out of the operating budget.
If we do an audit, would that cause my dues to go up? Not directly. This will come at the expense of reduced contributions to reserve fund and/or reduced expenditures on other postponable operating expenditures. Over time if our reserve fund is unhealthy or as our operational expenses increase due to additional expenditures such as this or simply inflation on our base expenses, dues could be increased.
Article Submitted by Finance Committee (Tammy Eversole, Kathy Mitton, Guy Scharf, Larry Spencer, Steve Struck)
Contact ✉ Larry Spencer, SMVE Treasurer if you’d like additional information.