HOA Budgeting & Finance
Audit vs. Review vs. Compilation: What Does Your HOA Need?
"Do we need an audit?" is one of the more confusing financial questions a board faces — partly because there are actually three different levels of third-party financial oversight, and they're not interchangeable. Understanding the difference helps you meet your obligations without overpaying for assurance you don't need. Here's the breakdown.
The Three Levels of Assurance
Think of these as a ladder, from lightest to most rigorous:
Compilation — a CPA takes the association's financial data and presents it in proper financial-statement format. The accountant doesn't verify or test anything; they organize and present. It provides no assurance that the numbers are accurate — just that they're properly formatted. Cheapest and lightest.
Review — a CPA performs analytical procedures and inquiries to provide limited assurance that the financials are free of material misstatement. They're not digging into every transaction, but they're checking that the numbers make sense and asking questions where something looks off. Middle ground in cost and rigor.
Audit — a CPA performs a thorough examination: testing transactions, verifying balances, confirming with third parties, and evaluating internal controls, to provide reasonable assurance (the highest level offered) that the financials are accurate and fairly presented. Most rigorous, most expensive, and the only one that involves real verification.
Which One Does Your Association Need?
The answer depends on several factors, and the first place to look is rarely the accountant:
Your governing documents. Many CC&Rs and bylaws specify a required level — often an annual audit, or an audit above a certain budget size. This is the most common source of a hard requirement, and it's binding.
State law. Some states mandate a particular level of financial oversight for associations above a size or budget threshold. Requirements vary widely by state, so check your statute alongside your state's other reserve and financial rules.
Association size and complexity. Larger associations with bigger budgets, more units, and more complex finances lean toward audits — both because the stakes are higher and because owners and lenders expect it. A small, simple community may reasonably use a review or compilation.
Lender and buyer expectations. Financing reviews and prospective buyers may want to see audited or reviewed financials, especially as GSE project reviews tighten.
Risk factors. If there's been turnover in financial roles, suspected irregularities, weak controls, or owner distrust, a higher level of assurance is worth the cost. An audit is also the most effective tool for catching or deterring the fraud and errors that quietly drain association accounts.
Cost vs. Assurance Trade-Off
The levels rise in both cost and confidence. A compilation is the cheapest but tells you nothing about accuracy; an audit costs the most but actually verifies the numbers. The right choice balances what you're required to do, what your size and risk warrant, and what your owners and lenders need to see. Many mid-size associations land on an annual review with periodic audits, or follow whatever their documents specify.
A practical note: whatever level you choose, third-party financial oversight is one of the controls that protects both the association and the board. A board that commissions appropriate review and acts on the findings is demonstrating the kind of diligence that supports its fiduciary protection.
How This Connects to Reserves
Financial oversight and reserve health are related but distinct. An audit or review examines the financial statements — including whether reserve funds are properly accounted for and held separately from operating money. It does not tell you whether your reserves are adequate — that's the job of the reserve study. Boards need both: the study to know if reserves are sufficient, and the audit/review to confirm the money is accurately tracked and properly segregated. One checks adequacy; the other checks accuracy.
Practical Guidance for Boards
- Check your governing documents first — they often specify the required level
- Check your state law for size-based mandates
- Match the level to your size, complexity, and risk — bigger and riskier argues for audit
- Consider lender and buyer expectations, especially for condos facing project review
- Don't confuse oversight with reserve adequacy — you still need a current reserve study
- Act on the findings — oversight only protects you if the board responds to what it surfaces
The Bottom Line
Compilation formats, review checks, audit verifies — three levels of assurance at three price points. Pick the one your documents, state law, size, and risk profile call for, and pair it with a current reserve study so you're confirming both that the money is tracked accurately and that there's enough of it. For the full financial-management picture, see The HOA Budget Guide.