California’s statutes do not require homeowner associations to perform a yearly audit.  An association’s governing documents may, however, require an “audit.”  Otherwise, only the preparation of a yearly review of the financial statements of the association is required.

Civil Code Section 1365 requires the Association to prepare and distribute the following documents, unless the governing documents impose more stringent standards:

1.    A pro forma operating budget or a summary of the pro forma operating budget, with a written notice that the pro forma operating budget is available to the membership.

2.    (Commencing January 1, 2009.) A summary of the reserve funding plan adopted by the board of directors of the association, as detailed in Civil Code Section 1365.5(e)(4).  The summary must include a notice to members that the full reserve study plan is available upon request and the association shall provide the full reserve plan to any member upon request.

3.    A review of the financial statement of the association, prepared in accordance with generally accepted accounting principles by a CPA for any fiscal year in which the gross income to the association exceeds seventy-five thousand dollars ($75,000). A copy of the review of the financial statement must be distributed within 120 days after the close of each fiscal year.

4.    A statement describing the association’s policies and practices in enforcing lien rights or other legal remedies for default in payment of its assessments against its members.

5.    A summary of the association’s property, general liability, earthquake, flood, and fidelity insurance policies, which shall be distributed not less than 30 days nor more than 90 days preceding the beginning of the association’s fiscal year.

At a minimum, a review of the financial statement of the association is required for associations with gross income exceeding $75,000.  However, if the governing documents require an “audit,” it must be performed.

Recently, the Statement on Auditing Standards applicable to audits  changed to avoid these expenses making audits more burdensome and much more expensive.  To avoid these expenses, those associations with more stringent requirements in their documents requiring an audit should consider proposing an amendment to require simply a review of an association’s financial statements by a licensed CPA, as required by Civil Code Section 1365.

Please contact our office if you have further questions or would like a representative of our firm to discuss this matter with one of your Boards of Directors.