HOA Detective™ – Feb 14, 2025: In an era where the Chief Executive of the United States is dismantling the most important functions of government in his zeal to rid the nation of the awful scourge of “waste, fraud and abuse” it seems an appropriate time to address the status of HOA Accounting Standards in the United States, in particular the audit and review standards that govern the accounting professionals who provide such services to HOA clients.
Homeowners Associations (HOAs), also known as Common Interest Developments (CIDs) or Common Interest Realty Associations (CIRAs), play a pivotal role in managing shared properties and amenities within communities. Accurate and transparent financial reporting is essential for these entities to ensure fiscal responsibility and maintain the trust of their members. However, the accounting standards governing HOAs have been criticized for being outdated and inadequate, leading to significant challenges in an industry that often lacks stringent regulation.
Current Status of Accounting Standards for HOAs
The primary guidance for accounting and auditing in HOAs has historically been the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide for Common Interest Realty Associations. Originally issued in 1991, this guide was last updated in May 2008. In 2009, the Financial Accounting Standards Board (FASB) incorporated this guidance into the Accounting Standards Codification (ASC) under Topic 972, titled “Real Estate—Common Interest Realty Associations”. Since then, there have been minimal updates specific to HOAs, despite significant changes in the real estate and financial landscapes.
In recent years, broader accounting standards have been introduced that impact HOAs. Notably, the FASB’s Accounting Standards Codification Topic 606 (ASC 606), “Revenue from Contracts with Customers,” became effective for nonpublic entities for periods beginning after December 15, 2018. This standard requires entities, including HOAs, to recognize revenue in a manner that reflects the transfer of promised goods or services to customers. For HOAs, this pertains to member assessments and other revenue streams.
Critiques of Current Standards
Many industry experts argue that the existing accounting standards for HOAs are insufficient and have failed to keep pace with the evolving complexities of these organizations. The lack of updated, industry-specific guidance has led to inconsistencies in financial reporting, making it challenging for stakeholders to assess the financial health of HOAs accurately.
One significant issue is the treatment of reserve funds. HOAs are responsible for maintaining common areas and amenities, which requires setting aside funds for future repairs and replacements. However, the current standards provide limited guidance on how these reserves should be calculated, reported, and audited, leading to potential underfunding and financial shortfalls.
Challenges in an Unregulated Industry
The inadequacy of accounting standards is exacerbated by the fact that the HOA industry is largely unregulated at both state and federal levels. This lack of oversight can result in financial mismanagement, fraud, and a general lack of transparency, ultimately harming homeowners and communities.
Key Issues to Consider
- Enhanced Reporting for HOAs with Bank Loans
HOAs that secure loans from financial institutions take on additional financial obligations that can impact their members. Given this increased financial complexity, there is a compelling argument that such HOAs should adhere to more rigorous financial reporting standards, such as undergoing annual audits instead of limited reviews or having no external financial scrutiny. Audits provide a higher level of assurance regarding the accuracy of financial statements, which is crucial for stakeholders, including homeowners and lenders. - Accountability to the Buying Public
Prospective homebuyers often consider the financial health of an HOA when making purchasing decisions, as it can affect property values and future financial obligations. Therefore, there is a case to be made for HOAs to be held to financial reporting standards like those of publicly traded companies, ensuring transparency and accountability to current and potential homeowners. - Regulatory Oversight
The absence of stringent financial reporting requirements for HOAs, especially those managing substantial annual budgets, raises concerns about potential mismanagement and lack of accountability. State and federal regulators may need to implement more robust financial reporting and auditing requirements to protect homeowners and ensure the financial integrity of these associations.
Conclusion
The current accounting standards for HOAs are outdated and inadequate, leading to significant challenges in financial transparency and accountability within the industry. Addressing these issues through updated standards, enhanced reporting requirements for HOAs with financial obligations, increased accountability to the public, and greater regulatory oversight is essential to protect homeowners and ensuring the financial health of these communities.
For more detailed information on this topic, you may refer to the following resources:
- An Overview of Accounting Standards for the CIRA Industry
- Revenue Recognition Implementation for Common Interest Realty Associations
- New Revenue Recognition Standards for CIRAs: Are You Ready?
By staying informed and advocating for stronger standards, stakeholders can work towards a more transparent and accountable future for HOAs.
