Michigan HOA Audit Requirements: When Your Association Must Conduct Financial Reviews

Michigan HOA Audit Requirements: When Your Association Must Conduct Financial Reviews

Michigan has no state statute that mandates annual financial audits, reviews, or compilations for homeowner associations based on revenue thresholds or unit count. Your association's audit obligations flow entirely from your declaration, bylaws, and articles of incorporation. This absence of state law creates flexibility but also risk if your board does not understand what your governing documents require.

What Michigan Law Does and Does Not Require

Michigan does not set a revenue threshold above which an HOA must engage a certified public accountant to perform an audit. Unlike states that require an audit when annual revenue exceeds a specific dollar amount, Michigan leaves this decision to each association's founding documents. The Michigan Attorney General's office has authority to investigate consumer complaints about nonprofit corporations, including HOAs, but the office does not publish audit mandates.

Your first step is to locate your association's bylaws and declaration. Search for any provision that mentions financial statements, annual reports, audits, reviews, or independent accountants. Some Michigan associations drafted bylaws in the 1980s and 1990s that require an annual audit by a certified public accountant without specifying a revenue floor. Other associations require only that the board present an annual financial statement to members with no external review.

If your governing documents are silent on audits, you are not violating Michigan law by skipping one. However, you may still face fiduciary duty claims if members believe the board mismanaged funds and refused to provide transparency. Michigan common law imposes a duty of care on nonprofit corporation directors, and courts have found boards liable for failing to maintain accurate financial records.

The Three Levels of Financial Examination

When your governing documents or a member vote require financial oversight, you will encounter three types of examination. Each has a different scope, cost, and level of assurance.

An audit is the most rigorous. A certified public accountant examines your financial statements, tests transactions, confirms bank balances, and issues an opinion on whether the statements are free from material misstatement. Audits typically cost between $5,000 and $15,000 for a small to midsize HOA in Michigan. An audit provides the highest level of assurance but requires significant board time to gather documentation.

A review is less comprehensive. The accountant performs analytical procedures and inquiries but does not test individual transactions or confirm balances with third parties. A review provides limited assurance that the financial statements are plausible and free from obvious errors. Reviews typically cost $2,500 to $7,000 and take less time than an audit.

A compilation is the least rigorous. The accountant takes your trial balance and formats it into standard financial statements without verifying accuracy. A compilation provides no assurance. It simply organizes your data into readable reports. Compilations typically cost $1,000 to $3,000 and satisfy bylaws that require the board to present annual financial statements without specifying an audit or review.

A Local Example from West Michigan

The Cascade Glen Homeowners Association in Cascade Township, southeast of Grand Rapids, illustrates what happens when a board ignores its own bylaws. The association's 1998 bylaws required an annual financial review by a certified public accountant. Between 2016 and 2019, the board presented annual financial statements prepared by the treasurer but never hired an accountant. In 2020, a group of members filed a complaint with the Michigan Attorney General's office alleging financial mismanagement.

The Attorney General's office did not impose a penalty because Michigan law does not mandate audits, but the complaint prompted the board to hire a certified public accountant to perform a review. The accountant discovered that the association had misclassified $22,000 in reserve expenditures as operating expenses, understating the reserve fund balance by nearly 30 percent. The board corrected the statements and adopted a policy requiring an annual review going forward, but the dispute cost the association more than $8,000 in legal fees and damaged member trust.

This example shows that even when state law is silent, your governing documents create enforceable obligations. A board that skips a required audit or review risks member litigation and reputational harm.

When You Should Conduct an Audit Even If Not Required

Your governing documents may not require an audit, but certain circumstances make one prudent. If your association holds more than $500,000 in reserve funds, an annual audit provides assurance that the board is safeguarding member assets. If your association recently discovered embezzlement, fraud, or significant accounting errors, an audit helps restore member confidence and identifies control weaknesses.

If your association is considering a loan or bond issuance to fund a major capital project, lenders and bond underwriters typically require audited financial statements. If your board is negotiating a lawsuit settlement or insurance claim that depends on accurate financial records, an audit strengthens your position.

Some Michigan associations adopt a tiered approach. They perform a compilation when annual revenue is below $250,000, a review when revenue is between $250,000 and $750,000, and an audit when revenue exceeds $750,000. This approach balances cost with transparency and adapts as the association grows.

The Role of the Michigan Attorney General

The Michigan Attorney General's office oversees charitable organizations and nonprofit corporations under the Charitable Organizations and Solicitations Act. While most HOAs are not classified as charitable organizations, the office receives complaints about HOA financial mismanagement and can investigate under its general consumer protection authority.

The office does not have the authority to require an HOA to conduct an audit, but it can refer cases of suspected fraud or embezzlement to local prosecutors. If members file a complaint alleging that the board refused to disclose financial records or misappropriated funds, the Attorney General's office may contact the board and request documentation. A prompt, transparent response that includes recent financial statements and board meeting minutes often resolves the inquiry without further action.

What the Michigan Condominium Act Covers

If your association is a condominium, the Michigan Condominium Act governs certain financial disclosures. The Act requires the association to prepare an annual financial statement and make it available to co owners within 120 days after the fiscal year ends. The Act does not specify whether the statement must be audited, reviewed, or compiled, but it does require that the statement include operating fund revenue and expenses, reserve fund balances, and any amounts owed to the association.

The Act also requires that the association maintain accurate books and records and allow co owners to inspect them during normal business hours. A co owner who believes the financial statement is inaccurate or incomplete can request access to the underlying records, including bank statements, invoices, and contracts. If the board denies access without a legitimate reason, the co owner can file a lawsuit to compel disclosure.

How to Determine Your Association's Audit Obligation

Pull your declaration, bylaws, and articles of incorporation. Search for the words audit, review, financial statement, certified public accountant, and independent accountant. If you find a provision that requires an audit or review, note whether it specifies when the engagement must occur, who selects the accountant, and how the report will be distributed to members.

If your documents require an audit but do not define the term, assume it means a full scope audit by a certified public accountant under generally accepted auditing standards. If your documents require a financial statement but do not specify an external review, a compilation prepared by your treasurer or management company may satisfy the requirement.

If your documents are silent, check your association's past practice. If the board has consistently engaged a certified public accountant to perform an annual review for the past ten years, members may reasonably expect that practice to continue. A sudden decision to stop the review without explanation could prompt a member challenge.

What to Include in Your Request for Proposal

When you decide to hire a certified public accountant, prepare a request for proposal that specifies the scope of work. State whether you need an audit, review, or compilation. Provide the number of units, annual operating revenue, total reserve fund balance, and a list of bank accounts and investment accounts. Include your fiscal year end date and the deadline by which you need the final report.

Request a fee estimate that breaks out the accountant's time for planning, fieldwork, and report preparation. Ask whether the fee includes attendance at an annual meeting to present the report to members. Request references from other Michigan HOAs the firm has served.

Compare at least three proposals. The lowest bid is not always the best choice. A firm that specializes in HOA and condo accounting will complete the engagement more efficiently and identify industry specific risks that a generalist might miss.

What Boards Should Do Next

Review your governing documents and identify any provision that mentions financial examinations. If you find an audit or review requirement, confirm that your association has complied in recent years. If you have not, schedule an engagement for the current fiscal year and adopt a board resolution committing to annual compliance going forward.

If your documents are silent but your association holds significant reserves or has experienced financial disputes, consider adopting a financial examination policy. The policy should specify when the board will engage a certified public accountant, what level of examination is required, and how the report will be shared with members.

Consult your attorney for your specific situation to confirm that your current practice complies with your governing documents and Michigan nonprofit corporation law. An attorney can also review your financial controls and recommend improvements that reduce the risk of fraud or embezzlement.

Manorway's AI assisted platform helps you track audit deadlines, store financial reports, and document board resolutions related to accountant engagements. When your board uses a centralized system to manage compliance obligations, you reduce the risk of missing a required audit and create a clear record of your financial transparency efforts.