by Nick Basra, Gordan Whelan Associates
Most UK leases prescribe that the annual service charge accounts should be certified or audited by an Independent Accountant. In circumstances where the lease is silent, there are still fundamental reasons for ensuring the accounts include an Accountant's report.
Some Managing Agents have an in-house employee to prepare and certify Service Charge Accounts. However, this may allow shortcuts to be taken under pressure from management and there is a risk that the task will not be completed thoroughly. Ultimately, it is the lessees who bear the burden of the cost if mistakes are overlooked due to a lack of professional scepticism or inexperience of various complex issues.
As external service charge accountants, we always perform a comparison of actual and budgeted expenditure with a line by line analysis. We discuss material movements with the Managing Agent and record the explanations given. If the explanations do not satisfy our query or comply with the lease we do not hesitate to re-ask.
Obtaining further evidence requires us to have an open and respectful relationship with the Managing Agent. Whilst we have a contractual engagement with the Client (Freeholder or RMC) we never forget that we are also providing a service to the lessees as they are the end users.
What is best practice reporting?
The accounts should be prepared in line with TECH03/11, a technical release published in October 2011 by the Institute of Chartered Accountants in England and Wales, in conjunction with ARMA and RICS. As it is a lengthy document, I have summarised the following key points:
1. The lessees should receive the accounts within 6 months of year end. This ensures lessees are kept informed in a timely manner of how their contributions have been spent.
2. Where the lease dictates, a Balancing statement and Income and Expenditure report should be prepared on an accruals basis and not a cash basis. This means that if for example, utility bills are received after the year end but relate to the previous accounting year then the charge should be proportionately calculated between the two periods.
3. Service Charge accounts should be examined by an independent, qualified accountant.
4. Service charge monies are monies held in trust and should be held in a “ring fenced” bank account in the name of the property. They must be separately identifiable in order to ensure that the funds are not used for other purposes.
5. Leases that pre-date 1980 often use the word "audit" when the term held a less formal meaning. Where this is the case therefore, it is accepted that a statutory audit is not necessarily required as this would result in significant and disproportionate costs to the lessees. What about statutory accounts?
If a Residents Management Company (RMC) exists, statutory accounts will need to be filed at Companies House and be mindful of late filing fees. We always recommend that tax on interest on these accounts is deducted at source.
Some RMC directors prepare the statutory accounts themselves but these attempts can go wrong. The accounts are made without reference to or knowledge of the legislative requirements and the directors are responsible for ensuring that the accounts filed at Companies House meet the requirements of the Companies Act.
Service charge accounting is a specialist area and it is best to use Accountants who are familiar with the requirements.
Gordon Whelan Associates is a firm of Chartered Accountants and as honorary consultants to the Federation of Private Residents’ Associations (FPRA), they are happy to discuss any accounting issues you have.
Email: Nick@gordonwhelan.co.uk Telephone - 023 8027 6323
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