There can be few words in a lease that cause more confusion and angst than the term “audit”.
Service Charge Accountants They're all the same aren't they?
11 March 2020
Most leases will require annual service charge accounts to be reported on by an independent accountant but what criteria should be used to select the reporting accountant? Can anyone calling themselves an “accountant” carry out the task?
The first port of call for a managing agent or lessee looking to choose an appropriate accountant is the lease. This may specify that the reporting accountant belongs to a particular professional body or that the task must be carried out by certain type of professional (e.g. a registered auditor).
If the lease doesn’t contain any requirements, then the next point of reference is the best practice guidance note for reporting on service charge accounts; TECH03/11. TECH03/11 contains the following requirements;
A) Accountants must belong to one of the following professional bodies,
- Institute of Chartered Accountants in England and Wales (ICAEW)
- Association of Chartered Certified Accountants (ACCA)
- Institute of Chartered Accountants of Scotland
- Chartered Accountants Ireland
- Association of Authorised Public Accountants
B) The Accountants must be entitled to engage in public practice. This entitlement will be granted and defined under the rules of the professional body to which they belong.
C) The accountant should be independent of the Landlord and the Managing Agent.
Questions to ask
It follows that the first three questions to be asked of the prospective accountant are:
- Are you a member of a professional accountancy body?
- Are you entitled to engage in public practice?
- Do you have any connections with the Landlord or the Managing agent?
This will immediately rule out a number of prospective candidates including unqualified accountants or an accountant employed by the Managing Agent or Landlord.
The next consideration is most likely to be price and it is tempting for Directors of Residents’ Management Companies (RMCs) and Managing Agents to appoint the most price competitive accountant they can find to carry out the work. This is understandable as on the face of it, an accountant’s fee does not improve the experience of living in the property. However, this approach doesn’t really appreciate the value of the reporting accountant’s role in the annual service charge process.
The signed accountants’ report should provide assurance and comfort to all parties that an independent professional has reviewed the accounting records, that service charge expenditure has been properly accounted for and that the accounts are not misleading. Many of the issues that come before a First Tier Tribunal involve lack of transparency over service charge expenditure. The savings from racing to the bottom on price when appointing an accountant can be dwarfed by the cost implications of a dispute in the courts at a later date.
Does Size Matter?
The size of the firm of accountants should not necessarily be a key factor in appointing an accountant to report on service charge accounts. However, one key advantage of using a substantial firm rather than a small firm or sole practitioner is the ability of the reporting accountant to provide add on services as required.
At Fortus we work closely with the Company Secretarial team, Tax specialists, HR and other consultancy services. At the very least, directors and managing agents need to be satisfied that the firm chosen has sufficient resources to ensure that accounts are finalised within six months of the accounting year end. This ensures best practice guidelines are met.
Specialist or generalist?
There are some very good reasons for choosing a specialist service charge accountant to act as a reporting accountant as opposed to a generalist. Perhaps, the most compelling reason is that the specialist will have a clear focus on the task to be carried out and will understand the nuances that differentiate service charge reporting from general accounting practice activities.
The specialist will also, over a period of time, develop systems and procedures to ensure that service levels are maintained to a high standard. For instance we implement sector training for all staff, in addition to the financial training they are required to undertake for their professional exams or continuing professional development. This ensures they can offer the more specialised service and share their knowledge and expertise.
The ‘Pillars of Trust’
As with all professional relationships it should never just come down to tangible factors such as size and price. Far more important is an assessment of the firm and whether they can be trusted to deliver on their promises. Time will always be well spent considering the following;
- Is the firm technically competent in service charge accounting and service driven?
- Can the firm be objective and add value to the relationships between lessees, directors and Managing Agents?
- Can the firm be relied upon to show integrity and to maintain professional standards to a high level
Lessees have the right to inspect “accounts, receipts & other documents” supporting service charge expenditure. But how powerful is this right?