If we set aside the Section 21 report then there are two options for reporting on service charge expenditure. These options are laid down by best practice guidance, TECH03/11, as either a Factual Findings Report or an Audit report. Of these options, the most usual Accountant’s report attached to service charge accounts is the Factual Findings report.
The nature of the Factual Findings report
The Factual Findings report is the product of what is termed an Agreed Upon Procedures (AUP) Engagement. In conducting an AUP engagement, a qualified accountant is asked to perform specific procedures. Within a service charge reporting engagement the AUPs are broadly to:-
- Check that the service charge accounts agree to the underlying accounting records
- Select a sample of transactions and check that they can be supported by documentation or other explanations
- Confirm that the cash balance agrees to the underlying bank statements.
Having carried out these procedures, the accountant will then report on a factual basis that the procedures were carried out and that either there is no requirement to bring anything to the reader’s attention, or that there are exceptions that need to be highlighted in the report.
It is important to realise that, unlike an audit, the report does not represent an opinion by the accountant and therefore the report does not give any assurance to the reader that the accounts are materially correct or free from error or misstatement.
The key differences between an AUP engagement and an Audit engagement can be summarised as follows,
|Difference||AUP report||Audit report|
|Assurance that accounts are materially correct||None||Reasonable assurance that accounts are materially correct or free from error or misstatement.|
|Work carried out||Agreed upon procedures||Audit procedures designed to reduce the risk of mis-statement to an acceptable level.|
|Report||Factual findings only. No opinion expressed||An opinion that the accounts are not wrong to an extent that would change the reader’s decision making.|
|Accounting standard / Guidance||TECH03/11 and International Standard on Related Services (ISRS4400)||TECH03/11 and International Standards on Auditing (ISAs), ISA800 Audit of Special Purpose Frameworks|
Although the factual findings report does not express an opinion it does provide comfort to the reader that certain items have been checked by a qualified accountant. There are also similarities in that both reports add credibility to the service charge accounts as they indicate that an independent accountant has checked the accounts. In both instances, there is an implied assumption that the accountant has exercised skill, professional judgement and integrity when signing the report.
The future of AUP engagements
The International and Assurance Standards Board (IAASB) have just completed a consultation on revising the guidance on AUP Engagements – read our response to that consultation. The key issues likely to emerge from the consultation process are:-
- An increased emphasis on the importance of the reporting accounting being independent
- The role of professional judgement and scepticism of the reporting accountant when carrying out AUP engagements
- Clarifying the terminology that can be used in a factual findings report. For example, in an AUP engagement, the accountant cannot state that they “certify” the service charge accounts as it implies complete accuracy.
- Reviewing the format of the AUP report.
At Haines Watts Service Charge Team, we are particularly interested in the format of the AUP report and we are investigating preparing a findings section to the factual findings report along the following lines;
|Agreed Upon Procedure||Findings||Comments|
|To agree the accounts to the underlying accounting records.||The figures in the Balancing Statement agree to the accounting records.||100% of Balancing Statement items checked to underlying records.
100% of expenditure headings checked to the underlying accounting records.
|To check that the accounting records are supported by receipts, documents or other evidence.||For the sample of accounting transactions tested all were supported by receipts, documents or other evidence.||90% of all expenditure supported by underlying records.|
|To check that service charge monies agree to or reconcile to the underlying bank statements.||All cash balances on Balancing Statement agrees to or reconciles to underlying bank statements||100% of Cash balances agreed to bank statements.|
The advantages of this type of report are that:-
- It reduces the length of the report to the accounts
- It attempts to communicate to the reader in a more succinct way what the accountant has done and therefore the value they bring to the accounting process
- It makes it easier for the reader to draw his own conclusions on the efficacy of the service charge statements.
The accounting guidance on service charge reporting is likely to change in the near future. TECH03/11 is based on the 2nd RICS Code and is therefore out of date. The revised TECH03/11 will have to take into consideration the revisions to ISRS4400 and the relevant auditing standard, ISA800.
One aspect of service charge reporting that will not change is that whatever report is attached to service charge accounts the quality of the engagement and the value of the report will always depend on the skill and experience of the reporting accountant. This value will inevitably be enhanced if the report is prepared by accountants who truly understand the nature of the engagement and are particularly skilled in service charge reporting.
For advice, information or simply a quick chat about your service charge needs, please get in touch using our contact form