The Independent Accountant’s report
Leaseholders will want to know whether an independent accountant has examined and reported on the accounts and any conclusions of this work.
It is best practice for an independent accountant to either; examine the service charge accounts and report certain factual findings or to audit the service charge accounts.
Look for a page in the accounts which has been signed by an independent firm of accountants, preferably a firm that specialises in service charge accounts work.
Look to see if there were any exceptions to the report. For example, a typical except for statement would be;
“During the year a payment of £1,000 was made to a third party supplier, we were unable to substantiate this payment with receipts, other documentation or evidence that we inspected.”
In the majority of cases the report will have no exceptions and the report of certain factual findings will look like this:
Is there a reserve fund and if so how much is in it?
Leaseholders will want to know how much of the service charge funds have been set aside as a reserve fund to carry out major works.
Leases often contain a clause which allows for money to be collected and set aside to meet future major expenditure.
The 3rd RICS Residential Code states that “The intention of a reserve fund is to spread the costs of ‘use and occupation’ as evenly as possible throughout the life of the lease to prevent penalising leaseholders who happen to be in occupation at a particular moment when major expenditure occurs.”
The information about any reserve funds will usually be at the bottom of the Balance Sheet page or might be in the notes to the accounts:
In this example the reserve fund was £10,000 at the beginning of the year. £2,000 was included in the current year budget as an amount to be collected and transferred to the reserve fund. £4,000 was spent out of the reserve fund to carry out external decorations leaving a remaining balance of £8,000.
It is important to note that there may not be as much cash available as the amount shown in the reserve fund of £8,000 particularly if the service charge is having difficulty collecting service charges promptly.
How much cash was in the service charge bank account at the end of the year?
Service charge funds received from leaseholders are funds held in trust and should be held in ring fenced designated bank accounts. This information should be shown in the balance sheet for the service charge accounts.
The amount of cash in the service charge account at the year end date is very dependent on the timing of the issue and payment of service charge demands. If the cash figures is substantially smaller than any reserve fund balance (see previous section) then this usually indicates that there is a significant level of leaseholders who have not paid over their service charge contribution.
What if I am not receiving service charge accounts or the service charge accounts do not answer the questions above?
There is no statutory requirement for the routine preparation and content of service charge accounts but the accounts should comply with the provisions of the lease for the property as otherwise there may be difficulty in recovering the expenditure from lessees.
Where the property is managed by Agents who are members of the Royal Institution of Chartered Surveyors (RICS) or of the Association of Residential Managing Agents (ARMA), the rules of those bodies require members to adhere to the TECH03/11 guidance which is included within the 3rd RICS Service Charge Residential Management Code (The Code).
In a response to the recent Department for Communities and Local Government Consultation (DCLG), “Tackling unfair practices in the leasehold market”, Haines Watts have recommended that all property owners that contribute to service charges are given a statutory right to receive service charge accounts within a prescribed period of time.
For advice, information or simply a quick chat about your service charge needs, please get in touch using our contact form