Rental home

April 15th 2020 / BY: Wisteria

Residential leasehold property – Is a service charge audit required?

I am asked this question every week. The answer is not so simple since the term “audit” is often used generically to mean a number of things. Do you mean:

  • Prepare accounts; or
  • Have the independent accountant carry out a review and deliver a report of factual findings; or
  • Have the accounts audited

For clarity residential leasehold properties usually have a requirement in the lease or tenancy agreement to prepare accounts where variable service charges are paid by the leaseholder in accordance with their lease to cover the cost of providing services, repairs, maintenance, improvements, insurance and management.

The lease or tenancy agreement usually sets out the way in which service charge are to be accounted for: who shall approve the accounts; as well as other matters relating to engaging accountants, reporting requirements and accountancy fees. The lease should always be followed. If there is believed to be a conflict between the lease and the law or with general practice then legal advice may need to be sought by the lessees or the landlord.

The lease or tenancy agreement should be clear what type of assurance work or audit is required. Many leases refer to “audit”; and it is generally accepted that for leases that were made up prior to 1980 any reference to “audit” probably means preparing accounts. For leases made up after 1980 when it refers to an “audit” it generally means an audit. Should another type of examination be carried out then lessee should challenge it.

A report of factual findings is a more limited form of review than a full audit. Specifically the report limits its work to that agreed; and the accountant will report only its findings related to this work. So for instance the scope may require the accountant to review all purchase invoices over £1000 and check that they agree to the accounts. The accountant will do exactly this and report by exception.

It is practice that the accounts are produced containing an income and expenditure account and a balance sheet. The accounts should contain explanation of accounting policies used and sufficient disclosure notes to adequately explain and analyse the primary statements. Comparative year numbers should be provided.

Should an audit be carried out the auditor should follow International Standards on Auditing (ISA 800). Where a factual report on service charge accounts is required then the accountant should follow the guidance on residential Service Charge Accountants published by ICAEW or ACCA.