Year End Accounts: Report on Factual Findings
Whilst many leases written after 1980 contain a provision for them to be prepared and audited, as per the ICAEW Technical Release 03/11, leases written before then tend to be less specific. Whilst this lack of specification can allow freeholders or managing agent to consider whether the terms can be interpreted and acted upon when they were written, great care has to be taken. This is because any interpretation could be challenged by lessees and, if taken to the First Tier Tribunal, could mean that the landlord might not recover the charges. Our leases fall into the latter so instead a ‘report on factual findings’ is carried out. A qualified accountant is asked to perform specific procedures as per what is termed and Agreed Upon Procedure (AUP) engagement. Within a service charge reporting engagement the following will be carried out:
- A check that the service charge accounts agree to the underlying accounting records;
- The selection of a sample of transactions and checking that they can be supported by documentation or other explanations;
- Confirmation that the cash balance agrees to the underlying bank statements.
Having carried out these procedures, the accountant will then report on the facts, stating that either there is no requirement to highlight any exceptions or that there are exceptions that need to be highlighted.
This is not a full audit and so is much more limited in comparison. Certification of the service charge accounts relies on all relevant information being supplied this procedure also does not need the same degree of professional judgement. Instead it provides a minimum set of procedures that can be adhered to (although they can be tailored according to the managing agent’s requirements, or to the circumstances of the property). It also does not contain any opinion held by the accountant but it does show that certain items have been checked by a qualified accountant. As a result of such factors, the cost of this report is usually lower than that of an audit.
The structure of a report on factual findings is as follows:
1: Summarising Expenses
These are expenses that may be charged to the tenants under the terms of the lease(s) including any payments towards a reserve or sinking fund, or, if the landlord or managing agent has prepared such a summary, checking it against the underlying leases(s).
2: Copy Of Accounts
A copy of the accounts will be obtained and the figures on each line will be agreed with the landlord’s or agent’s accounting records, checking that they a) come from the accounting records, and b) what controls are in place to make sure of their accuracy. There will also be checks to make sure there is no double accounting and that no figures in the accounting records are left out from the service charge accounts.
3: Addition Of The Service Charge Statement & Supporting Schedules
The addition of the service charge statements and any supporting schedule(s) of service charges and relevant costs will be checked along with service charges demanded by the landlord during the year showing all charges demanded from each tenant. This will be either in the form of a budget or a schedule. They will check that all units paying variable service charges within the property are included in the schedule of income. They will also compare the schedule of service charges with income recorded as received and banked. Where differences are identified they will check there are valid reason.
4: Compare Service Charge Accounts To Previous Year
The service charge accounts will be compared to the previous year or budgeted expenditure, to find variances that could show an error. Where variances are due to errors, these will be brought to the attention of the landlord or agent so that adjustments can be made. There are many kinds of required adjustments which can include the following:
- The accrual or deferral of revenue or expense items;
- Reclassification adjustments to conform book figures to physical counts (stock);
- Any unusual transactions.
5: If service charge statements have previously been provided to the tenants, they will agree the brought forward balances in the current year accounts against the service charge statement issued for the previous period. These balances are likely to include carried forward surpluses or deficits on the previous period’s service charge statement, together with closing balances on reserve fund accounts.
6: If required by the lease, they will ensure that the service charge accounts contain a prominent certificate or statement signed by the party required to do so by the lease. Similarly, if required by the lease, they will ensure that the accounts include a certificate of sums payable by individual lessees. Even if such a declaration is not required by the lease, a formal statement along these lines helps to clarify the respective responsibilities of the landlord/agent and reporting accountant in relation to the statement of account.
7: Where other income is recorded, if the amounts are in excess of 5% of total expenditure for the year, they will either agree the figure or provide a sample of component entries to any supporting documentation to check accuracy and description of record.
8: They will either check all expense categories accounting for 10% or more of total expenditure (excluding any transfers to funds or a lower percentage requested by the landlord/managing agent to ensure that more items are checked) or check the five highest expense categories excluding any transfers to funds.
9: Depending on the nature of the expense, they will either a) check recorded expenditure against documentation showing a total sum (for example a contract for work carried out or services provided, payroll summary of employee costs or managing agent’s fee based on contract), or, b) for a selection of items recorded as expenditure in the year, agree to supporting documentation and consider whether the expenditure has been correctly analysed in the service charge account and accurately recorded.
10: For all expense categories selected above, they will check that invoices received or paid after the year end and any prepayments and accruals have been correctly accounted for, in accordance with the stated basis of accounting.
11: Where expenditure represents an allocation of an expense across one or more service charge schemes, or across multiple schedules within a scheme, they will obtain written confirmation from the landlord or managing agent that:
- All expenditure, including on long-term agreements and transfers to reserve funds, is in accordance with the provisions of the lease(s);
- Applicable consultation requirements in relation to any major works have been complied with;
- All relevant costs have been accurately included in the expenditure for the accounting period.
12: Where expenditure has been incurred which has been debited to a reserve/sinking fund, they will select a sample of expenditure items and agree to purchase invoices, ensuring that the invoice details show the expense to have been in respect of works carried out or services provided to the property or service charge scheme to which the service charge information relates. They will also obtain written confirmation from the landlord or managing agent that the amounts have been accurately reflected in expenditure on the reserve fund.
14: They will agree any recorded bank balances to the bank account balance(s) maintained by the landlord/managing agent. If the account is held by a managing agent in a single client account with funds from other properties, the agent’s records must be capable of showing the balance pertaining to each property or service charge scheme. Where a reconciliation is required in order to agree the balance with that of the bank statement balance, they will check that the reconciling items are valid, such as cheques received or paid out, not cleared at the year end.
15: For other headings on the balance sheet, they will prepare or obtain a listing of items within any balance that exceeds 5% of the expenditure for the year and will also agree the highest value item within each list to appropriate documentation that supports the description and accounting treatment of the balance in question.
16: They will check that any service charges paid in advance or arrears recorded on the balance sheet are consistent with receipts in the period and balances brought forward, through the preparation or checking of a service charge control account.
Note: Because TECH03/11 is based on the 2nd RICS Code, it is now outdated due to the publication of the 3rd RICS Code. The revised TECH03/11 will also have to take into consideration the revisions to ISRS4400
(International Related Standards) which the Report on Factual Findings uses and auditing standard ISA800.
(Audit of Special Purpose Framework).