What are Service Charge Audits And Why are they Important?

Within most leases, the landlord are required to provide to the tenants an annual statement of service charge expenditure. In October 2010 the institute of Chartered Accountants England and Wales (ICAEW) issued a technical release, “Accounting for service charges.” The Technical Release 03/11 issued by institute of Chartered Accountants England and Wales (ICAEW) entitled, “Guidance on accounting and reporting in relation to service charge accounts for residential properties on which variable services are paid in accordance with a lease or tenancy agreement.”

The Guidelines Contains the Following Instructions:

It is a healthy practice to issue service charge accounts within 6 months of the year end.

Service charge accounts should include a balance sheet along with income and expenditure statement and explanatory notes. It is also considered best practice to include comparatives as well.

Another thing to take note of is that service charge accounts should be prepared on accrual basis. For the uninitiated, accrual basis means that the account statement should also include the costs that were incurred but not paid.

The onus is on the landlords or property owners to provide their tenants with service charge statement. However, it is important to note here the service charge audit statement prepared by the landlord must be verified by an independent accountant before it is issued to the tenant. The service charge accounts should be handed over to the tenant along with the examination certificate.

Also Read: Landlords Property Tax

The amount that is paid by the tenant to the landlord as service charges should be held in a ring fenced bank account. This does not imply that each property should have a separate bank account, but the funds for each property must be separately identifiable, as it is a breach of trust for one property to bear the cost of another.

All the transactions carried out with the landlord or the managing agent should be fully disclosed.

Generally the annual service charge expenditure statement is certified by the landlord’s accountant, surveyor or the managing agent. There are also certain types of leases for which the annual statement of service charge expenditure needs to be audited. Even if there is no specific mention or requirement for annual statement of service charge expenditure in the lease agreement, it is always considered a good practice to prepare an annual statement of service charge statement as it ensures a certain level of transparency and offers the occupiers the much needed peace of mind.

There are quality firms in the UK that offer residential and commercial service charge audits services to landlords. This allows landlords and property management agencies to meet their service charge obligations and obtain certification. Top of the line firms have a sound knowledge of the functioning and working of the commercial and residential property industry, which enables them to offer comprehensive audit services at pocket friendly prices.

Also, for property owners and property management agencies, managing and delivering an annual statement of service charge expenditure across a portfolio can eat into their vital resources which could be gainfully employed somewhere else. Preparing an annual statement of service charge expenditure and then getting it audited is not their prime business and this exercise often distracts them from their prime responsibility of managing their assets. Well-established service providers offer a detailed, flexible and value-for-money services so that you can concentrate on your core competencies. Audited statements also develops trust between the landlord and the occupier and mitigates risk by providing a comprehensive oversight of your assets.

Some of the Important Functions Carried Out by a Service Charge Audit Firms are Enumerated as Following:

A well-established service provider has extensive experience in managing both small and large properties. They do timely work and ensure the risk of misstatements are totally eliminated. They carry out 100% testing of transactions and review it thoroughly to ensure it is completely error-free.

Their services include:

• Preparation of the annual statement of service charge expenditure as well as certifying it.
• Ensuring that both recoverable and non-recoverable expenses are properly accounted for
• Statutory accounts preparation for management companies
• Advice related to VAT along with sundry other tax advices

Services offered by top quality annual statement of service charge expenditure providers are generally divided into four stages. They are mentioned as following:

Preparation of Service Charge Reconciliation

Top service providers possess the expertise and the knowledge to prepare detailed, easy to follow, cogent, concise and coherent service charge reconciliation statements. It is important as you need to ensure you have a hassle-free transition between your internal reporting and your service charge reconciliations.

External Service Charge Audit

Different property have different amount of risk associated with it which is very important for a service charge audit provider to understand. To gauge the risk associated with each property, the service providers works closely with the asset management team. This provides complete assurance to the property owner as well as to the tenant.

Service charge audits should be on time—everything from the process to the final submission should follow a set procedure. It is crucial as missed deadlines could pile up documents on you and the clutter could be pretty cumbersome to clear. It would be an additional headache for landlords with a large number of assets to manage. Top rated service charge audit providers offer a dedicated project management team to ensure that your service charge audit remains on track. They proactively track and manage each stage of the process to ensure that the audit remains on schedule and all tasks conducted in an efficient and time-bound manner. The team is equipped with the requisite workflow technology to ensure that they are fully capable of tracking the production and review of reports.

Complete Reports for Each Tenant Backed by Analytics

Well-established service providers also offer detailed reports of the clients’ assets, which helps landlords to efficiently manage their assets. For example, service providers can deliver charts or statistics showing key financial factors extracted from the service audit charge report prepared.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.