Approval of commercial service charge accounts ensures both owners and managers have acted with professional care and integrity when it comes to expenditure in supplying services to the building.
Audits and independent reviews give credibility to the service charge accounts and are essential in complying with professional standards – and yet the terms can cause confusion when it comes to which procedures should be carried out.
Is an audit or an independent review required?
Leases often require service charge accounts to be reviewed by an independent third party (such as a chartered accountant). However, terminology around this review can vary from lease to lease. Some leases may ask for an audit, others specify the need for an independent review.
To add further ambiguity, the meaning of ‘audit’ and ‘review’ have changed over time.
In older leases, prior to the first Auditing Standards and Guidelines published in 1980, the term ‘audit’ would not have involved any specific procedures other than those needed to assist in the preparation of the accounts – it certainly wouldn’t have required an audit to be conducted against current standards.
Where a lease that has been drawn up since 1980 refers to an audit then, in most circumstances, an audit should be carried out. If there are reasons an audit is not appropriate (perhaps the cost of one is disproportionate to the need for assurance on the statement of service charge expenditure) all occupiers must confirm in writing that they wish to depart from the terms of the lease.
What is the difference between a service charge audit and a service charge review?
The obligations and style of a service charge audit differs from an independent service charge review.
From a technical point of view…
- An audit report is carried out in accordance with International Standard on Auditing (ISA) (UK) 800 (Revised) Special considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks.
- An independent review report, as set out in ICAEW Technical Release 09/14BL, is carried out in accordance with International Standard on Review Engagements (ISRE) 2400 (Revised) Engagements to Review Historical Financial Statements.
Service Charge Audit
An audit is an independent external review process that adds to the credibility of service charge accounts and compliance with contractual or legislative obligations. It involves performing procedures to obtain evidence that a specified process is being followed and ensures there is no material error within the service charge accounts.
By its very nature, an audit is likely to be extremely time-consuming and hence costly – particularly for larger properties with many leases in operation. The auditor may need to employ an expert to carry out certain aspects of their work, for example in relation to the interpretation of the leases and assessment of the manager’s internal controls.
The decision to undertake a service charge audit should be driven by a clear directive within the lease and not undertaken without due consideration.
Independent Service Charge Review
An independent reporting accountant will review the Statement of Service Charge Expenditure and Notes to the Service Charge Expenditure.
The reporting accountant should be
- A member of an accountancy body; and
- Independent of the owner and manager.
They should not be
- An employee, director, or associate of the owner or manager of the property; or
- An agent or associate of the owner or manager of the property.
Following the review, an accountant will issue a review report in accordance with ISRE 2400 (revised), which gives a conclusion as to whether the service charge accounts comply in all material respects with the provisions of the RICS Professional Statement.
Complying with requirements set down in the lease
It is essential that any contractual requirements to carry out a service charge audit or service charge review are followed.
Compliance may be a ‘condition precedent’ and recent case law has determined that failure to comply may adversely impact your ability to recover costs.
How M+A Partners can help
An experienced service charge accounting team means you will receive professional advice on best practice when it comes to reviewing service charge accounts. Our guidance and services are aligned to the standards of management required in commercial property, including RICS Service Charges in Commercial Property.
Should you require a service charge audit or independent service charge review of your commercial service charge accounts, please get in touch with me using the details below.
