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News on the Block Guide 2021

A Guide to choosing an accountant for residential service charge accounts

Service charges are a crucial part of the upkeep of leasehold development. The funds raised from leaseholders are vital for such things as maintenance of buildings and grounds, insurance of common areas, cleaning, lighting and a wide range of other services depending on the requirements of each individual site. Clear, transparent accounting for service charges is therefore essential for whoever is charged with the management of a leasehold development to ensure leaseholders can see how their money has been spent and to understand how well prepared they are to meet future major costs. If disputes around service charge costs do arise, the annual accounts will be subject to intense scrutiny and there could be serious financial implications if it’s determined they have not been prepared correctly. Therefore, for managing agents, freeholders, directors of residential managements companies/right to manage companies and recognised residents’ associations etc the decision over who will prepare the service charge accounts is an important one.

The lease

The starting point in anything service charge related is the wording in the lease. When it comes to choosing an accountant to prepare year end service charge accounts this principle certainly does apply. Reading the lease and noting how the accounts are to be prepared, by whom, when and how they are to be signed off/certified is an essential first step. Not all leases will set out specific provisions relating to accounts, but if they do it would be a huge risk to ignore them, especially if recovering annual deficits or raising future demands is linked directly to the production of the accounts.

Independence

Generally speaking, having accounts prepared by an independent accountant is likely to be a distinct advantage. Service charges are often contentious so having the accounts prepared by someone who doesn’t have a vested interest in the financial affairs of the site is likely to increase the sense for all parties that the accounts have been fairly compiled and presented. However, the lease could require that the managing agent or the free holder’s accountant prepares the accounts so it may be that it’s not possible to choose a completely independent accountant. It might also be a requirement of the lease to have someone other than an accountant approve the accounts (e.g. a qualified surveyor), so how the different professionals will work together needs to be agreed upfront to ensure the work progresses smoothly.

This guide is in partnership with WR Partners

News on the Block Guide 2021

Professional status and affiliations

Choosing an accountant who is part of one of the main chartered accountancy bodies (i.e. ICAEW, ICAS or ACCA) is generally considered advisable, and could be something specified in the lease. Membership of such an organisation requires all partners/directors and technical staff to work to certain standards, undergo regular continuing professional development training and for the firm to have appropriate professional indemnity insurance in place. In addition, some firms of accountants who specialise in service charge accounts hold ARMA partners status and employ IRPM qualified staff, allowing them greater insight into the sector and providing access to more specialist training courses etc. Accountancy firms may set even higher internal standards than those set by the main accountancy bodies or be members of an organisation that helps promote higher standards such as the UK200 Group. These sector specific affiliations and voluntary adherence to higher standards are unlikely to be written into a lease but are well worth considering when choosing between accountancy service providers. Also, some types of reports for service charge accounts can only be signed off by a registered auditor, i.e. audit reports and section 21 reports, so make sure you only appoint an appropriately registered firm if one of those is required.

Knowledge and experience

It’s w ell worth calling accountants to discuss their knowledge and experience in the sector. It’s quite easy to list specialist areas of work on a website, but it doesn’t let you know if they currently prepare one set of a particular type of accounts, ten, a hundred or a thousand. Talking to someone who works on those accounts will give you the opportunity to get much greater insight: how many they deal with, do they work with a mixture of self- managed sites and ones managed by agents, do they deal with sites of different sizes, do they deal with sites that are mixed use etc. and how long have they been doing this type of work. They may offer related services that you may also need or may help them to understand the sector better, be that dealing with residential management company or freehold company accounts, dealing with the tax implications of lease extensions or providing accounting related support to people involved in service charge disputes.

Timing and scope

Best practice will be to prepare residential service charge accounts within 6 months of the end of the service charge year. With such a timescale there should be greatly reduced risks of costs incurred in a service charge year being time- barred by the ’18 - month rule’. Some accountants won’t necessar ily be aware of this sort of deadline and may believe they have 9 months after the year end to prepare such accounts, in line with the normal private company filing deadline. Often non specialist firms look to fit in service charge accounts around their c ore work, which can lead to work be unduly delayed, so it’s important when choosing an accountant to make sure they understand when the year end service charge accounts need completing and that they will have the capacity to prepare them at the required time.

Approach and values

The relationship with the accountant preparing the year end service charge accounts will be an important one, especially if you are an agent who deals with a large number of sites. Finding an accountant you can agree an approach with and can get to know well allows

This guide is in partnership with WR Partners

News on the Block Guide 2021

for a smoother process and reduces the risk of delays and misunderstandings. If you don’t have an established relationship with any accountants it’s worth talking to firms you are considering using to ask them how they work, what information they need, what format the records will be provided in, what their normal turnaround times are like etc. It’s also worth reviewing the accountants’ website to see what that says about the firms approach and values as this may give an insight into whether they are the kind of people you would feel comfortable dealing with.

Value for money

Employing an accountant should be subject to the same consideration as any other contractor or professional. It’s likely the cost of year end accoun ts preparation will be recoverable under a lease, either as a specifically allowed item of expenditure or from a combination of other clauses. If there is any doubt about that, consideration should be given to how the cost could be recovered, perhaps being built into the management fee if the wording of the lease allows. It’s also worth considering the level of the fee. As with other costs, it is not essential to choose the cheapest of all available options, but all service charge costs must be reasonable, so making sure the chosen accountant provides a service that justifies their fee is essential. Choosing the right accountant can help ensure the service charges are reported in a clear and timely fashion, at a reasonable cost to leaseholders and in an appropriate timeframe and format. Such an accountant could also provide other support and services if required as well as reassurance that if the costs in the accounts are ever challenged there is the best chance of explaining and justifying them. The right service charge accountant can be a trusted partner and adviser as well as a contractor providing accounting services and help the service charge process run more smoothly and with much less cause for disputes.

If you have any questions about the above please feel free to contact Tim Lunt on [email protected]. Tim is a fellow of the Association of Chartered Certified Accountants and a member of the Institute of Residential Property Managers and leads the specialist service charge accounts team at WR Partners. WR Partners are a firm of chartered accountants and business advisors who are ARMA partners, registered auditors and members of the UK200 Group - the UK’s leading professional services group of independent quality assured chartered accountancy and law firms.

This guide is in partnership with WR Partners