Can we get around having an audit even if the lease states that an audit is required?

So a question we often get is - CAN WE GET AROUND HAVING AN AUDIT EVEN IF THE LEASE STATES THAT AN AUDIT IS REQUIRED?

ICAEW TECH03/11 gives two circumstances when it is possible to avoid your service charge accounts being audited even when the lease states that an audit is required.

1. If the lease is dated before 1980 then an audit is not required. The reason for this is that the lease predates the ISAs (international standards of auditing).*

2. If the costs to carry out an audit are “disproportionate” to the benefits obtained. And what is considered disproportionate is a matter of judgment, although TECH03/11 does give the example of a small property where the lessees are all members of the RMC for that property.

 * The terminology governing annual statements of account, particularly in older leases, may be quite general, and auditing standards and practice have changed fundamentally since the Auditing Practices Committee was established in 1976, leading to the publication of the first Auditing Standards and Guidelines in April 1980 (ISAs). The work effort required by current auditing standards is unlikely to be what was anticipated when older (pre-1980), leases were drawn up.

In practice, therefore, there is scope for the landlord to consider whether the terms in the lease may be construed according to the meaning given to those terms at the time when the lease was drawn up; whereas the term ‘audit' in a lease made before 1980 would not have involved any particular procedures beyond those needed to assist in the preparation of the accounts.

The circumstances when the “disproportionate” argument can be justified would seem to be limited. For example, a relatively small set of service charge accounts with a single schedule of expenditure and few complications.

The follow on question we often get is…

WHAT IF WE ALL AGREE THAT WE DON’T WANT OUR SERVICE CHARGE ACCOUNTS AUDITED?

Perhaps the RMC directors claim that they have agreed and minuted in their board minutes that they wish to dispense with an audit. Even if all the lessees unanimously agree to this course of action it is still not a watertight option.

The only sure way for RMC directors to avoid criticism at some stage in the future is to vary the terms of the lease and to change the term “audit the accounts” to “certify the accounts” or something similar. This course of action is not always popular as varying a lease can result in a significant cost to lessees and it may be many years before the savings in audit fees outweigh the legal costs of varying the lease.

CONCLUSION

An audit report on service charge accounts should not be dismissed without due consideration. In most circumstances, the additional assurance provided by an audit will warrant the additional cost of an audit being carried out.

Do keep in mind though, whatever report is attached to service charge accounts, the quality of the work will be enhanced if the reporting accountants are experienced and specialise in service charge accounts.

At Qube Accountants, we are here to guide you through these requirements, ensuring you remain compliant and efficient. If you have any questions or need assistance, please do not hesitate to contact us.

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