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Does a Service Charge Lease Audit Have to Be Carried Out by a Registered Auditor?
If your lease says that the service charge accounts must be “audited”, you might reasonably assume that you need to appoint a Registered Auditor.
However, when you look closely at ICAEW TECH 03/11, ISA 800 and ICAEW’s guidance on Registered Auditor signing requirements, there is an important distinction which is often missed:
A requirement for an “audit” is not necessarily the same thing as a requirement for a “Registered Auditor”.
That distinction can make a significant difference to landlords, managing agents and RMCs dealing with residential service charge accounts.
What does TECH 03/11 say?
TECH 03/11 is the principal ICAEW guidance dealing with the preparation and reporting of residential service charge accounts.
Where a lease does not require an audit, the normal alternative under TECH 03/11 is an examination resulting in a report of factual findings. This is the type of independent accountant’s report commonly attached to residential service charge accounts.
However, where the terms of the lease require, or are construed as requiring, an audit, TECH 03/11 says that ISA 800 – Special Considerations: Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks – provides the framework for the audit.
In simple terms:
No audit requirement in the lease → normally a TECH 03/11 factual-findings engagement.
Lease requires an audit → an ISA 800 audit should normally be undertaken.
But that still leaves an important question.
Does the ISA 800 Service Charge Lease Audit have to be carried out by a Registered Auditor?
Not automatically.
This is where ICAEW’s guidance is particularly helpful.
Its guidance on Registered Auditor signing requirements specifically addresses service charge accounts and says that, where the terms of a lease require or are construed as requiring an audit, the report will need to be an ISA 800 report.
It then states:
“If the reporting accountant is not a registered auditor, this fact must be made clear…”
in the details accompanying the auditor’s signature on the report.
TECH 03/11 itself contains the same requirement: if the reporting accountant carrying out the service charge audit is not a Registered Auditor, that fact must be made clear alongside the signature on the audit report.
That wording is significant.
It means ICAEW expressly envisages circumstances in which an accountant who is not a Registered Auditor can undertake the ISA 800 audit required by the lease.
The accountant is acting as the auditor for that particular engagement, but that does not mean that they hold the regulatory status of a Registered Auditor or that the engagement is a statutory company audit.
So what is the difference?
There are several common scenarios:
What the lease or legislation requires | Type of work | Registered Auditor needed? |
No audit specified | TECH 03/11 report of factual findings | No |
Lease says the service charge accounts must be “audited” | ISA 800 audit | Not automatically |
Lease specifically requires a Registered Auditor / Statutory Auditor | Audit in accordance with the specific requirement | Yes |
Section 21 statutory certification where the relevant statutory criteria apply | Section 21 certification | Yes |
The important point is therefore to read the actual wording of the lease or transfer document, rather than simply seeing the word “audit” and assuming that the work must be sent to a statutory audit firm.
What if the lease says “qualified accountant”?
This requires a little more care.
Terms such as:
qualified accountant;
independent accountant;
auditor;
qualified auditor;
Registered Auditor; and
Statutory Auditor
should not automatically be treated as interchangeable.
The definitions section of the lease or transfer document should always be checked, because the document may define exactly who is permitted to carry out the work.
Similarly, statutory requirements can give particular words a specific legal meaning.
For example, a Section 21 request under the Landlord and Tenant Act 1985 is a different process from the normal annual service charge accounts.
Where the Section 21 summary relates to service charges payable by leaseholders of more than four dwellings, the accountant certifying that summary must meet the relevant statutory requirements, which include eligibility for appointment as a statutory auditor.
A Section 21 certification should therefore not be confused with an ordinary lease-required ISA 800 audit.
What about older leases?
Older leases require particular care.
Auditing standards and practice changed significantly following the introduction of formal Auditing Standards and Guidelines in 1980.
TECH 03/11 recognises that where an older lease uses the word “audit”, the meaning of that term may need to be considered in the context of what would have been understood when the lease was originally drawn up.
In other words, the word “audit” in a pre-1980 lease may not necessarily have contemplated the type of formal audit engagement that would be understood by that term today.
For leases drawn up since 1980, however, TECH 03/11 is much clearer. Where the lease requires or is construed as requiring an audit, an audit should be undertaken, and substituting a different form of examination could potentially be challenged by a leaseholder.
So the rule is not simply:
“Pre-1980 = no audit.”
Instead:
Older lease + audit wording = interpret carefully in context.
What if an audit seems disproportionate?
TECH 03/11 also recognises that there may be situations where the cost of an audit appears disproportionate to the benefits obtained; for example, a relatively small property where all of the leaseholders are members of the RMC.
In those circumstances, the landlord, managing agent or RMC may wish to consider whether an alternative form of examination could be agreed with the leaseholders.
However, this should not be treated as an automatic way of overriding an audit requirement in the lease.
TECH 03/11 specifically warns that an agreement with leaseholders may not, in legal terms, be sufficient to displace the requirements contained within the lease itself.
The safest starting point therefore remains:
Follow the lease.
Where there is uncertainty over the legal interpretation of the lease, appropriate legal advice may also be required.
Does merely mentioning “audit fees” mean an audit is required?
No.
This is another important distinction.
A lease may include audit fees, accountancy fees or similar professional costs within the list of expenses that the landlord is entitled to recover through the service charge.
That does not, by itself, mean that the lease requires the annual service charge accounts to be audited.
For example:
“The landlord may recover accountancy and audit costs…”
is very different from:
“The annual service charge accounts shall be audited…”
The operative wording needs to be reviewed.
This is why it is important not simply to search a lease for the word “audit” and stop there. The whole clause, together with any relevant definitions elsewhere in the document, should be considered.
Can Qube Accountants undertake a lease-required audit?
Where a lease or transfer document requires the service charge accounts to be audited, but does not specifically require the work to be undertaken by a Registered Auditor, there is a route for Qube Accountants to undertake the engagement as an ISA 800 audit.
This is not simply a standard TECH 03/11 factual-findings engagement with the word “audit” added to the report.
An ISA 800 engagement is a proper audit and must be undertaken in accordance with the relevant auditing standards. This includes appropriate audit planning, risk assessment, materiality, obtaining sufficient appropriate audit evidence, documentation and the expression of an audit opinion.
The firm undertaking the audit must also have the appropriate quality-management arrangements in place.
Where the reporting accountant is not a Registered Auditor, this must be made clear in the details accompanying the auditor’s signature on the audit report.
There will still be circumstances where a Registered Auditor is genuinely required — for example, where the lease specifically requires one or where a particular statutory requirement applies.
The correct route therefore depends on the precise wording of the lease or transfer document.
The key question to ask
When reviewing service charge accounts, the question should not simply be:
“Does the lease say audit?”
Instead, ask:
“What exactly does the lease require, and who does it say must perform that work?”
For residential service charge accounts:
No audit requirement → normally a TECH 03/11 factual-findings report.
An audit requirement → normally an ISA 800 audit.
A specific requirement for a Registered Auditor → the work needs to be undertaken by an appropriately Registered Auditor.
Section 21 statutory certification → separate statutory requirements need to be considered.
Old or ambiguous wording → review the provisions carefully before deciding on the appropriate reporting route.
Conclusion
The word “audit” in a residential lease or transfer document should not automatically cause alarm.
Neither should it automatically mean that the service charge accounts need to be sent to a statutory audit firm.
The crucial distinction is between requiring an audit and requiring a Registered Auditor.
ICAEW’s guidance expressly recognises that an ISA 800 service charge audit can, in appropriate circumstances, be undertaken by a reporting accountant who is not a Registered Auditor, provided the applicable professional, auditing and quality-management requirements are met.
For managing agents, landlords and RMC directors, that makes careful review of the lease wording extremely important.
If you have a property where the lease or transfer document contains the word “audit”, send the relevant wording to the team at Qube Accountants.
We can review the documentation and help you determine whether the property requires:
a TECH 03/11 factual-findings report;
an ISA 800 audit; or
work by a Registered Auditor.
The presence of the word “audit” does not, by itself, answer that question.
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