Flat management companies are often set up by leaseholders who have purchased their freehold with a view to saving costs, both in terms of the service charges that they pay and in relation to other costs that were charged to them by their former freeholder, such as insurance premiums. Saving money is all very well, but what about the accountancy fees? In its first year of trading any freehold company will need to file statutory accounts – showing the transaction that has taken place. After this, if funds don’t flow through the company then it can file ‘dormant’ accounts, writes Karen Bright, Head of Litigation and Dispute Resolution, at solicitors Bishop & Sewell.
But what about the service charge account? Particularly if the flat owners self-manage. This is an important point that is often overlooked. Lots of leases require an accountant’s certificate and even if you are saving money by running some things yourselves it may well be a false economy to dispense completely with the accountant’s certificate.
Money for old rope?
It is not uncommon for directors of Residents’ Management Companies (RMCs) to come under pressure to reduce costs and one of the prime contenders for achieving this is to dispense with the services of a reporting accountant. There are apparent benefits that make this attractive. Professional fees do not necessarily improve the quality of life at a property and it is always tempting to look at the other lessees to see if they have bookkeeping skills and be willing to help out with the accounts or even carry out a “self audit” of the records. A cosy and informal, internal arrangement might seem more attractive to directors than the annual chore of getting the accounting records ready for an external accountant.
High risk strategy
However, the “aren’t we all good mates” approach to property management is fraught with risk for directors. The lease will often state that the reporting accountant is to be an ”independent qualified accountant”. In the absence of such a statement in the lease then best practice guidance contained in the 3rd RICS Residential Code and TECH03/11 requires that the reporting accountant is not only independent but also a practicing member of a professional accountancy body.
Failure to follow the lease or best practice may leave the directors open to criticism if a dispute arises at a later date. Directors should always remember the old adage that “near neighbours make good enemies” and it is most unusual (over a prolonged period of time) for lessees to agree on everything. If a dispute does arise then no one will thank the directors for saving money on accountancy fees if the result is a legal bill at a later date. The inevitable challenge to the directors will be that the accounts cannot be relied upon because they have not been prepared in accordance with the lease or best practice.
The value of the independent accountant
Directors should also consider if the reporting accountant’s fee really is just a cost to the property. The signing of the independent accountant’s report has an important role to play in the annual service charge process. It provides comfort to all lessees that the accounts have been reviewed by an independent professional. Furthermore, if the directors appoint a practicing accountant to report on the service charge accounts then they can also be assured that the accountant holds a practising certificate from their professional body and is subject to the body’s rules and obligations including carrying out the work to a required standard and holding professional indemnity insurance.
If an experienced service charge professional is appointed then that is even better as they will be able to provide further support and advice to the directors of the RMC. Additional value added services that can be provided to RMC directors include advice on the accounting implications of lease terms, Company Secretarial fees, compliance with Companies House filing requirements, management accounts, corporation and trust tax and attendance at AGMs to explain the accounts.
Under the Companies Act 2006, directors are required to exercise due care and skill and directors of RMCs are not exempt from this requirement. Directors should resist the short term popularity that arises from reducing costs if it means that the property is managed in an unprofessional manner.
Karen Bright is a Partner and Head of the Litigation and Dispute Resolution teams at Bishop & Sewell. If you are looking for assistance with regard to a property dispute matter please contact her on +44 (0)20 7079 4143 or email: [email protected]
About Bishop & Sewell LLP
Bishop & Sewell is a long-established, full service Central London law firm – with an international reach – specialising in Personal, Property and Commercial legal matters. To learn more, visit www.bishopandsewell.co.uk