The world of service charge accounting creates true financial professionals

by: Mary-Anne Bowring

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service charge accounting creates true financial professionals

Finance is not a backroom role in Property! You have to have broad enough shoulders to start with What am I due to pay, then have first class interpersonal skills when the customer invariably rambles off into issues such as their neighbour putting out washing on the balcony or the cleaner only spending 20 minutes on site. Mary-anne Bowring believes that all finance personnel working within the property industry should be extremely proud that they belong to the elite group of Property or Service Charge Accountants, as the skills they learn to master are much more than those held by an Ordinary Accountant. Any business owner or principal of a practice will admit that over the years they have invested huge amounts of their time training external accountants and auditors to become competent to carry out service charge accounts, in spite of the ICAEW guidelines. It still shocks me how many accountants nominated by Clients still seek to prepare a set of service charge accounts without any reference to the lease, or requesting the budget says Mary-anne.

It is the existence of the lease that makes the job different and challenging.In theory anybody can make a transaction i.e. pay an invoice, or bank a receipt, arguably with training anybody should be able to balance a balance sheet and understand how this links into a profit and loss account. In the service charge world, however, the facts are that before one starts making even the simplest transaction, one should know if the property is new build or not, (if it is, there are complicated schedules to be considered in respect of developers voids); and even simple expenditure such as the electricity bill needs consideration: is it the electric for the list so just Block A pays, or for the estate so everyone pays? Remember, it is the lease that says what should be paid by whom. It may not even be one lease that needs to be considered, as sometimes not all owners contribute to all items in the service charge schedule (for instance those not connected to communal parts may not pay for internal decorations).

In complex schemes there may be five or more different schedules to which owners contribute.All external accountants should be provided with a copy of the budget and lease as a matter of good practice. The budget is the most likely piece of paper to highlight an expenditure which has not been invoiced and should be accrued, and without an understanding of the legal structure that surrounds the particular building, how is the external accountant supposed to guess from a list of bills, that there are several service charge schedules, i.e. one for the Block with a lift, one for houses and flats, and a further schedule for the flats communal heating system? Finance personnel are invaluable in the year end process, to liaise with and guide the external accountants, as, let's face it, 8 out of 10 Property or Estate Managers are a little frightened of the year end accounts! All this means that we are no longer dealing with a single profit and loss account. (In the property world we call it the income and expenditure account. Why? Simple, because service charge schemes are not intended to be profit making!)

An individual scheme may be composed of several pools of funds, each of which is, in fact, an income and expenditure account in its own right, in which the costs for each service charge schedule (set out in the lease) need to be stated and apportioned just to the owners liable to contribute to that schedule. Even the seemingly simple job of purchase ledger needs care and diligence, as expenditure has to be allocated not only to the correct expense code but also to the correct service charge schedule. This takes finance out of the theoretical arena into a reality of needing to understand where the intangible meets the tangible. For example, whilst it may be common sense for a property manager to know that in a mixed scheme of houses and flats, you would not expect the houses to contribute to the lift.

If the finance officer treats a scheme as merely lift expenditure to the scheme, then of course the scope for getting it wrong is huge! The lease is the starting point but the requirements of codes of practice and statutory regulations follow hard on its heels and the vital tasks of compliance and risk management usually fall on the shoulders of the finance officers. Who carries the can if the dreaded Section 20B deadline is missed! The external accountants are well-versed in the Companies Acts but often know little about the Landlord and Tenant Act and the service charge accountants expertise is indispensable in sheltering the business from the consequences of failing to recover costs on behalf of the Client.

The vast and growing body of professional skills and competences required of the service charge accountant is currently largely met through self-instruction and on-the-job learning. For many, this starts with asking a colleague which button to press to enter data on the computer system and then finding that the colleague had it wrong anyway! All are left more or less frustrated and limited in their development by the absence of ready access to structured learning and qualification. Well, the IRPM is only too aware of the skills our property finance experts cultivate and to benchmark this the IRPM is planning to begin talks with the accountancy professions to look at the synergies being provided and to ensure that service charge modules are optional modules within the AAT, ACCA qualifications, etc.The IRPM also intends to create a Part 2 exam specifically geared at finance officers and has set this within its business plan as an objective to be achieved in the next 1 to 2 years. No longer will our finance people labour in the dark and our businesses will prosper as a result.