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Comments from ACCA
September 2007

A consultation paper on regular statements of account and designated client accounts

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the above consultation paper issued by Communities and Local Government (CLG). The consultation paper was considered by ACCA UK’s Practitioner’s Network and their views are set out as responses to the proposals raised for comment.

Proposals dealing with a regular statement of account to be provided to service charge payers (Section 152 of the 2002 Act).

Proposal 1 It is proposed that the legislation should allow the regular statement of account to deal with some or all of the service charge costs payable by the tenant and the tenants of dwellings associated with his dwelling rather than just the shared costs.

We believe that to have to prepare accounts for each set of shared service costs would be excessive and will not necessarily be beneficial to users. In particular the additional costs incurred through any such requirements are likely to be greater for this type of entity and will ultimately be passed onto service charge payers.

We therefore agree with the proposal to include a broader range of service charge costs to be dealt with in a single statement of account, rather than just the shared costs. However, in order to ensure that the transparency of any such set of accounts is appropriate for any individual tenant, who would like to understand what their service costs are contributing towards, the information provided in the statement of account needs to be sufficiently broken down. Therefore any costs (eg repair and maintenance) incurred on a particular block in an estate should be identified as well as the estate costs.

Proposal 2 We do not propose to prescribe the exact format of the statement of account and are prescribing the content in a way that allows greater flexibility in how the information can be presented. We will require it to be prepared on an accruals basis under the historical cost convention and for it to be legible in a typewritten form of at least 10 point.

We agree that the accounts should be prepared under the historical cost convention as modified by the requirements of the service charge account and they are prepared on an accruals basis.

The general rules and example statements as set out in Annex A of the consultation paper, appear to be uncomplicated. The proposals of setting out details of common costs across a number of shared dwellings, as well as the costs of those individual dwellings themselves, in a columnar approach, appear to be satisfactory.

We agree that a certain level of flexibility in providing information in a form that is more relevant to the accounting processes in use by the landlord would save additional costs in the long term to both landlords and leaseholders. However, we wish to point out that increased transparency would benefit from having a prescribed layout. We would therefore suggest that certain headings (those in bold in the second example of Annex A possibly) could be made mandatory.

Proposal 3 It is proposed that the prescribed content for the statements of account to be provided by local authority landlords is modified in order to take account of the particular way in which they are required to account for expenditure on their housing stock and ensure that service charges are provided with relevant information at a reasonable cost. This will include prescribed details of the overall expenditure that they are required to contribute towards through their service charges together with an individual statement of account.

We believe that in principle it would be desirable to have one standard report issued for all statements of account in the interests of transparency and comparability.

We do however acknowledge the practical difficulties in achieving this as noted in the consultation paper. Clearly a requirement for local authority landlords to effectively account on an individual block by basis, similar to other landlords, would be inconsistent with the way in which they have to account for expenditure on their housing stock, under the Housing Revenue Account (HRA). This may result in an additional cost burden to change their current accounting systems in order to provide the same accounting information relating to the service charge for connected groups as that provided by other landlords.

If these costs are significant and are then going to be passed onto service charge payers then the additional benefits of the extra information and consistency of a standard statement of account would be diminished. Providing that there is sufficient evidence that this may be the case, it could justify allowing local authorities to issue a modified report.

The consultation paper states that unlike other landlords, local authorities should be required to fully account to leaseholders on an individual basis for service charge costs incurred, payments received and any balances of funds held in relation to each accounting period. This is in line with how most local authorities already account to leaseholders.

We agree both with the fact that this is necessary information that individual service charge payers should receive and also with the proposals that it would by quite impractical and costly for the reporting accountant to be required to provide additional comfort on the information in the individual statements.

Proposal 4 It is proposed that local authorities are able to provide a separate statement of account for capital expenditure.

Again in principle we would prefer a single statement of account which includes such capital expenditure, although we understand the potential practical difficulties in doing this, as highlighted in the consultation paper.

To have to account for large scale major works in the statements of account would necessitate the identification of expenditure incurred for a particular block/estate in each period of the contract. We acknowledge that this could involve a significant increase in workload and system costs, which again would ultimately be passed on to leaseholders. Therefore in the context of the cost/benefit to leaseholders the proposal to provide a separate statement of account on capital expenditure following completion of the works, may be the most practicable solution.

Proposal 5 It is proposed that the prescribed content for statements of account to be provided by RSLs is also modified in the same way as for local authority landlords although they would be expected to provide the same statement as for private sector landlords where it would be appropriate to do so.

We initially refer to our comments on proposal 3 and our preference for one standard statement of account.

However, we understand that there are similarities between Registered Social Landlords (RSLs) and local authorities and it would be appropriate for RSLs to provide a statement of account similar to that of local authorities (as set out in Annex B of the consultation paper), should this be different. This would show the required detail about the service charge expenditure which the tenant in question has been required to contribute towards through their service charges together with details of any Reserve Fund and an individual statement of account.

The CLG suggest that where appropriate an RSL would be expected to provide a statement of account containing a full Income and Expenditure Account and Balancing Statement. This seems reasonable although we believe that more details should be given in terms of what circumstances the full statement of account may be required. By further providing examples of when they may be required, this would assist the preparers of such information.

Proposal 6 It is proposed that the summary of the rights and obligations of tenants of dwellings in relation to service charges need not be supplied with the regular statement of account although there should be a reference in the statement to the right to receive the summary with each demand for service charges.

We agree with this proposal.

Proposal 7 It is proposed that an accountant’s report must be supplied alongside the statement of account subject to specified exceptions. This will contain certain prescribed statements of fact to indicate that checks have been carried out on the information in the statement of account. The accountant will provide the report having regard to the relevant guidance.

Accountant’s Report

The views offered on the accountant’s report below are an overview and are restricted to our comments on the example report in Annex C only. Paragraph 29 states that there will be further discussion on the specific content of the report which is being sent to the ‘relevant accountancy bodies’ for comment. ACCA will comment on this as is appropriate.

With regards some of the disclaimers in the example report, we believe that those that are bracketed should be optional. This should also include the reference to not being in accordance with International Standards on Auditing (ISA) and International Standards on Review Engagements (ISRE) in the final paragraph of the example report. The report already states that it ‘does not constitute an audit or a review of any kind’, and therefore we believe that this is not necessary required. The reference to this not ‘being designed to provide any assurance’ ensures that the report complies with ISRE in this respect.

The second paragraph of the ‘Report of factual findings’ refers to ‘no exceptions’ in the performance of the procedures. We believe that it would be more appropriate to state that ‘in all material respects no exceptions were noted..’.

Agreed upon procedures

We agree that the procedures should be agreed by means of a formal letter of engagement between the reporting accountant and the landlord. The guidelines for this should be issued by the Recognised Supervisory Body.

In general we believe that the minimum procedures outlined in Annex C are a useful starting point for carrying out the work. However, we suggest that this should be a matter that is also consulted upon with the professional bodies as is to be the case with the accountant’s report.

We do note that in the example guidance there is explicit reference to sample sizes and consideration of expenditure when requiring the agreement of samples to supporting documentation (procedures 6, 7 and 10). We believe that sample sizes should be based on materiality and an assessment of risk.

Proposal 8 - It is proposed that the definition of a qualified accountant, who will be able to provide a report on a statement of account, will be amended so that it covers all accountants who are members of recognised supervisory bodies for company auditors.

We agree that relaxing the requirement for only a registered auditor to be able to carry out the work, would enable a wider pool of practitioners to carry out such work. The widening of the definition of qualified accountants who are eligible to carry out this work is acceptable.

Proposal 9 It is proposed that an exception would apply from the requirement to provide an accountant’s report where the service charges dealt with in the statement do not exceed £5000 in total.

We agree with the assumption that there is likely to be a minimum cost to be incurred in the provision of an accountant’s report and therefore it is reasonable to make available an exception to provide an accountant’s report.

We not believe that the basis for the exception should be based on service charges. The charges could contain errors and the costs could be higher for those entities that fall in and out of the regime. Therefore we suggest a more stable, non-financial measure would be more appropriate, such as for example the number of units in accommodation.

Proposal 10 It is proposed that the first accounting period for the regular statement of account will commence on the day after the end of the accounting period being operated when the new provisions come into force. However a default provision will be included under which the first accounting period must commence at the latest, 12 months after the commencement date.

We agree this default provision appears reasonable.

Proposal 11 It is proposed that a summary (under existing section 21) can be requested for the last accounting period that was completed before the commencement of the first accounting period under the new provisions. This right will continue to be available for a period of a year after the end of the accounting period in question. The request should be complied with within one month of the request or six months of the end of the relevant twelve month period, whichever is the later. Section 22 of the 1985 Act then provides that a request can be made within six months of the receipt of the summary for reasonable facilities to inspect and take copies of accounts, receipts and other documents supporting the summary.

We agree with this proposal.

Proposals dealing with service charges to be held in separate account (Section 156 of the 2002 Act (New section 42A of the Landlord and Tenant Act 1987)).

Proposal 1 We propose amending section 156 of the 2002 Act to continue to allow the payee to hold a number of different trust funds in the same account. This would not prevent them from maintaining separate accounts for each fund if they choose to do so. In order to achieve this, we propose removing section 42A(2)(b) which states that no other funds are held in the account.

We would agree with this proposal. The 2002 Act stated that ‘no other funds are held in the account’, if it is to be designated for a trust fund. There may be a number of scenarios where some leaseholders contribute to certain upkeep, whilst other do not. This would mean that separate accounts would be needed for each group, which would clearly be quite inefficient and increase administration costs. The benefits to the tenants of increased transparency and protection through the explicit sanctions, need to be off set against the likelihood of the additional costs being passed down to them. We believe that this proposal will be beneficial in this respect.

Proposals 2, 3 and 4 in respect to service charges to be held in separate account are responded to jointly.

Proposal 2 For the avoidance of doubt we propose clarifying in legislation that only monies received in relation to service charges or relevant costs are held in the account (including any other monies received in respect of the service charges or relevant costs, such as grants for works etc). Monies received which are not service charges, such as ground rent or administration charges for example must not be held in the account.

Proposal 3 We propose giving tenants the right to request and receive all the statements of account and reports that are required to explain the balance of service charge monies being held in the designated client account into which that tenant’s service charges are paid. Further we propose that there will be a requirement that all those statements of account must have the same accounting periods (as defined under section 152 of the 2002 Act) and should include the overall balance held in the relevant designated client account. We also propose giving those leaseholders the same inspection rights (as they have for their own statements).

Proposal 4 We propose that where an accountant’s report is required under section 152 for any or all of the statements of account that deal with monies held in a single designated client account, the accountant must consider all the statements together. If he is unable to report that any one of the statements of account complies with the requirements as specified in section 152 any or all of the tenants may withhold their service charge if they wished to do so, because doubt would have been cast over the account as a whole. In addition, in order for this to work effectively the exceptions from the requirement to provide an accountant’s report as set out in Proposal 9 in Chapter 3, will not apply in such cases.

The final three proposals generally meet the objectives of improving transparency and reducing the risk of fraud, whilst providing appropriate sanctions for non-compliance. The benefits they will provide on the whole are likely to outweigh the costs, many of which are inevitable to a large extent.

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