As specialist property accountants who regularly provide service charge accounting for block management companies, this question crops up time and again. Does my property’s service charge require a full audit or will a report of factual findings be sufficient? And what exactly is the difference?

We’re here to break down the differences and give you a simple guide to the factors that will influence your decision. 

What do these terms mean?

Understanding your requirements for financial reporting and transparency isn’t always clear when much of the terminology we use to describe financial auditing overlaps colloquially. However, they all have distinct meanings. 

Here’s a quick glossary to help you understand these terms:

Service Charge Audit: This is a comprehensive examination of the service charge accounts, conducted in accordance with International Standards on Auditing (ISA 800).

Report of Factual Findings: This is a more limited form of review where the accountant performs specific agreed-upon procedures and reports their findings.

Preparing Accounts: This involves compiling the financial statements without providing any assurance.

How to know if you need auditing or a report of factual findings 

The answer to whether you need a service charge audit or a report of factual findings depends on several factors:

Lease requirements

    This is the most critical factor. Your lease will often specify the type of financial reporting required. If it calls for an ‘audit’ the interpretation depends on when the lease was drafted:

    • Pre-1980 leases: ‘Audit’ generally means preparing accounts.
    • Post-1980 leases: ‘Audit’ typically refers to a full audit as we understand it today.

    Property size and complexity

      Larger and more complex properties with significant service charge funds may benefit from a full audit. Whereas smaller properties might find a report of factual findings is more than sufficient. 

      As a general principle, where increased complexity is involved an audit shows increased commitment to financial transparency for leaseholders.

      Specific regulatory requirements

        Certain regulations can directly influence your reporting needs. For instance, the RICS Code of Practice requires that for properties with more than four dwellings, service charge summaries must be certified by a qualified accountant. Getting this certification often necessitates a higher level of scrutiny than a simple report of factual findings, potentially pushing you towards opting for a full audit.

        Cost considerations

          Full audits are generally more expensive than reports of factual findings because they are more comprehensive. 

          Again, this may tie into the size and complexity of the building as well as leaseholder expectations. For a smaller building with fewer leaseholders, the benefits may not outweigh the cost.

          Decision-making considerations

          When making your decision it may be useful to keep in mind these particular key considerations.

          1. Financial responsibility: As a block management company, you have a duty to ensure service charge funds are correctly managed and reported.
          2. Transparency: Leaseholders have a right to understand how their money is being used, which may influence the level of assurance you provide.
          3. Regulatory compliance: Recent changes in leasehold reform have increased scrutiny of service charges. This might mean a higher level of reporting is necessary. This also includes compliance with other legal and professional regulations that we’ve touched on, including the RICS Code of Practice and TECH 03/11.
          4. Risk management: The right level of financial review can help identify and mitigate potential issues in service charge management. This is especially pertinent for buildings where cost-benefit analysis is necessary to structure the use of the service charge in the coming year.

          Take the stress out of leasehold property accounting

          As we’ve explored above, determining the appropriate level of financial reporting for your property involves numerous factors. At Williamson & Croft, our team of experienced property accountants can guide you through this decision-making process, ensuring you meet all necessary legal and professional standards. 

          Get in touch today to book an introduction with our expert property accounts.