Have you ever thought about how service charge accounts are actually produced, and whether the process still makes sense today? It’s a process that’s been in place for decades, with very little change, even though it may no longer be the most efficient way of working.
As agents you are generally driven by lease obligations and legislation to certify the expenses / accounts of the block / scheme concerned. However, across the industry, agents follow a spectrum of processes. Many of you may wonder why there is this variety of processes for something you would imagine be the same everywhere?
Largely, it seems to be dictated by the size of the agent and their inhouse skills. Typically, smaller agents adopt a very basic approach, whilst larger agents do more analysis and documentation. The very basic approach consists of passing the essential financial records across to the accountant and letting them process everything. The more diligent approach is to ensure the financial records are clear in terms of accruals, pre-payments and reserve movements. This would mean having a clear trial balance and understanding the financial position before passing to the accountant. The sophisticated approach is compiling the accounts in-house before passing them across to an independent accountant to certify.
To help understand this variety of approaches, we think about the process of the annual service charge accounts as three tasks:
Preparation
Making sure all cash has been reconciled, all transactions allocated to schedules, reserve expenditure clearly identified and any ad-hoc works that has not yet invoiced is documented. Ensuringrelevant files are ready to be sent to an accountant.
Compilation
Using the prepared data, to produce accounts. This includes, creating a trial balance, processing all journals to apply the likes of accruals, prepayments, directly recoverable expenditure and surplus/deficits. Ensuring the financial statements reflect the accrual-based position of the scheme accurately
Certification
Reviewing the financial data and the agent’s input to ensure the financial statements and notes accurately reflect the scheme’s position and comply with general accounting principles and Tech 03/11 guidance, before signing the accounts in the typical form of a Report of Factual Findings.
Preparation is clearly the responsibility of the agent, as you are managing the scheme day-to-day as part of the management responsibilities. Therefore, it is your duty to ensure the prime financial records are accurate. Conversely, certification is clearly the responsibility of an independent accountant rather than an inhouse service. The key question is, who carries out compilation. To run your business effectively and efficiently we recommend being clear whether you carry out compilation or not and avoid a half-way house approach. This should also be reflected in your contract, making it clear whether compilation is included within your standard fee structure.
There is indeed value in making sure you understand the impact of accruals, prepayments, reserves and directly recoverable costs. Without this input accountants are often left to ‘guess’ these items and they invariably are not always accurate. What’s interesting is, that by the time the agent has worked through the spreadsheets, they have already completed a significant portion of the compilation work, often more than 70%. However, whenthe files are passed to the accountant, the accountant starts from scratch again and re-does the whole compilation task in their own system, which needless to say, inefficient and unneccesary.
For agents they are not being rewarded in fees for this compilation work, but the accountant is.
New Technology
With new technology we are now able to eliminate this inefficiency. If we take the above scenario as an example, but as the agent moves into completing the compilation task, they are effectively bringing together the accounts and the financial statements on behalf of the accountant.
Through our SCOAP system, we have the ability to enable agents to complete their side of the compilation task and pass the results straight across to the SCOAP accountant who picks up and carries on with the task using the data compiled by the agent. This avoids duplication whilst also allowing the agent to provide better quality records for certification. It requires more co-working between the agent and the accountant, but eliminates wasted effort, which leads to a win-win for all parties and provides a better-quality product for the homeowner. The added bonus is, that when this is achieved, the agent can charge for their efforts and recover the costs of the extra financial skills in their organisation.
In some cases, the agent, who has the right competence in their organisation, completes all of the compilation tasks, leaving the independent accountant to just certify the final accounts.
Conversely, where agents do not have the inhouse finance knowledge to complete any compilation works, or they choose to focus on preparation only, they can rely on the accountant to report back to them the position of the scheme in a structured manner. This saves the agent time and money and making the overall process more efficient.
So, if you undertake some or all of the compilation of the service charge accounts, it might be worth exploring how BOL and SCOAP can help make you more efficient and profitable. Alternatively, it may be worth reviewing your approach and focusing on Preparation only.
