Commercial service charge accounting and audit: a review

Abstract

Purpose -The purpose of this paper is to critique the accounting and auditing requirements of the 2011 RICS Code of Practice, Service Charges in Commercial Property and examines whether the new 2014 version of the RICS Code and its associated accounting guidance note provide a "best practice" framework for service charge accounting and audit. This theoretical discussion is then applied to empirical data obtained from a sample of UK commercial office properties to assess whether current practices used by managing parties for the preparation and review of service charge reconciliation certificates actually embody the principles of best practice. Design/methodology/approach -The paper uses inductive reasoning to theorise about how the accounting and auditing of commercial service charges might be improved. The paper also uses a deductive approach to identify whether current commercial service charges accounting and audit practices achieve a theoretical level of best practice. The paper reviews a range of secondary literature and utilises hand-collected data from the service charge documents provided to commercial leaseholders. Findings -The paper finds deficiencies within the RICS Code's requirements for service charge accounting and audit. As a result, empirical evidence is found suggesting that UK commercial service charge accounting and audit practices are inconsistent, lack transparency and provide poor levels of negative assurance for tenants. Research limitations/implications -Content analysis requires subjective interpretation on behalf of the researcher. Originality/value -Data are original to this research and provide a unique insight as to the accounting and audit practices used by facilities managers, managing agents, accountants and independent auditors within the commercial property sector.

Leases as inhibitors of best practice in service charge management

“…While the Code and its requirements have negotiated, confirmed and laid out what is best practice, research indicates that overall levels of compliance with its guidance remain poor, in both the UK commercial office and retail sectors (see, for example, Property Solutions, 2017, and Holt, Paul and White, 2017). There certainly appears to be an 'expectations gap' between what this occupational wisdom sets out as the service that commercial tenants might expect to receive in terms of the service charge accounting and administrative process, and what managing parties are actually providing (Holt, 2015). Questions concerning the reluctance of tenants to demand such compliance before signing a lease remain an area for further research since they appear inexplicable when examined rationally.…”

“…The research looked specifically at whether current lease provisions support the Code's accounting and audit guidance because this is an area that has seen significant improvement in guidance. Since its inception, the Code has attempted to improve both the relevance and reliability of the service charge accounting process, and now includes detailed requirements for the preparation, dissemination and review of the service charge accounts (see Holt, 2015;Holt et al, 2017). In order to assess whether current leases support the Code's attempts at improving the service charge accounting process, each lease's provisions were reviewed to see whether they provided information relevant to the following ten accounting-related metrics: Figure 3 presents the results of this accounting-related lease analysis.…”

“…Literature review UK commercial service charges have, in the last few years, been the subject of increased professional scrutiny after many years of being seen as problematic, yet unimportant (see, e.g., Calvert, 2008;Eccles and Holt, 2009;Eccles et al, 2011;Holt, 2015). There has also been international discussion on the issue as well (see, e.g., Halvitigala, 2018).…”

“…Despite this critical role in developing best practice, little is currently known about the extent to which current lease terms either conflict with or support the Code's requirements. In earlier research, Holt (2015) reviewed 20 leases at UK multi-let office buildings larger than 50,000 sq. ft, and found that none included a requirement for an audit or independent accountants' report, or specified whether accounts should be prepared on a cash or accruals basis.…”

“…Whilst puzzling in itself, it is indefensible when compared with the regulation that is obligated upon accounting mechanisms for UK residential service charges. Even small UK limited liability entities with turnovers of less than £1m face mandatory annual reporting requirements (for more details seeHolt, 2015, andCompanies House, 2016).…”