Are You Giving Your Service Charge Accountant What They Actually Need?
Qube Talk: Service Charge Accounting Insights
Welcome to another episode of Qube Talk, where we discuss all things service charge accounting.
I'm Ray Armand, and I'm joined by CJ Ralfe.
Today, we're discussing an important question for managing agents:
Are you giving your service charge accountant what they actually need?
You might think that once you've handed over your year-end information, you're done. But providing the right information, in the right format and at the right time can make the entire service charge accounting and year-end review process considerably smoother.
Many of the delays and errors we see in service charge accounting come down to three common issues:
Incomplete information
Unorganised or unclear records
Information being provided too late
Sometimes, information isn't received until six months or more after the service charge year end. That makes the process far more cumbersome than it needs to be.
In this episode, we're looking at the information accountants commonly need, what managing agents sometimes forget to provide, what can go wrong and how you can streamline your year-end record keeping to help get your service charge accounts completed faster and with fewer queries.
We'll also provide a checklist that managing agents can use as a starting point for building a standard year-end accounts pack.
Start With a Standard Service Charge Year-End Pack
Ray Armand:
Let's set the scene.
You've reached the end of the service charge year and you're ready to send the information to the external independent accountant.
They may be preparing and reviewing the service charge accounts, or perhaps your team has prepared the accounts and the accountant is carrying out the independent review.
But have you asked yourself:
Are we sending everything the accountant actually needs?
Do you have a comprehensive checklist that you work through?
Do you have a standard pack of information that you prepare for every site?
Or do you approach every development differently?
Ideally, you want to have a structured information pack.
Then, as you work through different sets of service charge accounts, pay attention to the questions your independent accountant regularly asks.
If the same questions keep appearing, consider adding the relevant information to your standard checklist.
Over time, you can build a comprehensive year-end pack that anticipates many of the accountant's questions before they even need to ask them.
The aim is to reduce unnecessary back-and-forth and make the service charge accounting process more efficient.
What Does Your Service Charge Accountant Actually Need?
CJ Ralfe:
Let's start with one of the most important items: the bank balance.
When you look at the balance sheet, one of the first things you want to understand is how much money is left in the fund.
That's why the year-end bank statement is critical.
We've had situations where we've been told that somebody forgot to obtain the bank statement at year end.
You need a bank statement that clearly shows the balance at the service charge year-end date.
If there are multiple bank accounts, make sure you provide the relevant statement for each account.
For example, you may have a separate account for a reserve fund or sinking fund.
Make sure those statements are available too.
Organise Bank Statements as You Go
You don't necessarily need to send your accountant every monthly bank statement for the entire year if proper bookkeeping records have been maintained.
However, you should retain the complete records.
The important thing for the year-end pack is to provide the bank statement that supports the closing balance at the service charge year end for each relevant bank account.
Don't wait until the accountant asks for it.
As soon as you receive the relevant year-end bank statement, save it in your year-end folder.
That way, when it's time to send the accounts pack to your accountant, the information is already there.
A Bank Statement Is Not a Substitute for Bookkeeping
Ray:
There's an important point here, particularly for smaller managing agents and smaller developments.
Occasionally, we're simply given bank statements and asked to prepare the service charge accounts.
The general expectation when an accountant is engaged to prepare accounts is that some form of bookkeeping has already been completed, unless you've specifically agreed otherwise.
For a very simple site with relatively few transactions, the bookkeeping may be straightforward.
But if you're using a bank statement as the starting point, each transaction still needs to be identified.
For example, imagine there's a payment to Sam Brown.
We don't know what Sam Brown did.
Was it cleaning?
Grounds maintenance?
Repairs?
Insurance?
You, as the managing agent, need to provide that information.
The transactions should then be summarised into appropriate expense categories.
For example:
Cleaning – £X
Grounds maintenance – £X
Repairs and maintenance – £X
Simply handing an accountant a bank statement doesn't necessarily provide all the information required to prepare meaningful service charge accounts.
Make Sure Your Bookkeeping Reconciles to the Bank
CJ:
If you've created a basic spreadsheet or summary of the transactions, make sure it actually reconciles to the bank balance.
For example, you might summarise:
Cleaning expenditure.
Grounds maintenance expenditure.
Other expenses.
Service charge receipts from leaseholders.
When you take your opening bank balance, add the receipts and subtract the payments, you should arrive at your closing bank balance.
There's little value in sending a summary that doesn't reconcile.
If it doesn't reconcile, the accountant will need to come back to you and ask questions.
That creates additional work for both parties and slows down the process.
Be Clear About Who Is Doing the Bookkeeping
Ray:
On the other hand, if you want to hand your accountant the bank statements and ask them to complete the bookkeeping as well as prepare the accounts, that's possible.
The important thing is to communicate that in advance.
Essentially, you're saying:
“We haven't completed the bookkeeping. Here are the bank statements and we'd like you to do that work.”
Your accountant then knows what they're being asked to do and can scope the work appropriately.
If the bookkeeping has already been completed, you generally don't need to send every monthly bank statement simply for the sake of it.
Provide the year-end bank statement to verify the closing balance, together with the appropriate bookkeeping records.
What About Supplier Invoices and Supporting Documents?
The next area is supplier invoices and supporting documentation.
Do you need to send every single supplier invoice?
Not necessarily.
CJ:
If your accounting or property management system makes it easy to export invoices electronically, you can provide them.
A detailed ledger showing the transactions for the year is also very useful.
From that ledger, the accountant can identify which invoices they want to inspect.
If your system allows every expense transaction to be linked directly to its supporting invoice, that's even better.
You could potentially give your accountant appropriate access to the system so they can retrieve the invoices they require.
Give Your Accountant Workable Information
There's little benefit in sending a random selection of invoices.
Your accountant may need to inspect different transactions.
Instead, either make the complete set of supporting documents easily accessible or wait for the accountant to identify the sample they need.
The key is to provide the information in a workable and searchable format.
System Access Can Reduce Year-End Queries
Ray:
The managing agents who can give us appropriate restricted access to their systems make the process much easier.
If invoices are attached directly to each transaction, the accountant can retrieve the supporting evidence they require without repeatedly going back to the managing agent.
That can significantly reduce questions and delays.
The principle is that there should be supporting evidence behind your expenditure.
The independent accountant may not need to inspect every individual invoice, but the supporting documentation should exist and be available.
Major Contracts and Major Works Documentation
If there have been significant contracts or major works during the year, make sure the relevant supporting documentation is included.
That might include:
Contracts
Notices issued to leaseholders
Information relating to major works
Relevant correspondence
Supporting documentation associated with significant expenditure
If significant works have taken place, don't wait for the independent accountant to discover them from the numbers and then ask for the supporting documents.
Provide the information upfront.
Service Charge Income Is Just as Important as Expenditure
CJ:
We also need to look at the service charge income.
At the end of the year, we need to understand which leaseholders or freeholders have paid the service charges raised for the period.
Have they paid in full?
Are there amounts still outstanding?
Has somebody paid in advance for the following period?
Is somebody in credit because they've overpaid?
We need a clear listing showing who owes what at the year end.
If you're operating a full accounting system, you may also be able to provide a year-end creditors or supplier listing.
Make Sure Every Leaseholder Has Been Billed Correctly
Another critical check is whether every leaseholder has been billed appropriately.
Your accountant needs information that allows them to verify that service charges have been raised as expected for the period.
For example, depending on the development and its documentation, costs may be divided between leaseholders in a particular way.
The accountant needs to verify that everybody who should have been billed has actually been billed.
You don't want to discover at year end that one leaseholder was accidentally omitted.
Provide a useful debtors listing, debtor statements or another suitable report showing what was billed and what remains outstanding.
Whatever system you use to manage service charge invoicing and collection, make sure the information can be shared with the accountant in a workable format.
Support Your Year-End Balance Sheet Figures
Ray:
There's a common theme running through the bank statements, debtors and creditors information.
We're trying to verify the assets and liabilities reflected at the service charge year end.
If there's a balance sitting on the balance sheet, the accountant needs appropriate evidence or a breakdown supporting that figure.
If there are other unusual balances, be prepared to explain what they represent and provide the supporting information.
Don't Forget the Service Charge Budget
Another important document is the service charge budget.
As part of the year-end process, the accountant may need to compare actual expenditure with the budget.
That means you should provide the exact budget that was issued to leaseholders at the start of the year.
If a revised budget was issued, provide that too.
Also provide relevant communications that accompanied the budget.
Why Budget Communications Matter
CJ:
The covering letter or communication that went out with the budget can be extremely useful.
Imagine an expense category was budgeted at 50% more than the previous year.
The accompanying communication may explain why.
Perhaps significant work was expected.
Perhaps a contract changed.
Perhaps there was another reason for the increase.
That commentary gives the independent accountant valuable context when reviewing the actual expenditure.
Explain Unusual Costs Before Your Accountant Asks
Ray:
Think about the financial information from a leaseholder's perspective.
What questions are they likely to ask when they receive the service charge accounts?
If something unusual happened during the year, tell your accountant.
Maybe expenditure differed significantly from budget.
Perhaps there were unusual costs.
Maybe there were insurance recoveries.
Perhaps there were major works.
Don't wait for the accountant to identify the transaction and come back with a question.
If you know something requires an explanation, provide it as part of the year-end pack.
The accountant is trying to understand what happened at the development so that the financial information presented to leaseholders makes sense.
Don't Forget Costs Relating to the Previous Financial Year
CJ:
It's also important to make sure all costs relating to the financial period have been captured.
Imagine the service charge accounts are finalised.
Then, the following month, you discover an invoice that actually related to the previous financial year.
Perhaps you reconcile a supplier statement and realise that an invoice was missing.
That's a problem you want to identify before the accounts are finalised.
If invoices are paid after the year end but relate to the previous financial period, make sure your accountant knows about them.
Depending on the accounting treatment, adjustments may need to be made to recognise those costs in the appropriate period.
Review Post-Year-End Transactions
One way to identify missing year-end expenditure is to review transactions immediately after the year end.
For example, you could provide the accountant with relevant information from the first month after year end.
They can then identify payments that may relate to the previous period and ask you to confirm what they relate to.
If you're putting the year-end pack together three months after year end, it can also be useful to provide relevant transaction reports covering those first few months.
This can help identify expenditure that may belong to the financial year being prepared.
If your own finance team prepares the service charge accounts before sending them for independent review, these are checks that should already form part of your preparation process.
Why Your Accountant Is Asking for All This Information
The objective isn't to make life difficult for managing agents.
The independent accountant has procedures that need to be completed as part of the service charge year-end work.
The information requested helps the accountant obtain appropriate evidence and understand what happened financially during the year.
Providing complete and organised information makes that process significantly smoother.
Common Mistake 1: Sending Only Bank Statements
One common problem is sending only the bank statements and expecting the accountant to reverse-engineer everything else.
Effectively, you're asking the accountant to complete the bookkeeping.
That's fine if it has been agreed in advance.
But if the accountant has been engaged to prepare the service charge accounts on the assumption that the bookkeeping is already complete, this can create additional work, queries and potentially additional fees.
Be clear about the service you require.
Common Mistake 2: Sending Information in Bits and Pieces
CJ:
Another common problem is sending information across multiple emails and at different times.
If your accountant has provided a checklist, try to work through it and send the complete pack together.
If you're using a client portal, upload the complete pack in an organised way.
Sending information in bits and pieces makes it easier for something to be missed and can slow the entire process down.
Common Mistake 3: Sending Year-End Information Too Late
Timing is another major issue.
Ideally, you want to start preparing the information soon after the service charge year end.
Don't leave it until you're approaching the deadline.
You need enough time for:
The accountant to prepare or review the accounts
Queries to be answered
The managing agent to review the figures
RMC directors, where applicable, to review the accounts
Corrections or additional information to be dealt with
The earlier you begin, the less pressure everybody is under.
Why Earlier Is Easier
Ray:
There's another benefit to doing the work sooner.
A financial year covers 12 months.
If you wait another five or six months before sending the information to your accountant, some of the transactions you're discussing could be 17 or 18 months old.
Then, when the accountant asks for a sample invoice, you're searching through old emails.
You may have to contact a supplier about work they completed more than a year ago.
People may struggle to remember what happened.
If your bookkeeping is maintained throughout the year and you prepare the year-end information shortly after the period closes, everything is much fresher.
The emails are easier to find.
People remember what happened.
The supporting documents are easier to locate.
It can genuinely reduce the amount of time required to complete the work.
Handover Confusion Between Managing Agents
CJ:
Another difficult area is where a development has changed managing agent during the financial year.
Perhaps you took over the development two or three months into the year.
You then reach year end and part of the financial period was managed by the previous managing agent and part by your business.
This can create handover confusion.
A clean financial handover from the previous managing agent is extremely important.
It's a topic in its own right, but the key point for year-end accounting is that the accountant needs sufficient information covering the entire financial period.
Don't Forget Formal Communications With Leaseholders
Ray:
Another common issue is failing to provide formal communications sent to leaseholders or directors that affect the financial information.
If a communication helps explain something that happened financially during the year, provide it.
It helps the independent accountant build a clearer picture of what happened at the development.
How to Be a 'Rock Star' Managing Agent at Year End
CJ:
If you want to make your year-end accounts process run smoothly, start by creating one organised year-end folder.
You may already have your normal monthly filing system.
That's fine.
But there are specific documents you know you're going to need at year end.
As those documents become available, copy or save them into the year-end folder.
For example, when the year-end bank statement arrives, save it immediately.
Don't wait until several months later and then try to find everything.
Standardise the Information Across Your Team
If you're going to use a standard year-end information pack, make sure your staff are trained to produce the information consistently.
The same types of documents should be provided.
The same naming conventions should be used.
The folders should follow the same structure.
This makes life easier for the accountant because they become familiar with the way your business provides information.
More importantly, it makes your internal processes easier to manage.
Introduce a Review Before the Pack Is Sent
Before sending the year-end pack to the accountant, have somebody else review it.
It doesn't necessarily need to be a lengthy technical review.
Even a short second check can identify missing documents, unusual information or inconsistencies.
A peer review can prevent unnecessary back-and-forth later.
Use a Master Service Charge Year-End Checklist
Ray:
A master checklist is key.
If someone has to work through the checklist and confirm that each item has been included, you're much more likely to receive a complete and consistent pack.
The checklist can include instructions about:
What information should be included
How files should be named
Where documents should be saved
What format reports should use
Who should review the pack
As your business grows, this also makes training new team members much easier.
You have a standard process they can follow.
Tell Your Accountant What Happened at the Development
CJ:
Include a section for ad hoc information.
If something significant happened during the year, tell us.
Maybe there was a fire.
Perhaps there were major works.
Maybe something unusual happened at the building that had a financial impact.
That context is useful.
Otherwise, the accountant is simply looking at numbers on a page and trying to work out what happened.
Real-world context helps explain the financial information.
Use Your Accounting Software Effectively
If your managing agency is growing and you're using accounting or property management software, make use of the reporting functionality available.
Useful reports may include:
Trial balance
Detailed transaction ledger
Bank reconciliations
Debtors reports
Creditors reports
Expense ledgers
Post-year-end transaction reports
Providing these reports can help the accountant investigate questions without repeatedly coming back to your team.
Excel can still work for smaller or simpler operations.
But as your portfolio grows, consider whether dedicated software would make your service charge accounting process more efficient.
Consider Whether You Need Accounting Support With Preparation
CJ:
If your managing agency doesn't have an internal bookkeeping or accounting team with the knowledge required to prepare the financial information, consider asking an accountant to prepare the service charge accounts as well as carry out the appropriate review work.
Trying to prepare financial statements without the necessary accounting knowledge can create additional problems.
The Benefit of a Specialist Service Charge Accountant
Ray:
There's also a significant benefit to working with a specialist service charge accountant.
A general accounting practice may work across many different industries.
A specialist service charge accounting firm deals with the common issues affecting managing agents and residential developments every day.
They understand the typical questions that arise.
They understand the year-end process.
And they are familiar with the financial information and supporting records normally required.
Working with a specialist can make the process much easier.
Preparation and Review Can Work Together Efficiently
CJ:
Managing agents sometimes assume that asking an external accountant to both prepare and review the service charge accounts will be significantly more expensive.
That isn't necessarily the case.
When the accountant prepares the accounts, they gain detailed knowledge of the financial information during that preparation process.
Some of that work can also support the procedures required as part of the subsequent review.
Depending on the engagement and circumstances, it may therefore be more efficient than maintaining an entire specialist internal accounting function solely to prepare service charge accounts.
We're on the Same Team
Ray:
One final point.
When your accountant comes back with questions, they're not trying to make your life difficult.
Their role is to independently review the information and help ensure that what is ultimately presented to leaseholders accurately reflects what happened financially at the development.
The managing agent and accountant are working towards the same outcome.
So help your accountant to help you.
Providing complete, accurate and well-organised information can ultimately improve the financial information your leaseholders receive and support the relationship you have with them.
Review Your Current Service Charge Year-End Process
Think about how you're currently sending information to your accountant.
Do you have a checklist?
Is the process standardised?
Is the information stored in one place?
Does somebody review it before it leaves your business?
Are the same questions coming back from your accountant every year?
If you don't currently have a checklist, start with one.
If you already have one, review it.
Ask yourself:
What could we add that would prevent another year-end query?
Your checklist should evolve over time.
Every recurring question is an opportunity to improve the process.
Final Year-End Tips for Managing Agents
To make your next service charge year end smoother:
Maintain accurate bookkeeping throughout the year.
Save the year-end bank statement as soon as it becomes available.
Make sure the bookkeeping reconciles to the bank.
Keep supplier invoices and supporting documents organised.
Provide major works and significant contract information.
Prepare clear debtors and creditors information.
Provide the budget and relevant communications.
Explain unusual expenditure or significant events.
Review transactions after year end for costs relating to the previous period.
Send your year-end information as one organised pack.
Don't leave the process until the last minute.
Use a standard checklist across your team.
Have somebody review the pack before sending it.
Give your accountant context, not simply numbers.
Keep improving your checklist after every year-end cycle.
A relatively small amount of organisation throughout the year can prevent a significant amount of work at year end.
LISTEN HERE
Want to hear Ray and CJ discuss what your service charge accountant actually needs at year end?
Follow Qube Talk for more conversations covering service charge accounting, managing agents, residential block management, service charge year-end accounts, RMC accounting, service charge budgets, bookkeeping and financial reporting.
Why Not Get in Touch With the Team at Qube Accountants?
Are you a managing agent looking for a smoother, more efficient service charge year-end accounting process?
Perhaps you're spending too much time dealing with year-end queries, struggling to organise financial information across multiple developments or looking for specialist support with the preparation and review of your service charge accounts.
Why not get in touch with the team at Qube Accountants?
Qube Accountants specialises in service charge accounting for managing agents and understands the unique financial and accounting requirements involved in residential block management.
Whether you need support with service charge account preparation, year-end processes, financial reporting or improving the information you provide at year end, our specialist team would be happy to discuss how we can support your managing agency.
This article is based on a Qube Talk podcast discussion and is intended to provide general information. Individual leases, developments, accounting engagements and circumstances vary, so appropriate professional advice should be obtained where required.
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