Professor Andrew Holt looks at how best practice can be achieved when preparing annual statements of expenditure
Unlike residential service charges, the financial reporting and accounting requirements for UK commercial service charges are not subject to statutory legislation. Where an individual lease fails to include financial reporting provisions, practical accounting guidance comes from a non-mandatory Royal Institution of Chartered Surveyors (RICS) Code of Practice, Service Charges in Commercial Property.
While the RICS code’s guidance was supplemented by an Institute of Chartered Accountants in England and Wales technical release in 2014, a new study suggests that compliance with many of the “best practice” accounting requirements of the code remain relatively low.
SCOR
The Service Charge Operating Report for Offices (SCOR) is published annually, by Property Solutions (UK) Ltd, and examines the quality of accounting practices within the commercial multilet office sector. Over the past six years, SCOR has identified ongoing issues with the quality of service charge accounting statements, including a lack of consistency and transparency within the information provided to commercial occupiers.
SCOR monitors compliance with 10 accounting requirements of the code. While compliance improved between 2010 and 2013, it has plateaued during recent years. SCOR’s latest analysis reviewed the service charge accounts at 100 multilet office buildings, representing £68m of service charge liability, and found that only one accounting certificate achieved the highest compliance ranking of 10 out of 10.
Around 80% of certificates charged a fixed management fee, clearly explained apportionment, and were signed off by a manager. Less than 33% disclosed whether the accounts were prepared using accruals accounting. Only 8% abided with the code’s requirement to provide a schedule of opening and closing accruals and prepayments.
SCOR findings show an “expectations gap” between what commercial occupiers expect to receive in terms of financial reporting and what managing parties currently provide.
While the code has helped to improve accounting practices within the commercial service charge industry, compliance with its guidance is typically seen as voluntary rather than mandatory, even for RICS members.
The result is that the RICS code appears to have resulted in a slow-burning evolution, rather than revolution. While some commentators hail this as progress, others suggest it provides evidence of the need for statutory legislation of commercial service charges, to force the use of best practice when preparing annual statements of expenditure.
Voluntary good practice
While legislation may be needed to improve financial reporting practices, there is evidence of good practice by some managing parties. One company detailed in the case study is London-based Tideway Property Managers, which is committed to maintaining best practice in reporting of its service charge accounts to occupiers.
Over time, the producers of compliant certificates should successfully retain occupiers and enhance their reputations through their service charge management and reporting practices. This voluntary adoption of best practice may serve to encourage its use across the industry.
The way forward
So what is the solution – continued voluntary evolution or legislation that revolutionises accounting practice?
This answer is unclear, but SCOR’s findings suggest that the quality of the accounting information reported to commercial occupiers is patchy and highly dependent on a managing party’s attitude to the code. Legislation is far from the ideal outcome, but the industry needs to work harder to promote best practice to avoid it.
A third solution may be to create a “badging-for-excellence” certification for managing parties that utilise best practice. Such a scheme would formally acknowledge accounting quality, and encourage better accounting practices within the commercial property sector – which is the ultimate end game.
Case study: Tideway Property Managers
Tideway Property Managers provides an example of a property management company that produces accounting statements that adhere to the RICS Code of Practice’s requirements.
Explaining the company’s motivation for producing code-compliant certificates, Tony Bones, managing director, said: “We are a small player but we want to play our part in encouraging best practice and showing that legislation on service charge certificates in commercial property is not necessary. The best way is to educate and help the industry to improve compliance with the RICS Service Charge Code.”
Tideway’s accounting practices have also been shaped by its business experiences in the residential sector, which is subject to legislation dictating its financial reporting practices.
“We are unusual in managing residential and commercial property and doing them well. Our experience in the residential sector, for which there is legislation dictating how the annual service charge statements must be presented, has helped inform our service charge certificates in the commercial sector,” Bones added.
For the company, client satisfaction provides a major incentive for producing compliant service charge statements.
“We have to think about our clients. If it was your money being spent, you would want to see transparency,” Bones said. As evidence of its desire for transparency, Tideway’s accounting certificates for commercial multilet office buildings include a balance sheet and explanatory disclosure notes. If such practices reflect “best practice”, why are they not the norm?
“The biggest problems are that some small managing agents do not wish or cannot afford to set high compliance standards and larger managing agents have a problem with volume,” Bones said.
From Tideway’s perspective, voluntary adoption of the code, rather than legislation, is the way forward.
“Laws often have unforeseen consequences. I would encourage property managers to comply with the RICS Service Charge Code to avoid the need for interference and potentially disruptive legislation,” Bones said.
Andrew Holt is professor of accounting at Metropolitan State University of Denver and co-author of SCOR 2016
