Goedkoop is duurkoop | An auditors view

17 March 2023 | Alistair Scholtz

Cheaper is not always better, and this is very true when considering the annual audit of your community scheme. February is the month with the greatest number of financial year ends, and comes at a time when auditors in general are entering the busiest few months of the year, attending to a wide spectrum of clients, from audits of large, multinational listed companies to smaller audits such as your body corporate or homeowners’ association. Auditors, much like other professionals, will have skill set and experience tailored to a specific industry or industries, and therefore selecting an auditor that is familiar with the community scheme environment and its reporting requirements (and challenges), is important. Selecting an auditor based purely on price could result in a short-term saving, but may result in annual financial statements (AFS) that fall short of legislated requirements, as well as not receiving tailored advice for dealing with identified issues in order for necessary improvements and/or changes to be implemented by the scheme, and those tasked with its management.

The accounting requirements that will be reported on in the annual financial statements of a sectional title scheme are clearly set out in Prescribed Management Rules 21, 24 and 26 of Annexure 1 of the Regulations to the Sectional Titles Schemes Management Act 8 of 2011. It should be noted that there is no requirement that a recognised financial reporting framework be used in the preparation of the financial statements. It is imperative that what is presented is detailed, transparent and specific to the needs of the users (internal and external), incorporates the minimum prescribed disclosure and reporting requirements, and considers all applicable legislation that has bearing on the body corporate. Homeowners associations will be reported on in terms of the Companies Act, or in terms of its constitution, and must comply with a recognised reporting framework.

Internal users such as trustees, directors, owners and management may make use of the AFS for various purposes, which may include:

• The acquisition of external funding (loans) to finance emergency remedial works or large capital-intensive projects.

• The acquisition of levy finance products in the case of unmanaged and unsuccessfully collected levy debts.

• The preparation of the annual budget and motivation for levy adjustments.

• The monitoring of annual administrative costs and the imposition of trustee spending restrictions.

• The basis for significant financial decisions of the scheme e.g., the installation of prepaid electricity meters due to increased utility costs and levy arrears.

External users such as banks, finance providers, revenue agencies, and prospective buyers rely on the AFS for various purposes, such as:

• The review of available assets and liabilities when considering maximum amounts to finance.

• The financial position of the scheme (particularly its liabilities) before purchasing a unit and whether any special levies or other charges exist that may impact the buyer’s ability to service debt.

• The review of general scheme compliance (insurance, tax, maintenance reserve fund, etc.) before deciding to purchase.

• The analysis of income and expenditure when verifying liabilities, such as taxes and levies payable, e.g., income taxes and CSOS levies.

Let us look a little closer at a few key areas that should be considered in detail when preparing your AFS.

Income:

Income should be classified correctly, i.e., each contribution type (administrative fund, reserve fund, exclusive use areas, special levies, penalty, CSOS levy, etc.) and all additional sources of income (rental, interest, recoveries, etc.) should be separately disclosed and not offset against expenditure. This is important to identify that sufficient income is being raised to cover the corresponding costs of either the administrative or reserve funds, and that any shortfall can be corrected by either a forthcoming levy increase, or by raising appropriate additional contributions after the required due processes have been followed. The sectional plans and registered / CSOS approved rules should be checked to ensure that all contribution types are being raised, either by participation quota (PQ) or nominated values as per the amended management rules. Rental income derived from common property should be verified against properly constituted rental agreements, and special or unanimous resolutions. Recoveries correctly recorded, may highlight billing discrepancies, faulty metres, excessive usage, potential leaks, etc. Accurately identifying and distinguishing revenue sources also will assist in determining the correct amounts that need to be paid to third parties in respect of items such as taxes and levies, e.g. income taxes payable to SARS and levies payable to CSOS.

Receivables:

Levy arrears need to be separated and shown as both levies in arrears and levies in advance and shown in an aged format. The levy roll should be scrutinised for unallocated deposits, and units that may have been transferred and that still reflect either arrear or prepaid balances. Once the status and timing of these payments have been verified, it may be necessary to either transfer funds to the Property Practitioners Regulatory Authority (if the funds are held in trust) or to show these funds as bad debts or income (if the funds are held in scheme accounts and the required prescription period has lapsed).

Suppliers that may have been overpaid, including prepaid insurance policies, should be recorded as payments in advance once the overpayment has been confirmed and checked. Utility and other deposits should not be expensed but reflected as receivables on the balance sheet. Any insurance claims and other control account receivables that may be outstanding, should be shown as debtors; this ensures the completeness of the income that is recorded.

Payables:

Creditors need to be verified and checked for completeness and accuracy, as this is an area that can greatly affect the position of the community scheme. Utility accruals need to be carefully checked to ensure that all payments made during the period have been recorded, that any adjustments to charges have been considered, and that if any debt arrangements have been made, these are also included in the liability.

Contractual services rendered to the scheme, and for which amounts are owed, should be checked to ensure, as above, that all payments have been acknowledged and all charges recorded.

Provisions, either as part of an unspent budget item or as a probable future financial outlay, because of a past occurrence, need to be checked for validity and accuracy so that amounts potentially owing are not overstated.

When dealing with refundable owner deposits, it should be confirmed that they are in fact refundable, that they are still valid, whether they attract interest, and what the repayment terms, if any, are.

The above is a snapshot of the many requirements, checks, and balances required to ensure that your community scheme financial statements accurately reflect the true financial position at year end, and at any point in time that it may be required. It is also a summary of the many and varied uses that your accounts may be called upon for and hopefully, the basis on which the decision is made when selecting a professional to assist with the annual audit, and any other financial matter, of your community scheme. This often overlooked document is an extremely useful tool if properly prepared and presented on time. Choose wisely.

Please contact us at TVDM Consultants at info@tvdmconsultants.com or 061 536 3138 if you would like more information, or if you have any questions on the article above. If you have not already done so, click here to sign up to our newsletter.

Alistair Scholtz is a Community Scheme consultant at PKF Octagon.