Transparent Accounting Anyone?

SC accnts sheep

Who decided on obscure accrual accounting?

Based on my experience, few leaseholders understand accrual accounts. Do you? I’m not too sure managing agents do either. Come to that, I wonder how many Members of Parliament know how to read them and what lies behind them?

Somewhere along the way it seems to have been decided that the people who pay all the bills (and rarely see a cost invoice even if they appeal to the Court of Appeal, let alone bank statements), should be fobbed off with the bare minimum of a balance sheet and income and expenditure statement with perhaps a few notes?

IandE_Yr2

Do not be fooled. These summary figures are not guaranteed to relate to factual records. Accrual accounts can be made to balance based on fiction. These figures are not actual transactions. The truth is buried behind the scenes. It may be true. It may not be. You will not know.

I’ve noticed there is no attempt to unravel these documents for ordinary folk. Parliament seems never to have concerned itself that the average leaseholder has no hope of seeing where exactly their money has been spent, which is supposedly the point of the exercise.

Balsheet_Yr2

These examples may not look exactly as yours, but the accounting principles will be the same.

Accrual accounts are from the world of businesses and organisations who self-manage their own finances and can see their own cash book transactions, invoices and bank statements. Even an RTM company in my experience may not see these essential background records as the contracted client to an agent. The industry may have had too long acting without any need for transparency to change its spots.

A compromise seems to have been reached with the government of the day not to implement key accounting clauses in the 2002 Act on the notion that the £leasehold caper could work together to self-regulate. This notion always goes well, doesn’t it.

To be fair, the ICAEW Tech 03/11 procedure (so-called because it was introduced in 2011) sets out best practice for accounting for residential service charges and is linked to the RICs Code, but openly admits about both:

does not have the effect of making a breach of the Code a criminal offence or create civil liability...“(Foreward and Summary, page 3).

In other words, like most things leasehold leaseholders can try to refer to these codes, but have no reliable binding right to transparent service charge accounting. The industry seems always to achieve a legal regime that leaves loopholes and ambiguities: so that, as in the Moorshead case, leaseholders could spend their lives in court seeking practical enactment of even the simplest rights.

As to the form of accounting for service charges, ICAEW Tech 03/11 says:

There is no statutory requirement for the routine preparation and content of service charge accounts but the accounts should comply with the provisions of the lease/tenancy agreement” (Foreward and Summary, page 3)

Again it is no surprise to leaseholders, despite years of problems through the courts, to still have no straightforward legal right to a prescribed and understandable form of service charge accounts that explain why and how four million homeowners are charged considerable sums of money each year.

The unusual aspect to all the accounting guidance is that it never seems to consider whether the proposed format is transparent to a lay person paying the bills. At best it seems more concerned with ‘tokenism’: just getting figures out there.

(I once tried to raise accounting irregularities at a tribunal and was severely reprimanded by the Chair for taxing both the time of the landlord and the panel. It felt as if it was considered outrageous that I should presume to point out accounting discrepancies as a mere leaseholder).

The ICAEW Tech 03/11 sets out ‘recommendations’ for an annual summary that includes an income and expenditure (I&E) account and a balance sheet to be prepared on an accruals basis. ICAEW Tech 03/11 does go further and provide helpful “examples”. These do not have to be followed. They are not binding.

Accrual accounts are worthless for the task the claim to satisfy. And that is assuming managing agents and landlords can be bothered to provide full accounting reports and notes.

As already said, leaseholders –often pensioners — have no hands-on involvement in the day to day cash book control and expenditure, let alone expertise in reading year end accrual accounts.

Accrual accounts are not designed to be transparent as to every transaction. That is not their purpose. Even if conscientiously prepared with full notes, accrual accounts are merely summary totals from the right hand side of a ‘trial balance’ (financial software side-steps the book keeper having to carry out the trial balance but exist it must).

The £leasehold industry presumably knows the average leaseholder has no clue how to interpret an accrual from a creditor, let alone how to read a set of summary accrual accounts, as stated by the Court of Appeal as far back as 1984 in respect of leaseholder-run companies:

Having set up a company, that company is composed of a number of individuals, none of whom may have the slightest ability to do accounts, to inspect properties, to manage properties, or anything else...” Embassy Court Ltd v Lipman (1984) 271 EG 545

Given the Court of Appeal could definitively assert such major limitations in leaseholder knowledge in 1984, it begs the question why no legislation since then has offered leaseholders simple transparent, layperson understandable, accounting of their sizeable annual bills?

Issues commonly found are accounts not ‘flowing’ correctly into the following year: i.e. adjustments applied to one year not fully or even at all brought forward to the following year for adjusting out of that year’s results. Actual cash book transactions may not match ‘bank movements‘ recorded in the trial balance.

Even as I explain these points I feel I will lose the majority of leaseholders unless they happen to run businesses. Why is it like this? Utility bills and tariffs can be complex, and the billing periods can run across accounting periods, but nobody would sanely suggest that utility bills are accounted for in the summary accruals format.

For every figure on the summary accrual accounts leaseholders receive there are up to seven adjustments possible behind the scenes. It is these hidden adjustments – together with other digital ‘tippexing’ – that can reduce the summaries to a systemic failure to give transparent account to the leaseholders as is surely required by their lease.

Even spending an afternoon studying invoices at an agents’ office will not make the annual accrual accounts clearer.

I argue legislation should require that leaseholders are entitled to instead receive a prescribed form of a full trial balance (known as an XTB).

I further argue that a prescribed full trial balance should be transparent to lay people, not just accountants.

I further argue that a prescribed full trial balance should be accompanied with lay person explanatory terminology and notes (though separate notes would not be as essential in a full trial balance, as all the figures would be shown in situ).

I attach a model for a transparent full trial balance. I have never received such a full trial balance. I do not expect I ever will. Yet my model example is derived from ‘Accounting 101’. The simplistic figures in the example are not meant to imply all the data that a live XTB would contain.

A full trial balance should provide transparency of all background income and expenditure transactions with paired debit and credit columns for:

Opening balances: All previous year balance sheet figures are transparently brought forward – nothing left out.

Opening balance adjustments: Likewise all previous year costhead and income adjustments are transparently brought forward and balanced to the balance sheet opening adjustments – this is where the ‘bodies’ can be buried, or more accurately mislaid.

Movements: This is where transactions through the service charge bank account in the period are recorded. (I have seen these figures bear little relation to the cashbook transactions in the period).

Journals: Some journals adjustments may be needed and should be entered in this pair of columns and supported by a Journals sheet.

Year End Adjustments: There is no limit on the number of paired columns (debits/credits) but at least two allow separating creditors, accruals and prepayments c/fwd, as well as balance sheet figures.

Income and expenditure: These debit/credit columns are, or should be, the exact same figures produced on a summary I&E account (assuming the bookkeeper/accountant worked from a balanced trial balance).

Balance sheet: These debit/credit columns are, or should be, the exact same figures produced on a summary balance sheet (assuming the bookkeeper/accountant worked from a balanced trial balance).

Extra rows would be added as new accounts/analysis categories are needed. No transactions in the period would be omitted: no hidden transfers out of the client bank account without a justifying expense; no floating creditor amounts not balanced to a cost head to c/fwd to next year, no hidden ‘tippexing’: simply every transaction out in the open to those who pay the bills, including the accounting costs.

The proposed method would require no more than incorporating data that a good accountant already must be provided.

A Journals sheet (as commonly understood) would briefly list and explain the JNXX transactions shown within my example XTB, and list/explain any other ‘digital tippexing’ in the Journals columns.

The principle would be simple: leaseholders have a right to see the unadulterated figures, not only obscure summaries and detached ‘notes’ of yet more obscure figures provided out of their mathematical context.

Mind you, the simplest method of all would be for the government to have followed through with the clauses in the 2002 Act and required landlords/agents to hold service charges in unique bank accounts for each development and by this simple requirement, tag on a legal obligation to forward copies of bank statements that flow from the previous ones.

Now wouldn’t that be something?

Especially in this modern digital age with so many online banking widgets and sophisticated accounting software.

Who gets to decide that leaseholders should not receive bank statements? These ’pooled’ accounts are a disaster for leaseholders and have been known to be for many years, which is why the 2002 Act had clauses to require individual bank accounts.

It is not as if the leaseholders would not pay the bank charges anyway. I would gladly pay for some transparency.

Accounting 101 full trial balance

 

XTB

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s