Service charge accounts and accountants' reports

For residential blocks, the lease usually decides what kind of accountant’s examination the annual service charge accounts need. The joint professional guidance, TECH 03/11, sets out two routes: an audit under ISA 800, which gives reasonable assurance, or the more common report of factual findings, which gives no assurance beyond the facts it reports. A separate statutory certificate applies only when a tenant asks for a summary of costs under section 21 of the Landlord and Tenant Act 1985.

Is there a legal requirement to have service charge accounts examined?

TECH 03/11, Residential Service Charge Accounts, was prepared by a joint working group of ACCA, ICAEW, ICAS, the Association of Residential Managing Agents and RICS. It records that there is no statutory requirement for the routine preparation and content of service charge accounts. The lease is the contract that governs how variable service charges are administered, so if the lease requires an audit, an audit should in principle be carried out. The release now carries a note that it has not been updated since it was issued and that many of its references are out of date, so users should read it with current auditing standards in mind.

Statute adds one specific duty. Under section 21 of the Landlord and Tenant Act 1985, a tenant, or the secretary of a recognised tenants’ association with the tenant’s consent, can require the landlord to supply a written summary of relevant costs. Replacement versions of section 21 enacted in 2002 and 2008 have only been brought into force for regulation making purposes, and no regulations have been made, so the request based version remains the law.

Change is coming. Section 56 of the Leasehold and Freehold Reform Act 2024 inserts a new section 21D into the 1985 Act, under which landlords would have to provide tenants with a written report on the service charge statement prepared by a qualified accountant. As at October 2026, legislation.gov.uk still shows section 56 as prospective, so it is not yet in force.

When is an audit needed rather than a report of factual findings?

TECH 03/11 takes the lease as the starting point.

Lease drawn up since 1980 that refers to an audit. An audit is what should be carried out. The guidance notes that auditing standards date from 1980, so the word in older leases may not have meant an audit in the modern sense.
Lease silent, or construed as allowing another form of examination. The normal arrangement is an accountant’s report of factual findings. If an audit is carried out when the lease does not require one, the extra cost may not be recoverable through the service charge.

Appendix D of the guidance gives the practical factors. Because the audit fee is divided between lessees, the fewer the dwellings, the higher the cost per flat. Larger properties, where lessees are less involved and shared costs with commercial units may be complex, are more likely to justify an audit. A factual report is appropriate for a small property with few dwellings and lessees actively involved in management, unless the lease requires an audit.

What does the accountant check in a factual findings engagement?

Appendix F of TECH 03/11 sets out a work programme, to which the landlord or agent can add procedures. The main steps are:

compare the accounts with the previous year or the budget to spot variances that could indicate errors;
agree brought forward balances, including reserve funds, to the previous statement;
obtain the schedule of charges demanded, check every unit is included and compare it with income banked;
where other income exceeds 5% of total expenditure, agree it or a sample to supporting documents;
check every expense category that is 10% or more of total expenditure (excluding transfers to funds), or the five highest categories, against contracts, invoices or other evidence, including accruals and prepayments;
obtain written confirmation from the landlord or agent that cost allocations follow the leases and that consultation requirements for major works were met;
sample reserve fund spending to invoices;
agree bank balances to the bank statements or reconciliations, with each property’s balance identifiable where an agent uses a pooled client account; and
list any other balance sheet heading exceeding 5% of expenditure and agree the largest item.

The results are summarised in a report, with any exceptions and their amounts set out clearly. This is a form of agreed upon procedures engagement.

What level of assurance does each report give?

Feature	Audit under ISA 800	Report of factual findings
Assurance	Reasonable assurance; a high, evidence based level	None, beyond the factual statements made
Conclusion	Opinion that the accounts are prepared, in all material respects, in accordance with the stated accounting policies	Findings on whether figures were extracted correctly, entries checked were supported, and the bank balance agrees or reconciles
Who may sign	An auditor working under ISAs	A practising member of a listed body; registered auditor status not needed
Cost	Higher; time driven by ISAs	Lower; based on relatively limited procedures

The example factual report in TECH 03/11 states that, because the procedures are neither an audit nor a review, the accountant does not express any assurance on the accounts other than the factual statements, and that other issues might have come to light had more work been done. Appendix D says the report still gives comfort that the listed items were checked by a qualified accountant independent of the landlord or managing agent. An ISA 800 audit report includes a paragraph alerting readers that the accounts use a special purpose basis of accounting and may not be suitable for other purposes.

Who can sign the report?

For an audit or factual report under TECH 03/11, the accountant must be a member of the Association of Authorised Public Accountants, ACCA, ICAEW, the Institute of Chartered Accountants in Ireland or ICAS who is entitled to practise. The member must hold a practising certificate, comply with the body’s professional indemnity insurance regulations and be independent, which means not an employee, director or associate of the landlord, the managing agent or an associated company.

A section 21 certificate has a statutory definition. Section 28 of the 1985 Act requires a “qualified accountant”, meaning a person eligible for appointment as a statutory auditor under Part 42 of the Companies Act 2006. Officers, employees and partners of the landlord or an associated company are disqualified, as are a managing agent for the premises and its employees and partners. TECH 03/11 adds that section 28 suggests the accountant must be an individual rather than a firm. See registered auditors.

What does a section 21 certificate involve?

The landlord must comply with a request within one month of the request or within six months of the end of the twelve month period it covers, whichever is later. The summary must show how the costs have been or will be reflected in service charge demands, and split them between costs not yet demanded of the landlord, costs demanded but unpaid and costs paid in the period. It must also show the total held to the credit of tenants at the end of the period. Under section 21(6), where the charges are payable by tenants of more than four dwellings, the summary must be certified by a qualified accountant as, in their opinion, a fair summary complying with section 21(5) and sufficiently supported by accounts, receipts and other documents produced to them.

TECH 03/11 notes that requests are rare because most landlords prepare annual accounts anyway, and suggests asking the landlord or agent to confirm in writing that no section 21 request has been made.

How might this work in practice?

Illustration only. A residents’ management company owns the freehold of a block of 12 flats. The leases require annual accounts but do not mention an audit. Expenditure for the year is £40,000, so any expense category of £4,000 or more is checked: buildings insurance of £9,000, the managing agent’s fee of £7,200, cleaning of £5,000 and repairs of £6,000. The accountant agrees these to the policy schedule, the agency contract and invoices, confirms the bank balance agrees to the statement, and finds one £600 roofing invoice that related to a neighbouring block. The report lists that exception with its amount, and the directors correct the accounts before they are sent to leaseholders.

What mistakes come up most often?

Calling a factual report an audit. TECH 03/11 says the report should avoid the word “audit” unless an audit was done, and the engagement letter should say so.
Commissioning an audit the lease does not require. The extra fee may not be recoverable from leaseholders.
Mixing up the accounts. The service charge statement for leaseholders is separate from the company’s statutory accounts; see flat management company directors and residents’ management company tax.
Using an accountant who is not independent. An employee of the managing agent cannot sign the report.
Ignoring the trust. Service charge money is held on trust, which affects bank arrangements and tax; see service charges and sinking funds.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.

Service charge accounts and accountants’ reports