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The Key Problem Areas Encountered by Irish Auditors for Property Management Audits

Welcome to Query Of The Week

Welcome to this week’s Query Of The Week. Each week our technical team respond to a huge number of client queries and in this segment, we share with you the most common questions that keep coming up time and time again.

In this week’s Query Of The Week, Des O’Neill discusses the key problem areas encountered by Irish auditors when conducting Property Management audits.

Property Management Audits – The Key Problem Areas Encountered by Irish Auditors

If this Query Of The Week was of interest to you, you will also be interested in our Property Management Audits- The Key Problem Areas Encountered by Irish Auditors online CPD course.

CPD Allocation 1 Hour
Fee €25 (or 1 CPD Club point)
Presenter Des O’Neill – OmniPro
Category Audit

Query Of The Week – Video Transcript

(Please note that this is a direct unedited transcript of the spoken word as recorded on the video) 

Each week our technical team respond to a massive number of client queries, and in this segment, we share with you the most common questions that keep coming up time and time again. In this week’s Query Of The Week, Des O’Neill examines the implications of the recent report from Keenan Property Management in the wake of the Grenfell Tower Disaster.

This week’s query arose when we were preparing a client firm an upcoming monitoring visit. As we were reviewing their client list and the audits that they had, we studied some files, and it was as we were creating an action plan that this query was raised.

What are the considerations of auditors and accountants when it comes to property management companies and what are their compliance obligations from a health and safety, and building regulations perspective when preparing financial statements for accounts report sign off or for audit reports?

The question stemmed from a report that was recently issued by Keenan Property Management. KPM decided to undertake a survey in the aftermath of the June 2017 Grenfell Tower fire disaster, in order to assess whether residents’ concerns over fire and safety in their homes were being addressed, or not. Seventy-one people perished in that Grenfell fire tragedy, and thankfully, we haven’t had that type of a scenario here in Ireland in terms of a mass fire like that. However, we have had tragedies, and we have had significant concerns in recent years where properties closed down because they were non-compliant.

KPM manage approximately 60 blocks or 20,000 apartments, and they believe there are fire safety issues in at least 70-80% of those housing units. That’s a startling result. So, our client has property management companies, and they want to know what their considerations and exposure are.

The first place we always go to when answering a question is to examine the relevant underlying legislation. In this instance, there are the Auditing Standards but the underlying legislation is the Multi-unit Development Act of 2011, and also, we feel, Companies Act, 2014.

Given that the multi-unit development company has been set up under the aspects of the Multi-Unit Development Act, and for managing the common area, obviously ISA 250 creates a significant focus within the audit on the issue. That’s a key impact.

In the scenario that the accountant presented it’s not just about the MUL Act and health and safety, it’s actually to do with the sinking fund provision. So, if there are health and safety issues, it is in common that the directors ensure there’s adequate provision made in the sinking fund. Moreover, from an accountant or an auditor’s perspective, they have to consider the adequacy of the sinking fund and that the financial statements, comply with the current Financial Reporting Standard being applied.

We’ve been raising this issue for years, and now it is, unfortunately, coming home to roost. It’s not just about health and safety at apartment blocks; the financial statements are a key consideration because the sinking fund is housed there. However, will a buyer buy an apartment block or buy an apartment in a block, where there is an inadequate sinking fund? We know this is the directors’ responsibility to assess the requirements but based on the KPM report we have issues here.

This now is where we jump into company law under Part Four of the Companies Act, about governance, and Part Five of the Companies Act, about directors’ duties such as, are the Directors meeting their requirements from a governance perspective, are they complying with their director’s responsibilities? For example, as raised by KPM, are the directors meeting the necessities of the fiduciary duties, are they acting in the best interests of the company? Forming an audit opinion has a higher bar, as the auditor has to apply the auditing standards and, as I said, ISA 250 comes into play. However, for compilation engagements, the signing accountant should only allow their name to be associated with financial statements to give a fair review under ISTRUS 4410. If there’s inadequate provision, or if there’s inadequate disclosure, are the financial statements appropriate?

There are other things to consider—ISA 250 applies to an audit file, and the file needs to reflect the considerations. Moreover, in respect of whether we’re doing an audit or an accounts compilation, we need to get bespoke representations. Do you look at minutes of meetings and third-party expert reports? To ensure the financial statements give a true and fair review. KPM has highlighted an issue that has been bubbling under the surface for years. They’ve now brought it out in the open, and this has an impact.

Watch your property management companies. Watch whether you’re an accountant, a compiling accountant, or an auditor. There’s one other consideration. Be very, very careful if you are or have been a director of one of these companies.

We’re running a webinar on property management companies and this topic on the 22nd of May 2019, and the webinar is called Property Management Company Issues in 2019.

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