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More diligent auditors get tough on sectional title governance

Much stricter corporate and financial governance requirements for community housing schemes are putting pressure on Sectional Title (ST) trustees and the directors of Home Owners’ Associations – and increasing the need for professional property management services.

So says Andrew Schaefer, MD of national property management company Trafalgar, who notes that there is now considerably more administrative work required in order for schemes to comply with all the provisions and regulations of the Community Schemes Ombud Service (CSOS) Act and the Sectional Titles Schemes Management (STSM) Act, which only came into effect at the end of 2016.

Corporate and Financial Governance

“However, it is in the area of financial governance that many schemes seem to be experiencing most difficulty at the moment – partly because of the unfamiliarity of some of the new requirements, but also because many external auditors are being particularly diligent now in identifying any ‘reportable issues’ as required by their own professional code of conduct.”

These issues, he says, might include:
*The failure of a scheme to establish or maintain an adequate reserve fund as provided for in the STSMA regulations;

*The failure of a scheme to add a sufficient amount to its annual levy budget until its reserve fund is brought up to the required level;

*The failure of a scheme to maintain separate accounting records and bank accounts for the reserve fund and the administrative (levy) fund used for day-to-day operations;

*The failure of a scheme to report on reserve fund expenditure in terms of a professionally-prepared 10-year maintenance plan;

*The failure of a scheme to charge owners their share of the additional CSOS levy each scheme must pay to help fund the CSOS, or the failure of a scheme to pay over that levy; and

*The failure of a scheme to ensure that it has sufficient fidelity insurance to cover all funds that it receives against the possibility of fraud or misappropriation by any “insurable person” who has access to those funds, including trustees, employees of the body corporate and managing agents.

There are many other possibilities, says Schaefer, some of which extend beyond the financial governance of the scheme itself to third parties. “If the scheme employs a managing agent, for example, its auditors should ensure that the trust account of that agent has reliable controls in place to safeguard the levies paid into it.”

In short, external auditors can be expected to be increasingly pro-active in their scrutiny of all community housing scheme financial records and arrangements. “And while this is in the interests of owners in these schemes, it does mean more work and more stress for trustees and directors, unless they appoint a professional management company that already has the systems and controls in place to facilitate high levels of compliance,” he says.

“At Trafalgar, for example, our trust accounts are scrutinised by our own external auditors who then supply a Certificate of Assurance to each scheme we manage. This not only saves time but also reduces their audit fees.

“Similarly, we already have fidelity insurance for client funds of up to R20m per claim, which the Ombud has confirmed is sufficient to cover the schemes we manage, provided that the funds remain within the trust environment and the body corporate savings accounts we control. This fidelity insurance is already included in our standard monthly management fee and means that our schemes do not have to incur any additional cost to be compliant with this provision of the CSOS Act.”

Schaefer says that there are many other ways in which professional managers can assist schemes to resolve governance and compliance issues and lighten the load for their trustees and directors. “But of course not all management companies are created equal, and it is essential to evaluate their expertise and the value they can add in an increasingly complex environment before making any appointment.”

Issued by Trafalgar Property Management
For more information contact
Andrew Schaefer on 011 214 5200
Or visit www.trafalgar.co.za

About Trafalgar
Trafalgar currently has more than 80 000 residential properties worth more than R80-billion under management in more than 1300 community housing schemes around SA.

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