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VIC: Q&A Financial Statements, Bank Accounts and Audits

The LookUpStrata Team
auditor cowners corporation

This article discusses auditing and your owners corporation.

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Question: Reviewing a financial statement from our previous OC Manager, I have found several dubious charges. Is this a police matter or should we have the books audited?

Reviewing a financial statement from our previous OC Manager, I have found several dubious charges. I’ve checked these charges with suppliers.

The discrepancies include a charge of $1685 for Essential Services when these services were billed as $232. There are also charges of three water excesses of $2500 each when no work has been carried out or billed. There are also Owners Corporation charges for repairs in addition to agreed insurance work.

What should I do? Is this a Police matter? Should we get an audit done? If we get an audit done, what are the next steps?

Answer: I would engage an auditor and provide the auditor with your concerns. If the audit report supports your findings, then I would suggest consulting a strata solicitor would be the next step with a view to potentially taking the matter to the tribunal for remediation.

Rod Laws TINWORTH & CO E: RodLaws@tinworth.com P: 02 9922 3660

This post appears in Strata News #570.

Question: In Victoria, what is the Tier 5 financial reporting requirements when preparing financial statements?

Answer: it is still recommended to meet industry best practices and offer a complete financial statement & balance sheet reconciled against the individual bank account on an accruals basis.

All references below relate to the Owners Corporations Act 2006.

There is a fair amount of unpacking required to answer this question effectively.

Two Lot or Services Only?

Firstly, as general information, a Tier 5 Owners Corporation can be in one of two forms, either:

  1. A two-lot subdivision, OR

  2. A “services only” subdivision where there is no common property, but there are either metered or unmetered supply or services that are shared (which can include water, gas, drainage, data etc.)

Different exemptions for different parts of the act apply depending on whether your Owners Corporation is a two-lot subdivision or services-only. For more information, you should become familiar with Part 2, S7A and S8.

Getting to the question at hand, financial reporting requirements for a Tier 5 Owners Corporation.

How funds are held

The Manager must keep Owners Corporation funds in a separate bank account S122(2)(c) held in the name of the Owners Corporation S27(2). In a nutshell: A dedicated individual bank account should be operated for Owners Corporation transactions and funds.

What records must be kept?

S33 requires the Owners Corporation to keep records of all transactions such as members fee payments and paid invoices as well as assets and liabilities such as fee arrears and unpaid contractor accounts. In a nutshell: You must have a record/paper trail for every transaction in and out of the account.

Financial Statement Requirements.

You will notice that Part 3 S34 provides precise requirements for Tiers 1, 2, 3 & 4. However, it appears to be silent concerning a specific financial report format for Tier 5. There is, however, a requirement hidden in a separate part of the act. Within Part 6 S126 it states, “The manager of an Owners Corporation must submit a report of all money held on behalf of the owner’s corporation by the manager on trust and any disbursement of that money to each annual general meeting of the Owners Corporation”. The act goes further to require “details of receipts and disbursements of money held on behalf of the Owners Corporation by the manager on trust in the relevant year… unless those details are included in the relevant financial statements prepared under section 34”. In a nutshell: Annually, the Owners Corporation must provide a report on all funds held, including all receipts & disbursements in the Managers report, unless this information is disclosed in a Financial Statement.

Despite the above seeming to provide a lower standard for Tier 5 OCs, it is still recommended to meet industry best practices and offer a complete financial statement & balance sheet reconciled against the individual bank account on an accruals basis. This reporting format has been the industry gold standard for many years as it provides transparency, accountability and a clear picture of financial performance.

Whilst this may be cumbersome for some self-managed Owners Corporations, this is one of the many justifications for engaging a professional manager who will provide professional financial reporting services for your Owners Corporation as part of their paid service.

Deryck Walker SMTI deryck.walker@smti.com.au

This post appears in the March 2022 edition of The VIC Strata Magazine.

Question: Can strata managers earn interest on the Owners Corporation money?

If a Strata Manager pools all their Owners Corporation’s money into one bank account, can they legally earn interest from the pooled accounts? They state they are unable to provide bank statements due to privacy.

Answer: 1 December 2021 amendments to the Owners Corporations Act 2006 will require Owners Corporation Manager’s to hold client funds in an individual bank account.

It may seem like I am going on a long tangent – but there is a purpose to my meandering response, so please hang with me!

The Owners Corporation Manager is an employee of the Owners Corporation. The Manager is simply arranging for the holding and managing of funds on behalf of their client. They are a steward if you will.

For many years it has been best practice for Owners Corporation Managers to administer individual bank accounts on behalf of each individual client, with each account held in the name of the Owners Corporation. There is absolutely no doubt that an individual bank account system provides unparalleled levels of transparency and accountability compared with a pooled/shared bank account system. It also does away with (or at least makes far more difficult) the ability for opportunistic individuals to do things like skimming interest or misusing their client’s funds. It is the Owners Corporations money, not the Managers. The holding of individual bank accounts is in fact a regular recommendation I make to friends when they are asking what to look for in a new manager.

Any argument that individual bank accounts require any significant burden or mountainous workload (compared with pooled) has been thoroughly eliminated, with modern strata software making the administering of individual bank accounts a relative breeze.

Unfortunately, the legislation in Victoria has never required Owners Corporation Managers to hold individual accounts despite the majority of the industry agreeing that this solution is in the best interest of Owners Corporations. However on that note, I am very happy to report that from 1st December 2021, amendments to the Owners Corporations Act 2006 will require Owners Corporation Manager’s to hold client funds in an individual bank account (S122 2 B).

The amendments go further, to state that any interest earned on Owners Corporation funds is the Owners Corporations interest (S122 4). This seems like a very common sense statement to make, but it is good to see the government closing up this loophole.

Deryck Walker SMTI deryck.walker@smti.com.au

This post appears in Strata News #517.

Question: Can an Owners Corporation make a Fixed Bank Deposit for investment for 6 months, even though an OC is a non-profit Organisation?

Answer: An owners corporation is a legal entity that is permitted to make a fixed bank deposit.

An owners corporation is a legal entity that is permitted to make a fixed bank deposit for investment for 6 months, as long as the interest earned from that account is used to fund maintenance of the common property. In my view, it would not be viewed that the OC is acting as a business if its members do not pocket the interest earned from that account and the interest is used to repair and maintain their common property asset.

Rochelle Castro RC & Co Lawyers E: law@rccolawyers.com P: 1300 072 626

This post appears in Strata News #492.

ARTICLE: The Auditor and Your Owners Corporation

The Owners Corporation Act requires an Owners Corporation to keep proper accounts covering all of its income, expenditure, assets and liabilities and provide for the making of true and fair financial reports. The members/owners or appointed representative management committee are responsible for overseeing the management of the Owners Corporation’s financial records.

In many cases, an Owners Corporation Manager is engaged by the committee to maintain the accounts and financial records of the Owners Corporation. Such records form the basis of the Owners Corporation’s financial accounts and will be produced by the Owners Corporation Manager for audit purposes.

Section 35 of the Owners Corporation Act 2006 sets out the parameters around the requirement to have financial statements audited. In a nutshell, a prescribed Owners Corporation must have an audit, and any other Owners Corporation may have an audit of their annual financial statements. It seems safe to assume the legislators included this section to provide some financial protection for owners.

The audit is performed to provide owners with some comfort that the financial statements for their Owners Corporation present a true and fair view of the results for a particular year. It is conducted by qualified independent professionals who operate in a highly regulated and scrutinised environment. In some cases, however, the only time there is ever mention of the Auditor is via an Audit Report presented with the financial statements and included in the AGM notice.

It is important to remember the Owners Corporation is the client of the Auditor, and they are paid by the Owners Corporation. They operate independently of the Manager and can be an essential source of information for the Owners Corporation. Their role involves checking and commenting on records and procedures conducted by the Manager in accordance with Australian Auditing Standards, yet in most instances, they are appointed by the Manager. Interaction is with the Manager with there being very little or no interaction at all with the Owners Corporation committees.

The Manager’s role includes tasks like

The Auditor’s role includes tasks like

In most cases, an Auditor will initially prepare a letter of appointment which should include the objective and scope of the audit. It should also set out the responsibilities of both the Auditor and management. This letter could also be received and acknowledged by the Owners Corporation. This might extend an opportunity to the Owners Corporation to request the Auditor offer an opinion on other aspects of the financial health and status, and perhaps whether the Manager is complying with the Act and fulfilling all requirements under the Management contract. This could require an additional fee but could give the Owners Corporation further comfort.

In multi Owners Corporation environments, the annual fees for the audit can be in excess of $5,000. Imagine if this expenditure was for plumbing. It is most likely the Owners Corporation would require the Manager to have a scope of works and get 2 or 3 quotes. However, in the audit environment, the Manager may organise the Auditor with the only notice to Owners being the acknowledgment of appointment at the AGM and then the ultimate receipt of an Audit Report.

It could be prudent for the Owners Corporation to ensure that one of the terms of appointment is that the Auditor provides a final report to the Members/Owners of the Owners Corporation. This Report would typically contain an explanation of the audit process and the level of cooperation received from the Manager, Key Areas of Focus such as GST and Income Tax reconciliations, Arrears assessment, weaknesses in systems, etc. This Report can be of far more use to the Owners Corporation because of its detail compared to an Audit Report which just reports on a Qualified or Unqualified basis.

There is certainly no accusation of impropriety here, but Owners Corporation’s or their committees should think about establishing this direct relationship with their Auditor. This enables the Owners Corporation to check and understand the responsibilities of each of the parties, and play an active role in the selection of the chosen Auditor. They should then have the opportunity to discuss the audit result with the Auditor and have any questions answered. This would be standard practice in a regular company audit.

Colin Young Chartered Account Horizon Strata Management Group E: colin.young@horizonstrata.com.au P: 03 9687 7788

This post appears in the September 2020 edition of The VIC Strata Magazine.

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