NSW: Owners Corporation Q&A Process to Appoint an Auditor

This article is about the process to appoint an auditor to audit the owners corporation accounts in NSW.

Table of Contents:

• QUESTION: During a strata audit, do auditors investigate and verify all payments, especially those made directly to the strata manager, to ensure they align with invoices and the strata scheme’s financial procedures?
• QUESTION: What can an owner do when $200,000 has disappeared from our balance sheet and the strata manager becomes defensive? Is this a police matter or a New South Wales Fair Trading matter? What’s the first step?
• QUESTION: How much detail should the auditor provide in the audit report? We only ever receive a very general statement.
• QUESTION: In the last AGM, the owners corporation for out 8 lot strata decided on an audit to check the financial records. As we are a small strata, can we conduct internal audits?
• QUESTION: How do we know if a strata manager fee is being deducted directly from accounts when we never sight the invoice? How does the auditor note which invoices don’t follow the due process for payment?
• QUESTION: If a strata management company has separate trust accounts for each scheme, is a yearly audit required on those trust accounts or is this only a legislative requirement if pooled trust accounts for all managed schemes are held in the same trust account?
• QUESTION: Does the cost of the audit vary with the quality of the OC’s strata manager or is reliance placed on the fact that all strata managers are licensed?
• QUESTION: Does an auditor make sensible recommendations about the cost-benefit of unwise expenditures?
• QUESTION: Our treasurer provides direct assurance of every dollar into and out of the admin and capital works funds. What value can an annual audit of an OC’s accounts provide over what a diligent and hands-on committee Treasurer achieves?
• QUESTION: Our Strata Manager tells us it is not really necessary to have our scheme audited. Are they correct in saying so?
• QUESTION: Can a single unit holder appoint an auditor at their own expense?
• QUESTION: At our AGM our owners corporation passed a resolution to appoint an auditor to audit all of our accounts. What is the procedure to appoint an auditor?

Question: During a strata audit, do auditors investigate and verify all payments, especially those made directly to the strata manager, to ensure they align with invoices and the strata scheme’s financial procedures?

If the committee discovered that large sums of money, aligning exactly with business invoices, were being paid directly to the strata manager instead of the repair company, would this be a cause for concern? For example, what if a $1,000 invoice for capital works repair was made directly to the strata manager rather than the repairer, while other similar repairs were paid to the repairer?

During a strata audit, is it standard practice for auditors to verify that the amounts listed in the trust bank statements match the corresponding invoices and payments?

Your video mentions that the majority of strata fraud cases involve pooled accounts. When conducting an audit, is it necessary to check whether the strata company is using a pooled account?

Answer: Cross-checking strata trust bank statements is fundamental to our audit process.

Does the auditor need to cross-check strata trust bank statements?

Cross-checking strata trust bank statements is a fundamental part of our audit process. We obtain bank statements directly from financial institutions like Macquarie Bank to ensure the accuracy and completeness of the records. This allows us to verify that the transactions recorded by the strata management match the actual movements in the bank accounts.

When payments are made directly to the strata manager, what action does the auditor take?

If we observe payments such as a $1,000 repair invoice paid directly to the strata manager instead of the contractor, it would warrant further investigation. Here’s how we approach such situations:

• Investigate the transaction flow: Examine why the payment was routed through the strata manager. There might be legitimate reasons, such as the manager paying the contractor upfront due to an urgent repair and then seeking reimbursement. However, this should be clearly documented and authorised.
• Verify supporting documentation: Check invoices, receipts, and any correspondence related to the transaction. Comparing the repairer’s invoice with the payment records helps ensure that funds are used appropriately.
• Assess compliance with policies: Review whether the transaction adheres to the owners corporation’s approved financial procedures. Any deviations might indicate a lapse in internal controls or potential mismanagement.
• Consider potential red flags: Consistent patterns of payments to the strata manager matching contractor invoices could suggest issues like misappropriation of funds or conflicts of interest, especially if not adequately justified.

Are pooled trust accounts a cause for concern regarding strata fraud?

Yes, many strata fraud cases involve pooled accounts. Pooled accounts aggregate funds from multiple strata schemes. This can increase the risk of errors or intentional misallocation due to the complexity of tracking individual contributions and expenditures.

What is Tinworth & Co’s audit approach for pooled accounts?

When auditing pooled accounts, we take additional steps to ensure thoroughness:

• Direct bank confirmation: Obtain statements and confirmations directly from the bank to verify that all recorded transactions and balances are accurate.
• Detailed reconciliation: Perform meticulous reconciliations for each strata plan within the pooled account to ensure that funds are correctly allocated and there’s no cross-subsidisation between schemes.
• Enhanced transaction testing: Given the higher risk, we increase the sample size of transactions tested, focusing on unusual or large payments.
• Review of internal controls: Assess the effectiveness of the strata management’s internal controls over pooled funds, including authorisation processes and segregation of duties.

What process do auditors use to identify irregularities?

Industry regulators and professionals have highlighted concerns about irregularities in pooled accounts. Staying informed about these issues allows us to adjust audit procedures accordingly. If irregularities are detected:

• Investigate the cause: Determine whether discrepancies are due to errors, oversight, or intentional misconduct.
• Report findings promptly: Communicate any significant issues to the owners corporation and, if necessary, relevant regulatory bodies.
• Recommend remedial actions: Provide actionable recommendations to strengthen financial controls and prevent future issues.

What documentation is used when conducting strata financial statement audits?

A comprehensive audit requires a variety of documents:

• Strata management records: Including financial statements, general ledgers, and transaction listings.
• Bank statements: Sourced directly from the bank to ensure independence and accuracy.
• Invoices and contracts: To substantiate expenditures and confirm that services were received as billed.
• Meeting minutes and approvals: To verify that expenditures were authorised by the owners corporation.
• Correspondence and emails: For additional context on transactions and decisions made.

Caren Chen
Tinworth Accountants
E: Caren.Chen@tinworth.com
P: 02 9922 3660

This post appears in Strata News #714.

Question: What can an owner do when $200,000 has disappeared from our balance sheet and the strata manager becomes defensive? Is this a police matter or a New South Wales Fair Trading matter? What’s the first step?

Answer: Don’t send emails around before you have facts. Investigate and find out exactly what’s happening.

If it is at all possible, hold an extraordinary AGM and get an auditor appointed.

Quite often, fraud is not the case. I’m not saying that a disappearance of $200,000 is not extremely serious. In my experience, the police will not show any interest. Department of Fair Trading have become increasingly willing over the last two to three years to tackle rogue managers. You can always lodge cases with the tribunal.

Think about how you made the assumption that $200,000 was missing. Was it by your judgment, or was a professional involved? Have an independent auditor look into it to ensure you are correct.

If you have a problem, get united, work together and find a solution. Certainly, don’t send emails around before you have facts. Investigate and find out exactly what’s happening.

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

This post appears in Strata News #668.

Question: How much detail should the auditor provide in the audit report? We only ever receive a very general statement.

We are a small strata plan and get our financial accounts audited each year by the same company. We only receive a very general statement from the auditors along with the audited reports for inclusion in the AGM. Are we entitled to see more detail on what, if any, issues they may have found in the audit process?

Answer: This would suggest that no matters have arisen that are required to be brought to the attention of the OC.

The auditor is required to provide a report to those charged with governance of significant breaches of internal controls or other matters that should be brought to the OC attention. On the basis the auditor is not issuing a management letter, this would suggest that no matters have arisen that are required to be brought to the attention of the OC. There is nothing to prevent the OC from speaking to the auditor, however.

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

This post appears in Strata News #614.

Question: In the last AGM, the owners corporation for out 8 lot strata decided on an audit to check the financial records. As we are a small strata, can we conduct internal audits?

We are small strata of 8 houses. In the last AGM, the owners corporation decided to perform an internal audit to check the financial records.

Can we do that on our own rather than through external auditors? I put my hand up to do it as I am a retired financial manager with experience in the field.

Given the size of our small strata, is it ok for us to conduct internal audits?

Answer: The Act provides discretion to non-large strata schemes on whether to appoint an auditor or not.

The Strata Schemes Management Act provides discretion to non-large strata schemes on whether to appoint an auditor or not. If the Owners decide not to appoint an external auditor but decide to conduct their own review, this is OK. I understand the Strata manager would treat this as a search or inspection of records and charge the respective fee to the owner.

As a rule of thumb, I recommend all payments are approved by the committee, as a fundamental control, prior to being paid. This way the owners are aware of all expenses incurred prior to the supplier being paid.

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

This post appears in the October 2022 edition of The NSW Strata Magazine.

Question: How do we know if a strata manager fee is being deducted directly from accounts when we never sight the invoice? How does the auditor note which invoices don’t follow the due process for payment?

Answer: We refer to the agency agreement for management fees and other charges.

We use the agency agreement for management fees and other charges and ensure what is being invoiced agrees to the agency agreement including increases in management fees. If the due process for payment includes the SC ratifying the invoices prior to payment, it is a matter of reviewing the invoices approved for payment and looking for exceptions.

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

This post appears in Strata News #600.

Question: If a strata management company has separate trust accounts for each scheme, is a yearly audit required on those trust accounts or is this only a legislative requirement if pooled trust accounts for all managed schemes are held in the same trust account?

Can you confirm if a trust account audit is required if the strata manager has only one trust account encompassing all schemes, or if it is also required when the strata manager opens a separate trust account for each strata scheme?

We have audits done even though we have separate accounts but we are unsure if this is actually required by the legislation.

Answer: All trust accounts are required to be audited annually by the Department of Fair Trading – single trust accounts and pooled trust accounts – no exceptions.

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

This post appears in Strata News #594.

Question: Does the cost of the audit vary with the quality of the OC’s strata manager or is reliance placed on the fact that all strata managers are licensed?

Answer: Yes, the record keeping and the accounting of the strata manager has a strong bearing on the cost of the audit.

Rod Laws: The fact that a strata manager is licensed does not have an influence on the audit at all. Yes, the record keeping and the accounting of the strata manager does have a strong bearing on the cost of the audit.

If we come across strata managers that initially have very limited accounting knowledge, we do try and educate them. We try and assist, so they are not repeating the same mistakes. There may be a lot of mis-postings and mis-codings which we can help fix.

Only last week, we came upon an absolute train wreck of a set of accounts where levies have been issued, expenses have been paid, the bank has been reconciled and those transactions have basically been almost deleted out of the system. The bank module in their software still thinks that that transaction has been reconciled and that it’s still there when it’s not. So the bank account is never ever going to reconcile. In this instance, you have to throw away the file and start again. From an audit point of view, is that going to impact costs? Yes.

Whereas the opposite is true if someone is very diligent with their accounting and they seek to learn and improve and get better. Some of our managers, for example, where we do BAS returns, once upon a time there would be wild variances in their quarterly BAS reports, and now there are virtually none because they’ve been educated in what to do and what not to do.

Caren Chen: That’s why quite often when owners come to me and if we can provide a quote, the first question I always ask is ‘Who is your current strata manager?’. This gives me an idea straight away, regarding the types of problems we will be facing. With certain Strata Management companies, I will know straight away how long it will take. We will be able to work out that we might need to spend a bit more time doing this job.

On the other hand, if it is a company that we have worked together with before and we know that company, we might know their books and records are quite thorough. They might have a very intense and very good internal accounting structure inside the company. The owners Corporation gets the benefit of a lower audit cost because we know we are not going to spend much time doing the work. That’s the reality.

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

This post appears in Strata News #540.

Question: Does an auditor make sensible recommendations about the cost-benefit of unwise expenditures?

Will an auditor make sensible recommendations about the cost-benefit of unwise expenditures? For example, many schemes spend more on annual taxation compliance than they earn in non-mutual income instead of shifting funds into non-interest earning accounts and negating any obligations with the ATO.

Answer: No, it’s outside the scope of the audit engagement to make recommendations on unwise expenditure.

I’ll break the question into two pieces.

The first answer is no, that’s outside the scope of the audit engagement to make recommendations on unwise expenditure. Just like the shareholders of BHP appoint the directors of BHP to run the company for them, the owners appoint the committee to run the affairs of the Owners Corporation on their behalf with the help of the agent. So if again, referring back to my presentation, if the Owners Corporation decides to paint the fence green instead of painting the fence black, it’s their decision to make. It’s not really in the scope of the audit whether the fence should be green or black.

To answer the second part of the question, I agree. Especially with record low interest rates at the moment, it’s often very little benefit of receiving $2 or $3 in interest in an interest bearing account and then having to pay a tax agent to prepare a return.

You need to also be mindful that interest is not the only item of assessable income for an Owners Corporation that triggers the requirement to lodge a tax return. Remember, an Owners Corporation is taxed as a company so as soon as that company earns $1 in assessable income, you have to prepare and lodge a tax return. But I do sympathise with the point.

The other thing you need to be mindful of, and we see this a lot, is that everyone thinks ‘I don’t have any assessable income in my Owners Corporation, therefore I don’t have to lodge a return’. Tick, that’s correct. However, when a return is not lodged at all, what happens is in two, three or four years and sometimes 19 years later, the Commissioner writes to the current tax agent to say ‘Your 2002 income tax return remains outstanding. I am now ordering you to lodge a return even if it is nil’, and if you don’t do that, within the required timeframe, the Commissioner finds you $900 per year. What we do, as part of a service to make sure that it’s complete is we lodge what’s called a CEU form or a client update form. So yes, if you need to lodge a return, we lodge a return. If you don’t need to lodge a return, we tell the commissioner in that year that you don’t need to lodge a return so that you won’t get those letters in three, four and five years saying ‘I’m now directing you to lodge a return’.

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

This post appears in Strata News #525.

Question: Our treasurer provides direct assurance of every dollar into and out of the admin and capital works funds. What value can an annual audit of an OC’s accounts provide over what a diligent and hands-on committee Treasurer achieves?

Answer: An experienced auditor can provide that sort of checking process to help the Owners Corporation detect if there are any mistakes or if any incorrect funds are going into the bank account system.

Rod Laws, TINWORTH & CO:

An external audit does provide a different set of eyes looking at the same books, and we also tend to find in a lot of those situations where suddenly the treasurer sells or passes away and there’s no one else left to fill the void.

As I said in my presentation, where the Owners Corporation is taking an incredibly active role in managing and in effect auditing what the agents are doing to that degree, there’s probably a very limited role that an external auditor would do.

Caren Chen, TINWORTH & CO:

Even though it’s good that you have someone really able to help the owners corporation to look through those payments and check those payments, it does depend on the size of your building and sometimes it’s the structure of your building. For example, if your building is residential under the BMC it may be more complex.

There are a lot of things and even though the treasurer checks every single dollar, it’s not just the dollars you should be checking. You need to understand the binding legislation and the binding bylaw behind it. That’s why an experienced auditor can provide that sort of checking process to help the Owners Corporation detect if there are any mistakes or if any incorrect funds are going into the bank account system.

Caren Chen and Rod Laws
TINWORTH & CO

E: caren.chen@tinworth.com
P: 0499 025 069

This post appears in Strata News #523.

Question: Our Strata Manager tells us it is not really necessary to have our scheme audited. Are they correct in saying so?

We have never had our scheme audited, mainly on cost grounds. However, the Strata Manager always says that it is not really necessary as the strata management company is audited annually.

What is the difference and why would an individual strata scheme need to have their books audited if the strata managing company’s books are audited every year?

Answer: The strata manager certainly shouldn’t be advising that it’s not necessary for a scheme to audit its books and records due to the fact that they themselves have to be audited in accordance with their licensing requirements.

The strata manager certainly shouldn’t be advising that it’s not necessary for a scheme to audit its books and records due to the fact that they themselves have to be audited in accordance with their licensing requirements….

We would always recommend that a scheme’s finances are audited.

Audit requirements are prescribed by the Strata Schemes Management Act and regulation – large schemes and those with a budget exceeding $250k (budget defined under regulations).

• STRATA SCHEMES MANAGEMENT ACT 2015 – SECT 95
• STRATA SCHEMES MANAGEMENT REGULATION 2016 – REG 21

Andrew Terrell
Bright & Duggan
E: Andrew.Terrell@bright-duggan.com.au

This post appears in Strata News #396.

Question: Can a single unit holder appoint an auditor at their own expense?

Answer: No, and the only way to appoint an auditor is during their Annual General Meeting or holding the Extraordinary General Meeting as a special matter.

Caren Chen
TINWORTH & CO

E: caren.chen@tinworth.com
P: 0499 025 069

This post appears in Strata News #389.

Question: At our AGM our owners corporation passed a resolution to appoint an auditor to audit all of our accounts. What is the procedure to appoint an auditor?

At our AGM our owners corporation passed a resolution to appoint an auditor to audit all our accounts.

What is the procedure to appoint an auditor? Can the strata committee choose an auditing firm and sign an engagement contract with them? Or are we required to get a few quotes from different auditors and include them in an EGM for the owners corporation to vote on?

Answer: The owners corporation can either appoint a specific audit firm or just resolve to appoint an auditor and leave the audit firm selection to the Strata Manager.

Accordance with section 95 of the NSW Strata Schemes Management Act 2015, the owners corporation (OC) resolve to appoint an auditor at the Annual General Meeting (AGM) or Extraordinary General Meeting (EGM ). The OC can either appoint a specific audit firm or just resolve to appoint an auditor and leave the audit firm selection to the Strata Manager.

The strata committee (SC) can’t just choose an auditing firm and sign an engagement contract with them. This is because under section 36 of the NSW Strata Schemes Management Act 2015, the strata committee cannot make a decision that is required by or under any Act to be made by the owners corporation by unanimous resolution or special resolution or in general meeting. Hence, the Strata Committee cannot appoint an auditor without a resolution from the OC at an AGM/EGM.

The OC can request the Strata manager obtain audit quotes and the SC could select one of the quotes. However, it is critical to appoint an auditor who has experience in the Strata industry as it is a specialised field. An audit is an independent examination of the financial report and is similar to an insurance policy for the OC.

Caren Chen
TINWORTH & CO

E: caren.chen@tinworth.com
P: 0499 025 069

This post appears in Strata News #315.

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• NSW: Q&A Strata Accounting – Software, Tax Returns

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