[Webinar] Financial Audit of Your Apartment Complex and Closing of Accounts: Key Takeaways

Though we have conducted several workshops before on various topics related to apartment management and accounting, they were all conducted in Bangalore. Apartment Association Members from across the country had been requesting us to conduct similar workshops in their cities. The only way we could reach Association members across India was, if we take our workshops online. And a couple of weeks back we conducted our first online webinar. The webinar was a major success with Association members from housing societies across India joining us for a discussion on how to conduct apartment financial audit in complexes in a smooth manner.

Here we present the 7 step guide to a smooth financial audit and closing of of your housing society accounts, as key takeaways from the Webinar.

1) Understanding what is being audited

• Collections made by Association from Members in form of maintenance dues, usually collected monthly or quarterly
• Collections made by Association from non-members, like rent collected general store inside the apartment, etc.
• Payments made by Association to Vendors. This would include payments made to Housekeeping, Security, payment for common area electricity, water, etc
• Assets of the Associations like Elevators, Transformers, Generators, Water Treatment Plants, Electronics, Gym / Clubhouse equipment, etc.
• Investments of the Association which are typically Fixed Deposits

2) Understanding the parties involved in the audit

• Treasurer, who is a part of the Management Committee, who is also an owner
• Accountant, who does the day to day accounting entries
• Auditor, is a person who will be appointed by the Association for auditing the Society Accounts

3) Setting up your Accounting System for Success

1. Immediate entry of Collections into the Books is very important. With systems like a payment gateway for collecting maintenance dues, these entries happen automatically and hence save a lot of time and effort of management committee members
2. Daily entry of Expenses is very important
3. Bank Reconciliation (Matching the payments and expenses with the bank statement) should be done on a monthly basis
4. Monthly Payment of TDS, Service Tax, Professional Tax
5. Quarterly filing of TDS and Half Yearly Filing of Service Tax
6. Appoint an Auditor early on during the financial year. The Auditor would be able to advise you with regard to the right accounting practices which are to be followed. It’s also advised if he keeps having a look into your book of accounts on a quarterly basis. This makes the audit process at the end of the financial year very smooth.

4) Accounting Discipline to be Kept in Mind

1. Zero Cash Collections: This is because accounting of cash is messy and at the end of the year, unaccounted cash causes the most amount of problems
2. Minimal Cash Payments: It is a best practice to enter into bulk contracts with vendors, so that small payments which necessitates payment by cash, are avoided. Other than petty cash payments like refreshments for meetings, etc. its best to avoid cash payments. Cash payments made should be entered into the system on the same day.
3. Publishing of Cash Flow reports to Members periodically: This helps in maintaining transparency and also catching hold of any discrepancy early, rather than later in the financial year during audit.

5) Apartment Financial Audit Preparation

During Apartment financial audit preparation there are certain aspects of your Society’s accounting which you need to take care before the auditor starts looking into your accounting system. Its best to start the audit preparation around May-June, so that as an Association you are prepared for the closing of Society Accounts well within stipulated time.

1. All Financial Entries should be complete: All deposits, collections, payment entries should be done in the system
2. Bank Reconciliation Complete: The bank balance amount which your bank is showing should match the bank balance your financial system is showing minus some floating amounts like cheques deposited but not credited yet, etc.

6) Handling the Apartment Financial Audit Process:

During the Apartment financial Audit, here are the activities conducted by the auditor:

1. He will review and drill down into the trial balance. A trail balance would show the balance across accounting heads, classified across assets and liabilities.
2. Review of bank reconciliation and matching with Bank Statement
3. Review of Tax Collection, Remittance and Filing
4. Auditor will help in Posting of Journal Entries
   1. Accrued interest of FDs
   2. Provision amounts which are payable in last financial year, but you do not have visibility right away
   3. Depreciation

The Auditor would thus generate the Income & Expense Statement, take a print out of the statement from the accounting tool and put his signature and stamp on it. This would end the audit process.

7) Avoid the Frequent Mistakes made by Apartment Association or Societies:

1. Not performing Bank Reconciliation Regularly
2. Mistakes related to Taxes
   1. Not deducting TDS from Vendor Payments
   2. Service Tax (Service Tax to be collected if collection is equal to or greater than Rs. 5000 per household per month)
   3. Income Tax: Any Collection from members (Owners/Tenants) is exempt from Income tax. Collection from Non-Members (Rent from Vendors, Sponsorships, etc.) is within Income Tax Scope

Here is a presentation which details out the various ADDA Features which help in making Society Accounting hassle free for Apartment Treasurers & Accountants.

Webinar Question and Answer Session:

The webinar was followed by an interactive question and answer session, during which several relevant questions were asked. Here is a snapshot of some of the questions which were asked and the answers provided.

Q1) Can Bearer’s cheque also be collected by the Association for collecting payments? 

Answer: The best practice is to ensure any cheque paid is in the name of the Apartment Association. Please avoid bearer’s cheques.

Q2) Inside ADDA tool, what option is there for performing year end?

Answer: After you log into ADDA, Choose Admin option and there you can find the Trial Balance Tab. On the right corner you can find “Perform Year End” button. By clicking on it the system will help you with a checklist which has all the details. The checklist helps you where to make the required entries in the Admin portal. The system also passes retained earnings postings into your book of accounts.

Q3) Do you provide Auditing service?

Answer: We are software product company. We do not provide auditing service ourselves. But we have a large network of Top Auditors who serve premium Apartment Complexes. They are part of our Accounting Service Partners. We can connect you with them and you can contact and choose the auditor who will cater to your Apartment requirements.

Q4) Where can I find in ADDA the basis of deducting TDS for Vendors?

Answer: In ADDA “Expense Tracker”, you can setup a vendor in “Vendor Master”. Here when you add a vendor you can setup the TDS rate that you want to deduct for that particular vendor.

Once setup here, the TDS amount will automatically show up in the invoices. 

Q5) Is there a guideline on how much an Apartment Association can spend non budgeted amount incase of emergencies?

Answer: Typically you can create bye-laws in your AGM on the limits of budget for emergencies from the interests earned on the Corpus Funds. You can fix those extra amounts for such unforeseen incidents and its better if you can include them in your bye-laws.

Q6) What are the common mistakes that could be avoided to have the maintenance charges not go beyond Rs 5000/-? Any tips are much appreciated.

Answer: There are some simple things which you can keep in mind.

1. Very often lack of preventive maintenance causes money leakage to happen on repair of the Apartment Complex facilities for e.g. Elevators, Sewage Treatment Plants, Generator Payments, Swimming Pool Filtration. If at all you have registered for an AMC, you can actually put automatic reminders for these maintenance.
2. Looking into methods which can increase the Association’s revenue. You can look into implementing late payment penalty which most of the residents ignore to pay.
3. Efficient use of the Facilities available in the Apartment Complexes. On the dates when the facilities are not utilized by the Residents, it can be rented to the outsiders like say handloom exhibition, Tupperware exhibition, etc. So if the Management Committee finds a way to structure the Management of the Apartment Complexes the above mentioned points can actually reduce the maintenance charges.

Below are presentations from our previous accounting workshops. These presentations provide in great detail various aspects of Society Accounting, Best Practices & Standards.