Three entries in the client account that cannot be reconciled
Ravenscourt Mansions has 60 flats. Its £410,000 reserve sits in your firm's pooled client account, which holds funds for 38 blocks. In September, while preparing the year-end accounts to 31 March, you find: the Ravenscourt designated ledger has been overdrawn by £95,000 since June, because the lift replacement was paid for before the reserve call was collected; £60,000 of Ravenscourt's reserve was moved in May to cover a shortfall at Meridian Court and has not been returned; the statutory summary of costs due to leaseholders has not been issued; and the monthly reconciliations were signed off by the previous manager without any check against the underlying ledger. The freeholder's finance director says the £60,000 transfer was 'authorised verbally' and will be repaid 'when Meridian sells'. Client money protection insurance is in place.
1. What has gone wrong, and can the freeholder's verbal authorisation make the £60,000 transfer acceptable? What are your immediate steps?
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What has gone wrong.
- Service charge money is held on trust for the contributing leaseholders; it is not the freeholder's money and it is certainly not the agent's. A designated client ledger may not be overdrawn, and one block's money may not be used to meet another block's liabilities. The £60,000 transfer is borrowing between clients - the clearest possible breach of client money rules.
- Paying for the lift before collecting the reserve call has left Ravenscourt's ledger in deficit. A deficit must be cleared from the agent's own resources, never from another client's funds.
- Reconciliations signed without checking are a control failure and, if certified as true, a misstatement.
Verbal authorisation is irrelevant. The freeholder cannot consent on behalf of Ravenscourt's leaseholders to the use of their trust funds for Meridian, and an instruction from a client does not override the agent's client money obligations. A written instruction would be just as improper. The finance director may also have had no authority to give it.
Immediate steps.
- Repay £60,000 into the Ravenscourt ledger from the firm's own funds today, with interest at a fair commercial rate, and reverse the Meridian entry.
- Clear the £95,000 overdraft from the firm's own funds while the correct funding sequence is sorted out, and only then apply the reserve collection.
- Reconcile all 38 blocks ledger by ledger, not just in total, and put dual authorisation on inter-account transfers.
- Notify the client money protection insurer and the professional indemnity insurer, and report internally to the compliance officer and the board.
- Freeze all transfers between client ledgers pending review and take legal advice if there is any suggestion of dishonesty.
2. What do you do about the missing statutory accounts and the signed reconciliations?
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Accounts. A summary of costs for the accounting period, with the summary of rights, is due within six months of the end of that period - 30 September here - and that date has passed. Issue it as soon as the figures can be relied on, not as soon as the calendar demands:
- issue a correct summary with a covering letter explaining the delay and the corrections;
- do not issue a summary you know to be wrong simply to hit a date;
- check whether any costs incurred earlier need a s20B notice and whether any tenant has asked to inspect documents (a request within six months of the summary must be complied with, so the ledger must be presentable).
Reconciliations. Do not backdate them, do not re-sign the previous manager's certifications, and do not destroy the earlier versions. Prepare an accurate reconciliation as at today, with a note of the prior certifications made and the correcting entries, and preserve the originals.
Exposure to manage. Failure to provide the summary and rights without reasonable excuse can be an offence; the tribunal can limit or extinguish service charges where accounts are unreliable or costs were unreasonably incurred; the deficit and interest are a potential claim against the firm by the freeholder and leaseholders; and the auditors may require a management letter. Assume everything will be seen by a leaseholder or a tribunal, and write the file accordingly.
3. Who must be told, and how much? Consider the freeholder, both blocks' leaseholders, insurers, auditors and your professional body.
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Freeholder/board. A full written report: the entries, the amounts, the corrective steps taken, the deficit and interest borne by the firm, and the control changes. State the facts about the verbal authorisation without accusation. Recommend that the board minute its response.
Ravenscourt leaseholders. They are entitled to know that their reserve was affected and has been restored, and the interest credited. The correct vehicle is the statutory summary plus a short, factual covering letter. Concealment is far worse than the error and will be characterised as such in any complaint.
Meridian leaseholders. Not generally a matter for them unless their ledger was credited with money that was not theirs; the correction should be reflected in their accounts if so.
Client money protection and professional indemnity insurers. Notify in accordance with the scheme and policy conditions - usually promptly.
Professional body. Check your membership rules on notifying serious client money breaches; most require prompt notification and a remediation plan.
Auditors. Bring it to their attention before they find it.
The former manager. An internal HR and supervision matter, not a public one - but do not let an individual become the whole explanation; the failure was systemic (no second check, pooled account, unchecked sign-off).
If dishonesty is suspected, stop, take legal advice, and escalate to the board before taking further internal steps.