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The sectional title industry has been a part of the property landscape in South Africa for almost half a century, and plays a profound role in addressing the housing problem in the country. Stakeholders such as owners and investors in sectional title property are in most cases not directly involved in the management thereof, and place reliance on the audited annual financial statements of bodies corporate for decision-making purposes. Although the industry seems to be highly regulated, the legislation regarding accounting and auditing of sectional title property is vague and ambiguous. Furthermore, there are no industry-specific auditing and accounting standards to guide accounting and auditing practitioners in performing their work and industry financial benchmarks are not readily available. In addition, financial pressure on sectional title schemes is often very high due to the fact that some owners exercise unrealistic pressure to keep monthly levies as low as possible. Very little academic research has been undertaken on the sectional title industry in South Africa from an accounting and auditing perspective. The aim of this article is threefold: Firstly, to discuss the findings of a literature review on uncertainties, ambiguity and confusing aspects in legislation regarding the audit of sectional title property that may cause or increase the audit expectation gap. Secondly, to discuss the empirical findings of accountancy-related aspects of a sample of body corporate financial statements and accompanying audit reports, in order to identify current benchmarks, challenges, trends, deficiencies in reporting and possible norms for the sectional title industry. Specific reference will be made to the difference between the bodies corporate in the Mangaung and Matjhabeng areas. Thirdly, practical recommendations will be made on possibilities of closing the expectation gap, and further research opportunities in this regard will be discussed.

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Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
ACCOUNTING AND AUDITING OF SECTIONAL
TITLE PROPERTY: AN OVERVIEW FROM THE
GOVERNANCE PERSPECTIVE IN A DEVELOPING
COUNTRY
Leandi Steenkamp*
* Central University of Technology, Free State, South Africa
Abstract
The sectional title industry has been a part of the property landscape in South Africa for almost
half a century, and plays a profound role in addressing the housing problem in the country.
Stakeholders such as owners and investors in sectional title property are in most cases not
directly involved in the management thereof, and place reliance on the audited annual financial
statements of bodies corporate for decision-making purposes. Although the industry seems to
be highly regulated, the legislation regarding accounting and auditing of sectional title property
is vague and ambiguous. Furthermore, there are no industry-specific auditing and accounting
standards to guide accounting and auditing practitioners in performing their work and industry
financial benchmarks are not readily available. In addition, financial pressure on sectional title
schemes is often very high due to the fact that some owners exercise unrealistic pressure to
keep monthly levies as low as possible. Very little academic research has been undertaken on the
sectional title industry in South Africa from an accounting and auditing perspective. The aim of
this article is threefold: Firstly, to discuss the findings of a literature review on uncertainties,
ambiguity and confusing aspects in legislation regarding the audit of sectional title property that
may cause or increase the audit expectation gap. Secondly, to discuss the empirical findings of
accountancy-related
aspects
of
a
sample
of
body
corporate
financial
statements
and
accompanying
audit
reports,
in
order
to
identify
current
benchmarks,
challenges,
trends,
deficiencies in reporting and possible norms for the sectional title industry. Specific reference
will be made to the difference between the bodies corporate in the Mangaung and Matjhabeng
areas.
Thirdly,
practical
recommendations
will
be
made
on
possibilities
of
closing
the
expectation gap, and further research opportunities in this regard will be discussed.
Keywords: Sectional Title, Body Corporate, Audit, Assurance, Audit Reports, Trustees, Managing Agents
JEL Classification: M41, M42, G31, O16
DOI: 10.22495/rgcv7i1art2
1. INTRODUCTION
pertaining
reinforced
to property, being supplemented and
by various aspects of Germanic
The research findings in this article form part of the
results of an extensive study done on the sectional
title industry in South Africa from an accounting
and auditing perspective, performed in fulfilment of
the degree Philosophiae Doctor in Auditing. This
article will commence by giving a brief background
and overview of the sectional title property industry
in South Africa. The problem statement and aim of
the article will then be discussed, followed by the
research methodology. The next section will deal
with a brief literature review. A discussion of the
empirical findings will then be done under different
sub-sections, followed by a conclusion and possible
recommendations.
The South African law of property has mixed
origins, with Roman-Dutch law forming the
backbone of the South African common law
pertaining to property (Pienaar 2010, p.5).
Badenhorst et al. (2006, pp.57), Mostert et al. (2010,
p.11) and Van der Merwe (1989, p.3) identify the
principles of the Roman law of property as prevalent
in most aspects of modern South African private law
customary law. Before the early 1970’s, the concept
of sectional ownership was not recognised in South
Africa. It was impossible to obtain full ownership
rights to a section of a building such as an
apartment. In South African law, the maxim
superficies solo cedit was taken over from Roman
Dutch law (an ultimately Roman law), in terms of
which a landowner was also considered to be the
owner of any building erected on the land, and a
building was seen as a single unit (Pienaar 2010,
p.22; Van der Merwe 2014, pp.14). Ownership
consisted of the entire building, which could not be
bought in separate parts. This means that South
African law did not recognise separate ownership in
a building or parts of that building apart from the
ownership of the land on which the building was
built (Woudberg 1999, p.3; Shrand 1972, p.1).
Legal systems around the world were
compelled to consider the institution of legislation
on sectional ownership, and South Africa was no
exception. In 1971 the Sectional Titles Act ushered
in a new era in home-ownership in South Africa. For
18
Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
the first time in the history of South African law,
performing accounting and assurance services for
home owners were able to purchase a section of a
sectional title clients. Very few members of bodies
building, such as an apartment, with full ownership
corporate have knowledge of accounting standards,
rights on that section (Van der Merwe 2014, pp.19;
and this raises questions regarding an appropriate
Woudberg 1999, p.3; Nel 1999, p.1; Shrand 1972,
and cost-effective framework to use in the financial
p.1; Paddock 2008, pp.13). The original Sectional
reporting of sectional title entities (Steenkamp &
Titles
Act
No.
66
of
1971
was
later
completely
Lubbe 2015b, p.569). The size of the entities and the
overhauled, improved and replaced by the Sectional
cost constraints they face also raises questions on
Titles Act No. 95 of 1986. The Sectional Titles Act
how to perform proper assurance engagements in
No. 95 of 1986 has been amended by Act No. 11 of
the most cost-effective way (Steenkamp & Lubbe
2010,
which
was
published
in
the
Government
2015a, p.551). Even though the legislation relating to
Gazette on 7 December 2010.
sectional title property has been in place for more
The Sectional Titles Amendment Act No. 11 of
than 40 years, library, archive and internet searches
2010 contained the final amendments to the 1986
revealed that very little academic research has so far
Sectional Titles Act before the split thereof into
been done on sectional titles in South Africa. The
three separate statutes (Van der Merwe 2014, pp.1
academic
research
identified
was
mostly
35;
Van
der Merwe 2012, pp.611612).
T.
Maree
postgraduate
research
in
the
fields
of
law,
cost
(2015,
p.1)
explains
that
the
original
1986
Act
accounting, taxation and regional planning, meaning
contained
a
number
of
problems
regarding
the
that no academic research has been done specifically
examination, approval and filing of scheme rules
from an accounting and auditing perspective to date
and dispute resolution. Durham (2015, p.1) and Van
on the sectional title industry in South Africa, except
der Merwe
(2012,
p.611) refer to
the
three new
for the study by Lubbe for the degree Magister in
pieces of legislation as third generation sectional
Accounting (2013).
titles
legislation.
The
Sectional
Titles
Schemes
The aim of this article is threefold: Firstly, to
Management Act No. 8 of 2011 (also referred to as
discuss
the
findings
of
a
literature
review
on
the
STSMA),
incorporates
all
governance
and
uncertainties, ambiguity and confusing aspects in
management provisions regarding sectional titles.
legislation
regarding
the
audit
of
sectional
title
These sections were taken out of the 1986 Act and
property
that
may
cause
or
increase
the
audit
amended and adapted to create the STSMA. The
expectation gap. Secondly, to discuss the empirical
remainder of the Sectional Titles Act No. 95 of 1986
findings of accountancy-related aspects of a sample
(STA)
was
amended
by
the
Sectional
Titles
of
body
corporate
financial
statements
and
Amendment Act No. 33 of 2013. The 1986 act now
accompanying audit reports, in
order to identify
only
contains
technical
registrations
and
survey
current benchmarks, challenges, trends, deficiencies
provisions. The Community Schemes Ombud Service
in reporting and possible norms for the sectional
Act No. 9 of 2011 (also referred to as the CSOSA)
title industry. Specific reference will be made to the
henceforth provides a dispute resolution mechanism
difference
between
the
bodies
corporate
in
the
for sectional title and other community schemes.
Mangaung and Matjhabeng areas. Thirdly, practical
However, the three Acts operate as a unit, and more
recommendations will be made on possibilities of
than four years after being promulgated, neither law
closing the expectation gap, and further research
has been proclaimed yet. As a result, this article will
opportunities in this regard will be discussed.
refer only to the Sectional Titles Act No. 95 of 1986.
During 2010, it was estimated that the South
African sectional title industry consisted of almost
2. LITERATURE REVIEW
60 000 schemes (also known as complexes),
comprising over 800 000 individual units (Van der
2.1. Introduction
Merwe 2014, p.130(17); Editorial 2010, p.1; Muller
2009, p.42). (See also Editorial (2008, p.2).)
According to a recent general household survey
issued by Statistics South Africa, there are currently
around 714 000 households living in flats or
apartments and roughly a further 233 000
households living in town house complexes, adding
up to approximately 947 000 households living in
sectional title schemes (Statistics South Africa 2015,
p.122;125).
From the above it follows that sectional title
property plays a vital role in the property industry in
South Africa. There are various risks involved in
being a trustee of a body corporate, and the risks are
being aggravated by owner apathy with regard to
During the course of the literature review, the author
identified several regulations, rules and sections in
the Sectional Titles Act and related publications that
contain wording which is not in accordance with
accepted accounting terminology. Various instances
of unclear and contradictory pieces of legislation
and literature were also identified. It should,
however, be noted that a full legislative analysis falls
outside the scope of this article and will be dealt
with by the authors in a subsequent research output.
This section of the article will introduce the
concepts relating to auditing and accounting as per
the Sectional Titles Act and highlight some practical
issues identified in related literature.
scheme management. Furthermore, managing agents
face numerous practical problems in the day-to-day
management of sectional title schemes, and various
2.2. Sectional Titles Act requirements
incidents of fraud occurred in the industry in recent
years (Steenkamp & Lubbe 2015c, p.560). There are a
large number of contradictory and confusing legal
aspects in the current sectional title legislation.
Accounting and auditing practitioners also
encounter various practical challenges when
The Sectional Titles Act No. 95 of 1986 deals with
auditing and assurance in Prescribed Management
Rule (PMR) 40 of the Act, the wording of which is as
follows: “At the first general meeting and thereafter
at every ensuing annual general meeting, the body
corporate shall appoint an auditor to hold office
19
Risk governance & control: financial markets & institutions / Volume 7, Issue 1, Winter 2017
from
the
conclusion
of
that
meeting
until
the
“income statement” and “cash flow statement”. In
conclusion
of
the
next
annual
general
meeting:
order
to
better
reflect
the
functions
of
the
Provided that where a scheme comprises less than
statements the titles were changed. In accordance
10 units, an accounting officer may be appointed for
with IAS 1, a complete set of financial statements
that purpose and the auditor or accounting officer,
comprises of a statement of financial position as at
as
the
case
may
be,
must
sign
the
financial
the end of the period; a statement of profit or loss
statements.”
and other comprehensive income for the period; a
Steenkamp & Lubbe (2015a, p.552), explain that
statement of changes in equity for the period; a
there are four aspects in this Rule which should be
statement
of
cash
flows
for
the
period;
notes,
taken
note
of.
Firstly,
fact
that
the
heading
of
comprising
a
summary
of
significant
accounting
prescribed management rule (PMR) 40 (in Annexure
policies and other explanatory information; and a
8 of the STA Regulations) refers to the concept of
statement of financial position as at the beginning of
“audit”; secondly, the “appointment of an auditor to
the
earliest
comparative
period
when
an
entity
hold office”; thirdly the concept of the “accounting
applies
an
accounting
policy
retrospectively
or
officer” in cases of a scheme consisting of less than
makes a retrospective restatement of items in its
ten units; and fourthly the required “signing of the
financial statements, or when it reclassifies items in
financial
statements.”
Currently
available
its financial statements.
publications (Paddock 2008, pp.101; Pienaar 2010,
pp.163169; Constas & Bleijs 2009, p.100; Van der
Merwe 2014, p.1410(1)) on sectional titles also do
not give any further guidance on auditing other than
2.5. Information and Notes Pertaining to Proper
Financial Management
what is stated in the Act. (See also Riddin (2011,
p.1).).
As part of Subsection 2 of Section 37 the Act
prescribes the detail of further information to be
2.3. Small Schemes
contained in the annual financial statements of a
sectional title scheme as follows: “The financial
In the updated Sectional Titles Act as well as the
new Sectional Title Schemes Management Act and
Regulations thereto, the option for small bodies
corporate to appoint accounting officers were
scrapped from the legislation (see section 2 above).
Therefore, the legislation does not contain any
definition of or reference to ‘accounting officers’
anymore. The new rule 17(6)(j)(vi) stipulates that an
auditor should be appointed to audit the financial
statements, unless all sections in the scheme are
registered in the name of one person. The reason for
the change in legislation is due to the fact that
banking institutions require audited body corporate
financial statements as one of the prerequisites in
granting a home loan to a prospective buyer of a
sectional title unit (Paddock 2010, p.8; Lubbe 2013,
p.92). In future, this change in the legislation may
negatively impact on the practices of some members
of professional bodies (such as the South African
statement shall include information and notes pertaining
to the proper financial management by the body
corporate, including: (a) the age analysis of debts in
respect of levies, special levies and other contributions;
(b) the age analysis of amounts owing by the body
corporate to the creditors & in particular to any public or
local authority in respect of rates and taxes and charges
for consumption or services, including but not limited to,
water, electricity, gas, sewerage and refuse removal; and
(c) the expiry dates of all insurance policies.”
Regarding the age analysis of debts and
amounts owing, the Act does not specify the format,
content or level of detail of the age analyses. The Act
does not indicate whether the age analysis should
include all debtors and creditors, or perhaps just
those over 30 days. Furthermore, regarding the level
of detail, the Act does not make mention of whether
the age analysis should include the names of the
individual debtors and creditors (Lubbe 2013,
p.132).
Institute of Professional Accountants (SAIPA)) who
used to act as accounting officers for bodies
2.6. Reserve Fund Requirement
corporate. It may also have an effect on the
accounting and auditing fees paid by smaller bodies
corporate.
Probably the most significant and most controversial
change brought about by the third generation
sectional title legislation is the requirement by
2.4. Financial Statements
section 3(1)(b) of the new proposed Sectional Title
Schemes Management Act (STSMA) to establish and
Section 37(1) requires the trustees to prepare “a
financial statement in conformity with generally
accepted accounting practice”. Taking the principles
of statutory interpretation into account (Botha 2005,
pp.39–44), the sentence “in conformity with
generally accepted accounting practice” in the
Sectional Titles Act will have to be interpreted as
either IFRS or IFRS for SMEs. (See also Lubbe (2013,
p.127).) International Accounting Standard (IAS) 1
sets overall requirements for the presentation of
financial statements as well as guidelines for their
maintain a reserve fund. Section 3(1)(b) of the
STSMA requires the fund to be reasonably sufficient
to cover the cost of future maintenance and repair
of common property, but not less than such
amounts as may be prescribed by the Minister.
Currently, it is estimated that the percentage will be
25% of total levy contributions. It is widely believed
that bodies corporate that do not currently have a
reserve fund in place will be granted a period of two
years from enactment of the new Regulations (Prince
2015a, p.1; Prince 2015b, p.1).
structure and minimum requirements for their
content (IFRS Foundation 2015, p.A836). The newly
3.
RESEARCH METHODOLOGY
revised IAS 1 brought about several changes
regarding the wording used in financial statements.
Previously IAS 1 used the titles “balance sheet”,
The research design was developed to address the
research problem stated above. The research
20

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