A body corporate received an audit report with the following findings: no AGM held within the prescribed period, buildings not valuated in the last 3 years, inadequate financial records, not registered for income tax, and non-compliance with Management Rules 21(2) and 26. How serious are these findings?

Question

Answer 1

The audit findings point to serious governance failures that require immediate corrective action by the trustees or members. Let me break down each finding and its implications:

1. Non-Holding of the Annual General Meeting (AGM)

"The annual general meeting was not held within the prescribed period."

Reference: Management Rule 17(1), Annexure 1

Requirement: The body corporate must hold an AGM within four months of the end of its financial year.

Implication: Failing to hold an AGM compromises the election of trustees, approval of budgets, and levy decisions. It also limits members' ability to question financials or governance.

2. Lack of Valuation of Buildings in Past 3 Years

"The buildings have not been valuated in the last 3 years."

Reference: Management Rule 23(3), Annexure 1

Requirement: A replacement valuation must be done at least every 3 years for insurance purposes.

Implication: Insurance coverage may be insufficient or invalid. This poses a major financial risk in the event of damage or loss.

3. Non-Compliance with Financial Records and Audits

"We were unable to conduct an engagement... books of account and records were not adequately maintained."

Reference: Management Rule 26(1)–(5), Annexure 1

Requirement: The body corporate must maintain proper accounting records and prepare audited financial statements annually.

Implication: This undermines transparency, increases the risk of mismanagement or fraud, and could result in legal action or the appointment of an administrator under Section 16 of the Act.

4. Body Corporate Not Registered for Income Tax

"The body corporate is not registered for taxation in terms of the Income Tax Act."

Reference: This falls under external tax compliance (not directly under STSMA or Rules) but is a statutory obligation.

Implication: Potential non-compliance with SARS may result in penalties or interest. It also raises concerns about overall governance standards.

5. Breach of Management Rules 21(2) and 26

"The body corporate appears to have not been effectively managed as required by rules 26(5)(c)(iii) and (v)..."

Reference:

Rule 21(2), Annexure 1: Requires proper implementation of financial governance and administrative functions.
Rule 26(5)(c)(iii) and (v), Annexure 1: Relates to submission and disclosure of financial statements.

Implication: These failures may suggest financial mismanagement, with trustees potentially in breach of their fiduciary duties under Section 8 of the Act.

Summary of Severity

Finding	Legislative Breach	Severity
No AGM held	Management Rule 17(1), Annexure 1	High
No valuation in past 3 years	Management Rule 23(3), Annexure 1	High
Inadequate financial records	Management Rule 26(1)–(5), Annexure 1	Critical
Not registered for income tax	External obligation (Income Tax Act)	High
Non-compliance with Rule 21 & 26	Management Rules 21(2) and 26(5)(c), Annexure 1	High

Potential Consequences

Legal action by members or creditors
Application for administrator appointment under Section 16 of the Act
Penalties from SARS (if tax non-compliance is proven)
Loss of insurance cover or claims disputes
Reputational and financial damage to the scheme

Conclusion

The audit findings point to serious governance failures. Immediate corrective action should be taken by the trustees or members, including:

Convening a general meeting
Rectifying accounting and tax issues
Updating valuations
Considering formal reporting to the Community Schemes Ombud Service (CSOS) if trustees are not fulfilling their duties

Legislative References

Management Rule 17(1), Annexure 1

Requirement to hold an annual general meeting (AGM) within four months after the financial year-end.

Management Rule 23(3), Annexure 1

Obligation to obtain a replacement valuation of buildings at least every three years for insurance purposes.

Management Rule 26(1)–(5), Annexure 1

Requirements for maintaining proper financial records, preparing budgets and audited financial statements.

Management Rule 21(2), Annexure 1

Relates to the functions and powers of the body corporate in respect of financial governance.

Management Rule 26(5)(c)(iii) and (v), Annexure 1

Details specific requirements relating to financial reports and audit-related obligations.

Section 8 of the Sectional Titles Schemes Management Act, 2011 (STSMA)

Fiduciary duties of trustees, including acting honestly, avoiding conflicts of interest, and acting in good faith.

Section 16 of the Sectional Titles Schemes Management Act, 2011 (STSMA)

Provides for the appointment of an administrator in cases of serious financial or administrative mismanagement.

ELA