MANAGEMENT AND AUDIT OF
ACQUISITION OF LANDED PROPERTY
[Vacant Land or Buildings]
1.0 Introduction
1.1 The acquisition or disposal of landed property is not a common transaction for most individuals as it may be a once in a lifetime commitment. A primary goal of many individuals is to ensure that they have a house of their own where their family can be sheltered without any problems, aspire to own their own property either to live independently without interruption/interference from any persons/relatives or to acquire an asset as savings. It is normally their most important single financial commitment that involves the acquisition of a fixed asset. The acquisition of landed property by an individual is normally financed by financial institutions, thereby incurring debt for periods that may extend to up to three generations, as happens in Japan and some other countries due to the inability to pay the full cost with finance costs within a single lifespan. This long indebtedness situation does not apply to individuals who are rich or are children of financially rich parents/in-laws/relatives who may gift them [such as the giving of dowry by the bride’s parents to the groom in some Indian societies] the landed property or those who may acquire sudden wealth in the form of lotteries or some shrewd investments that provide bumper profits in short span of time.
1.2 Acquisition of landed property either as vacant land or completed buildings compatible with the needs of the buyer can also be transacted by the private and public sector entities. This article will give emphasis to audit of acquisition of landed property but not to disposal of any existing landed property. However the aspects that are listed and explained are also substantially applicable to disposal of landed property as the owner would have initially gone through the process of acquisition before it can be disposed off. These aspects may not be taken into account by Government and their agencies that generally have their own procedures that may take into account other ‘considerations’ in acquisitions or disposal of landed properties.
2.0 Responsibility of Management
2.1 It is the responsibility of the Management to prescribe comprehensive, effective, relevant procedures and internal controls for acquisition, management and disposal of landed properties. The more important aspects are detailed in this article. Managements should modify these aspects before they are approved for adoption and implementation to ensure compliance with requirements of Laws of the country and the local Statutory Authorities Laws applicable in the locality in which the involved property is located. It is equally important that Management and Board of Directors ensure the compliance of the prescribed procedures and internal controls by effective and continuous monitoring of the status of the landed properties. Regular monitoring is of utmost importance during the periods the vacant land and building properties are not developed or fully occupied/tenanted respectively.
2.2 Acquisition can result either on the initiative of a buyer or by responding by a prospective buyer to an offer by a seller of a landed property that may satisfy with his criteria for such acquisitions. The stronger bargaining position will normally rest with the party who responds and not to the party that makes the offer to buy or sell. This aspect should be taken into consideration by Management in all their acquisition/disposal of landed properties.
3.0 Professionals involved in acquisition of landed property and their charges
3.1 Acquisition and disposal of landed property involves millions of dollars [or currencies used in the localities where the landed property is located] annually. The deals are generally arranged by property agents/brokers, based on expert advice of professional appraisers, financed by financial institutions and documented by the legal practitioners. In every case the professionals involved levy fees that are based on rates as prescribed by their professional organizations or/as may have been approved by the relevant Authorities. The professional fees may also be subject to additional taxes [Service Tax] as prescribed by the relevant authorities but subject to specific licensing approvals for imposition and collection. These professionals are also allowed to claim other charges/disbursements that should be fair, reasonable and in some cases substantiated. The professionals are required/expected to act honestly, ethically and provide advice that is fair and impartial to both parties. In almost all cases the buyers/sellers do not have the relevant expertise and thus are generally at the ‘mercy’ of these professionals as they have no choice but to have blind trust in the advice regarding the valuation reports, terms and conditions of agreement, fees/claims imposed and other matters that may arise.
4.0 Role of Audit Committee and Internal Auditor
4.1 The Audit Committee through the Internal Auditor has an important role to play to protect the interest of his client and to ensure that there exist comprehensive and relevant procedures and effective internal controls that are to be complied with to ensure acquisitions/disposals are done in professional methods in manners that are cost-effective and cost-efficient. Thus the Internal Auditor has the responsibility to ensure that Management has implemented acquisition/disposal of landed property in manner as prescribed in the approved procedures and complied with the approved internal controls. Emphasis should be given to financial, legal and possible fraudulent possibilities/opportunities that may exist in the terms, conditions and terminologies used in the documentation pertaining to any landed property acquisition. Another important objective of undertaking audits is also to ensure that frauds are prevented, minimized or detected early to minimize losses.
5.0 Audit of
Land/Building Acquisition
5.1 Audit of landed properties can be done either on planned basis or
selected for specific reasons or directions from Management/Board of
Directors/Audit Committee members. Managements normally do not consult
the Internal Auditor when acquiring any landed property. The first sign
of any intended property acquisition is observed when payments are made
to any party involved in the proposed acquisition.
5.2 Audit should commence with scrutinizing
the terms, conditions, professional fees and other claims in respect of
professionals appointed in respect of the acquisition of landed
properties. The next aspect to be audited is the terms, conditions and
their financial/legal implications of the contents of the Sale
and Purchase Agreement. Clauses that require compliance or have legal or
financial obligations should be highlighted for detailed scrutiny to
ensure that the interests of the client are protected. These should be
compared with the objective of the land acquisition as should have been
detailed in the Management Paper. The contents of all documents should
be scrutinized.
6.0 Audit Visit
6.1 It is important that the Internal Auditor should visit the location of the land and/or building to be acquired, preferably prior to commencement of any audit of the acquisition. These visits can enable better understanding of the objectives and other aspects of the acquisition and any possible latent risks that may have been overlooked or not disclosed in the Management Paper either intentionally or otherwise. Site visits also assist in better understanding the intention and financial/legal implications of the terms and conditions and thus better planning the scope of audit and result in an effective audit.
6.0 Audit Controls
[a] Aspects that
should be verified in ‘Purchase of Land’
[i] Management Paper contents
- Purpose - intended usage of land
- Location
- Budget for land purchase
- Approval at relevant level
[Contents of the Management Paper should be comprehensive and encompass all known aspects pertaining to the land to be acquired to enable the decision makers to make an informed decision]
[ii] Land to be acquired
- Physical survey of the area of land to be acquired - To be confirmed
with ownership Title of Registration with relevant Authority
- Ownership - Legal Authority of Seller
- Status of Land Usage - Limitations to usage [Conditions in the
Title of Registration Document as imposed by
the relevant Land Authority [E.g. Agriculture, Residential, Commercial,
Building, Industrial, Others]
- Fees/Compensation payable if need to change the prescribed usage
status
- Past usage of land if used for purposes that may need to be rectified
[If used as refill or for dumping of environmentally
hazardous/toxic/dangerous materials - Cost of rehabilitation and
recovery of costs]
- Any outstanding/legal third party claims or restrictions - E.g.
Caveats [Ensure clean transferable title without any obstructions to
transfer of ownership]
- Occupied - Cost of vacant possession if to be vacated and at whose
cost
- Outstanding charges/dues imposed by relevant land/utilities/other
Authorities
[iii] Land Purchase Agreement [Sale & Purchase Agreement]
- Scrutiny of terms and
conditions prescribed in the agreement
- Finance costs: Interest and other charges - If purchase to be financed
by borrowings [Various modes of financing should be compared for
informed decision on mode of financing to be used]
- Valuation professional fees and survey costs - Party liable
- Legal costs - Party liable
- Land cost settlement - Payment terms
- Agreement to be legally binding and notarized - Party liable for
notarization
- Government prescribed fees [E.g. Stamp Duty payment] - Party liable
- Property agent's [Broker] Fees/commission/quantum - Rate and party
liable
- Settlement of outstanding dues on the proposed acquisition
[iv] On Completion of
Land Acquisition
- Ensure ownership document [Title/Deed] registered in the name of the
purchaser
- Bring to account - Total direct & indirect costs ['Asset' if for own
usage & 'Work in Progress' if to be developed and/or for sale]
- If for own use - Record in Asset Register
- For post acquisition period charges – Statutory fees/levies and insurance against risks
[b] Aspects that should be verified in ‘Purchase of Building’
[i] Management Paper contents
- Purpose - intended usage of building
- Location
- Budget for building purchase
- Approval at relevant level
[Contents of the Management Paper should be comprehensive and encompass all known aspects pertaining to the building to be acquired to enable the decision makers to make an informed decision]
[ii] Building to be acquired
- Physical survey of the condition of building to be acquired - To be
confirmed with ownership - Title of Registration with relevant
Authority
- Ownership - Legal Authority of Seller
- Status of Building Usage - Limitations to usage [Conditions in the
Title of Registration document as imposed by the relevant Land Authority
[E.g. Residential, Condominium, Industrial, Commercial, Others]
- Fees/Compensation payable if need to change the prescribed usage
status of building
- Costs of repairs/renovation/refurbishment if necessary and costs to be incurred
- Any outstanding/legal third party claims or
restrictions - E.g. Caveats [Ensure clean transferable title without any
obstructions to transfer of ownership]
- Occupied - Cost of vacant possession if to be vacated and at whose
cost
- Outstanding charges/dues imposed by relevant land/utilities/other
Authorities
[iii] Purchase Agreement [Sale & Purchase
Agreement]
- Finance costs - If purchase to be financed by borrowings
- Finance costs: Interest and other charges - If purchase to be financed by borrowings [Various modes of financing should be compared for informed decision on mode of financing to be used]
- Valuation professional
fees and survey costs - Party liable
- Legal costs - Party liable
- Building purchase cost settlement - Payment terms
- Agreement to be legally binding & notarized - Party liable
- Government prescribed fees [E.g. Stamp Duty payment] - Party liable
- Property agent's [Broker] Fees/commission/quantum - Rate and party
liable
[iv] On Completion of Building Acquisition
- Ensure ownership document [Title/Deed] registered in the name of the Purchaser
- Bring to account - Total direct & indirect costs under ‘Assets’
- Record in Asset Register for post acquisition period maintenance/service/other costs
- Insure the building against losses or other risks/claims
- Obtain as-built
drawings/manuals for the building - For post acquisition maintenance
- Obtain warranties/guarantees for maintenance of mechanical
installations where applicable
- For post acquisition period charges – Statutory fees/levies and
utilities charges
[It is important that professionals in the relevant disciplines are
appointed for any land/building acquisition/disposals. These
professionals should be authorized to practice under the relevant laws
of the country/Local Authority as applicable. The main disciplines would
include Licensed Agent [Broker] Legal, Valuation, Land Surveyor and
Finance if these disciplines are not available in-house. The cost of
services of these professionals, if employed, should be added to the
cost of the acquisition].
7.0 Conclusions
7.1 There is a general lack of expertise within Management resulting in ‘blind’ trust in the expertise, professionalism, integrity and ethics of those involved when appointed. This provides many opportunities/possibilities for fraudulent practices including creation of conditions for professionals for self-enrichment. As the primary responsibility for acquisition of landed property is done in a cost-effective and cost-efficient manner rests with the Board of Directors and Management, it is important that they equip themselves with relevant knowledge and expertise relevant to the acquisition/disposal of landed properties.
7.2 Similarly it is important that members of the Audit Committee and the Internal Auditors also equip themselves with relevant knowledge and expertise pertaining to acquisition/disposal and other matters related to landed properties.
7.3 The whole procedure of acquisition can be a very time consuming process. Thus it is important that Management ensure that all documentation relevant to the acquisition is comprehensive, accurate, in compliance with any legal requirements and maintained in proper and safe and properly indexed to ensure its availability in the event the property may be subject to any legal action from any party claiming interest in the property. It must be remembered that the amounts involved are in tens/hundreds of millions and in some cases in millions of dollars.
Internal Auditor should periodically confirm that legal documents pertaining to landed property are recorded in the relevant permanent register and kept in safe custody until such time it is disposed off in an authorized manner
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GSK/Apr 08
E-mail: gursharan38@gmail.com sharwant38@yahoo.com
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