Rosy Rourke, legal sector director at Armstrong Watson LLP, gives some key pointers in staying compliant with the SRA Accounts Rules.
When would our reporting accountant need to qualify our accountant’s report and submit it to the SRA?
Your accountant will be expected to use their professional judgement when preparing the report and in deciding if it should be submitted.
The SRA’s view is that reports should only be submitted where the breach is material and client money is at risk. A material breach may be one where there is intention to breach the rules, or if there is a significant weakness in the processes and controls in the practice which has led to the breach.
Most firms will have trivial non-reportable breaches. These should still be monitored by the practice in its breach register and reviewed by the reporting accountant, as repetitive trivial breaches may indicate poor systems and controls.
In addition, under the 2011 rules, all ‘cease to hold’ reports (if your firm ceases to hold client money) would also be delivered to the SRA. This would apply whether a report is qualified or not, and even if the practice still exists but has only changed its legal entity (such as on incorporation). See question 3 below for an update following the introduction of the new rules.
What should the reporting accountant provide to the law firm after each year’s review?
The reporting accountant must provide the COFA of the practice with a signed copy of the report, whether qualified or unqualified. The COFA should ensure that all managers of the practice have access to and have seen the report. The report must be signed and delivered to the COFA within six months of the end of the accounting period.
There is no longer a checklist for completion by the reporting accountant.
I would expect the reporting accountant to provide the practice with a management letter which details any breaches (reportable or non-reportable) found through their work, together with proactive suggestions for improvement. In addition, any best practice points where systems and processes could be improved should also be included.
Although it may be agreed with the reporting accountant that they will submit any reports required by the SRA, the ultimate responsibility for delivery is with the practice itself.
What has the impact been of the revised SRA rules since 25 November 2019?
The new rules came into force on 25 November 2019.
Although there was a lot of change, ultimately the underlying principles have remained the same. The focus is still on keeping client money safe.
The main areas of change are as follows:
- A revised definition of client money.
- An obligation to notify a client of a bill of ‘costs’ prior to transfer, rather than ‘fees’. The definition of ‘costs’ includes disbursements, so it would seem that firms are not allowed to transfer funds from client account to office account to cover paid disbursements without delivering a bill to the client.
- Under the new rules, monies from the Legal Aid Agency can still be paid into an office account. What has changed is the need to either pay unpaid disbursements within 14 days, or transfer the unpaid amounts from an office to a client account. The funds can now remain in the office account until required. It would still constitute a breach should a practice hold funds indefinitely by delaying payments intentionally.
- Only where a practice has shut down and closed its client account are ‘cease to hold’ reports required to be submitted to the SRA, unless requested otherwise.
- If the only client money that a firm holds is payment in advance for fees and disbursements, these monies can be paid into an office account. This treatment is optional and for those firms that do not wish to operate a client account. If you have a client account and wish to continue to operate it, then you can continue as you previously did.
- The introduction of third-party managed accounts as an alternative to holding client monies.
There were no transitional arrangements for the introduction of the new rules. Therefore, it is vital that your practice has followed the new rules – and any new internal policies and procedures – immediately following the rule change on 25 November 2019. It is important that all partners, fee-earners and accounts / cashier staff are fully up to date and aware of the new rules.
How has the definition of client money changed under the new rules?
Rather than change the entire definition of client money, the revised rule defines the client money which must be held in a client account. Included in the definition is monies paid in advance for fees and disbursements before a bill has been raised.
An exemption is provided for firms where the only client monies held are for advance fees or disbursements. Those monies can now be held outside of a client account, so a client account is no longer required.
The revised rule allows firms to continue to deal with client money in the same way as they did previously.
To help protect clients where advance payments for fees and disbursements are held in office accounts, the client must be informed upfront. The COFA is required to monitor the processes and controls within a firm operating under the exemption. Clients will still have access to the SRA’s compensation fund for those monies, should the worst happen.
What will the new rules mean for our accounting system and processes?
Every practice should have reviewed and updated their policies and procedures, and considered any updates necessary in order to implement the new rules. This process should have been completed, or at least be well underway.
All fee-earners, management and finance departments should have been fully trained in the 2019 rules. In addition, training is required around the impact the rules have had on your policies, procedures, systems and controls, to ensure that everyone is implementing them and being compliant.
Armstrong Watson LLP is the preferred provider of accountancy services for Law Society members.
This article is a general guide to the issues that we see in practice. It is not a substitute for professional advice which takes account of your personal circumstances. No responsibility can be accepted for any loss occasioned by any person acting or refraining from action on the basis of this article.