SRA accounts rules – significant changes on the way
Plan ahead to ensure you are not caught out by changes to solicitors’ accounts reports in November.
The SRA guidance is effective from 25 November and the changes are significant.
The accountants’ report guidance Planning for and completing an accountant's report, as well as providing guidance to assist reporting accountants prepare for, and complete, the accountants’ reports as required by the SRA Accounts Rules, highlights the statutory obligation on reporting accountants to report matters to SRA.
The immediate reporting obligation is unchanged, which is that reporting accountants are under a statutory duty as set out in section 34 of the Solicitors Act 1974 and section 5, schedule 2 of the Administration of Justice Act 1985, to immediately report to SRA:
any evidence of theft or fraud in relation to money held by a solicitor or a law firm for a client or any other person or in a client account or an account operated by the solicitor
if they have concerns about whether a solicitor or a law firm is fit and proper to hold money for clients or third parties or operate any such accounts.
The SRA is also clear that it expects reporting accountants to report any termination of the accountant's appointment where this is based on the intention to issue a qualified accountant's report.
These obligations will be considered later when we look at the solicitors who move in and out of the exemption criteria.
The exemption from obtaining an accountant’s report has been extended and the SRA ‘recommend both law firms and their reporting accountants have read it [the Planning for and completing an accountant's report guidance] carefully prior to commencing their programme of work.’
The exemption from obtaining an accountant’s report during an accounting period 12.2(b) states that where ‘firms have met the following criteria, they may be exempted from the requirement to obtain an accountant's report:
small amounts of client money are held (an average of less than or equal to £10,000 as well as a maximum of less than or equal to £250,000) at each reconciliation date; or,
the holding or receipt of money only from the Legal Aid Agency.’
The accounting year for Firm A runs from 1 April 2019 to 31 March 2020. The firm undertakes reconciliations at the end of each calendar month:
Reconciliation number
Reconciliation date
Client money balance
(including all applicable accounts)
1
30/04/2019
£11,214
2
31/05/2019
£7,487
3
30/06/2019
£9,107
4
31/07/2019
£9,255
5
31/08/2019
£11,394
6
30/09/2019
£9,947
7
31/10/2019
£11,959
8
30/11/2019
£10,053
9
31/12/2019
£8,255
10
31/01/2020
£4,681
11
29/02/2020
£11,105
12
31/03/2020
£7,988
Average balance
Add together the individual reconciliation totals. Total equals £112,445. Divide total by number of reconciliations to obtain average balance. Average equals £112,445 / 12 = £9,370.
Maximum balance
Establish the highest balance from all reconciliations taken. The highest balance from the 12 reconciliations = £11,959.
Test against exemption criteria
Is average balance below £10,000? Yes, average balance = £9,370. Is maximum balance below £250,000? Yes, maximum balance = £11,959.
As both criteria are met the firm is exempt from submitting an accountant's report.
Example 2
The accounting year for Firm B runs from 1 January 2019 to 31 December 2019. The firm undertakes reconciliations once every four weeks (28 days):
Reconciliation number
Reconciliation date
Client money balance
(including all applicable accounts)
1
01/01/2019
£23,172
2
29/01/2019
£124,891
3
26/02/2019
£18,184
4
26/03/2019
£10,634
5
23/04/2019
£2,686
6
21/05/2019
£2,209
7
18/06/2019
£654
8
16/07/2019
£19,277
9
13/08/2019
£7,260
10
10/09/2019
£12,016
11
08/10/2019
£21,391
12
05/11/2019
£4,121
13
03/12/2019
£7,107
14
31/12/2019
£8,347
Average balance
Add together the individual reconciliation totals. Total equals £261,949. Divide total by number of reconciliations to obtain average balance. Average equals £261,949 / 14 = £18,711.
Maximum balance
Establish the highest balance from all reconciliations taken. The highest balance from the 14 reconciliations = £124,891.
Test against exemption criteria
Is average balance below £10,000? No, average balance = £18,711. Is maximum balance below £250,000? Yes, maximum balance = £124,891.
As both criteria have not been met, the exemption does not apply, and an accountant's report must be obtained.
Where accountants’ reports are still required, the guidance Planning for and completing an accountant's report continues to state that ‘the reporting accountant need only undertake checks which they feel are proportionate and targeted to the size of firm and nature of the work the firm undertakes’. Firms should look at the guidance as it contains examples of certain checks which they may wish to undertake when producing the accountant’s report. These do require tailoring but provide a very useful work programme. The section is called Key risk areas for checking by the reporting accountants and key risk areas are identified. Under each risk there are sections on general guidance, examples of areas of focus and guidance on risk areas and considerations.
The following is taken from the client money in office account risk section and states:
Examples of areas of focus (work should be proportionate, not all of these will always be relevant. Accountants should use their judgement in performing suitable work to check compliance with the Rules)
Testing of business account receipts (to assess if receipts include client money).
Testing whether client money identified in the business account was transferred in accordance with the rules.
Testing whether client money received was banked in accordance with the rules.
Testing business account to client account transfers to identify number and reasons for such transfers.
Testing client bank reconciliation (for example, to assess if reconciling items led to a delay in the banking of client money or to identify unallocated round sum transfers)
Testing business bank reconciliations (for example, to assess if reconciling items led to banking of client money in the business account or to identify unallocated round sum transfers)
As highlighted earlier, reporting accountants have statutory duties. The exemption requirements would need to be considered by the solicitor and may or may not be discussed with the accountant or reporting accountant. The engagement will need to be considered by both the accountant or reporting accountant and solicitor.
Considerations will include:
the reporting accountant evaluating whether they would wish to remain as a reporting accountant (even where no accountant’s report is due)
the solicitor considering appointment of a reporting accountant where they fall in and out of the exemption requirements
whether the solicitor requires any assistance on the taking of the exemption
the reporting timeframe, as the exemption in theory will only be known after the year end, with the requirement to report within six months of the year end.
You can request a revised reporting accountant's engagement letter and suggested exemption evaluation letter by emailing supportingpractitioners@accaglobal.com with the subject line ‘SRA engagement letter’.
