Common Breaches of SRA Accounts Rules - By SPONSOR PKF Francis Clark LLP

Common Breaches of SRA Accounts Rules - By SPONSOR PKF Francis Clark LLP

COMMON BREACHES OF THE SRA ACCOUNTS RULES 2011

 

It has been a typical busy season for Reporting Accountants undertaking their work in completing the annual Accountant’s Report for law firms over recent months.

 

One of the key changes in the scope of the Accountant’s Report, is the underlying basis of the Reporting Accountant forming a qualified opinion within the report. Under the updated SRA guidelines a qualified opinion should arise where there has been a material breach of the SRA Accounts Rules 2011 (SRA AR 2011) or a weakness / failure has been identified in the firm’s systems and procedures which could put client money at risk.

 

Whilst this was by no means a relaxation of the application of the SRA AR 2011, the change in basis of a qualified report was anticipated to reduce the number of qualified reports previously submitted to the SRA under the previous definitions / guidelines.

 

General feedback from the sector has been indicative that the level of qualified Accountant’s Reports submitted to the SRA have reduced under the new requirements. In general however there are still a number of key SRA AR 2011 breach areas arising which are helpful to highlight that may assist firms in maintaining a secure control environment in safeguarding client money.

 

The below is not comprehensive but highlights some key areas of the SRA AR 2011 where there has been common breaches arising across legal practices, which may lead to a qualified Accountant’s Report.

 

Residual Client Balances

 

SRA AR 2011 – 14.3 and the supporting accounting system notes and procedures in the appendix of the rules, specify that a law firm must ensure that once a client matter has completed or substantially completed any residual client balance must be returned to the client. In addition a firm should ensure that they have controls and procedures in place to ensure for the timely closure of matters and the return of surplus client balances.

 

Where there is a genuine reason linked to the underlying legal transaction which requires a firm to retain client funds on completion of the matter, then the practice must also notify the client or person on whom those funds are held on the basis of the retention and every 12 months thereafter for as long as the funds are held in accordance with SRA AR 2011 – 14.4.

 

However in some cases it has been evident in the first instance that the initial controls in this area are not always as rigid as they could be in preventing unnecessary residual client balances arising or returning surplus funds after the matter has completed. This has been combined with weaknesses identified in reporting to clients on an annual basis thereafter where such client funds have been retained.

 

Taking a practical view point, residual client balances do inevitably arise from time to time and this is not necessarily reflective of a firm with inadequate controls in this area.

 

Whilst the above may or may not be indicative of a weakness in the firm’s controls and procedures, where this area is creating a further issue is how some practices are dealing with residual balances arising thereafter.

The first and foremost of the above is that regardless of the size of the residual client balance attempts must be made to return the amount to the correct destination.

 

Where efforts to return residual client balances are not successful and the client may no longer be contactable, the practice may then look to donate the balance charity where the balance is less than £500, applying the requirements of SRA AR 2011 - 20.2.

 

As part of SRA AR 2011 – 20.2 taking into account the level of the residual client balance, the practice needs to form a view if the reasonable cost of ascertaining the proper destination of the money is deemed excessive in relation to the balance held. (The SRA’s website provides detailed guidance on this area on actions a firm can adopt to trace the correct destination, together with the necessary application procedures to donate client balances held in excess of £500).

A significant point related to the items above is that law firms cannot charge their own time costs to clients for returning client funds held. There may however be circumstances where a law firm may deduct reasonable disbursements incurred such as costs for using a tracing agent.

 

The SRA have previously highlighted that firms are not permitted to build into their terms of business a provision that small residual client funds held at the end of a client matter may automatically be donated to charity.

Finally, unless specific SRA approval has been given, firms are strictly prohibited from writing off residual client balances to its own benefit. Surprisingly there has been an increased tendency where this is arising for smaller residual client balances being written off in one form or another to a firm’s benefit.

 

Client Funds Reconciliation Procedures

 

In accordance with SRA AR 29 and the accounting system notes and procedures in the appendix of the rules, every firm holding client money is required, at least every 5 weeks, to perform a total client funds reconciliation.

The client funds reconciliation must comply with the three way check process and be presented in a formal statement with supporting evidence of the checks being made.

 

The completed total client funds reconciliation should also be reviewed by a manager (that fully understands the reconciliation process and documentation) or the firm’s COFA. Evidence of this review should also be documented on the formal reconciliation statement.

 

The above process is an essential tool for any practice in monitoring client monies held. As well as other control system aspects, the process provides a key mechanism to assist in identifying any potential shortfall / discrepancies within client funds held.

 

Generally most practices do have very strong controls and procedures in the area. However in some instances there have been some very significant systematic failures in the client funds reconciliation process. Given the importance of this area, significant deficiencies in this control process have inevitably resulted in qualified Accountant’s Reports being issued.

 

There are of course a number of reasons where a qualified Accountant’s Report may be issued and the above items only highlight those where there has been a perceived common theme in terms of qualifying breaches of the SRA AR 2011 across legal practices.

          

This publication is produced by Francis Clark LLP for information only and is not intended to constitute professional advice. Specific professional advice should be obtained before acting on any of the information contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of its production), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.

 2 November 2016

 

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