Changes to reporting requirements

Updated rules for reporting on client money will make it easier for solicitors to do business, according to the Solicitors Regulation Authority (SRA) on publication of the latest version of their handbook.

The major change to the handbook came in part 6 of the SRA Accounts Rules 2011 on accountants' reports, where the SRA expanded the exemption for firms from obtaining an accountant’s report.

To qualify for the exemption, firms are required to assess at the end of the accounting period whether the average (at least five-weekly) balance of client money they have held or received is less than, or equal to, £10,000, and that the maximum aggregated total of client money held or received is less than, or equal to, £250,000.

Both thresholds need to be satisfied for the exemption to apply. If a firm does satisfy the criteria, it will be exempted from the requirement of obtaining an annual accountant's report for that accounting period.

The statement or passbook balance is the total balance obtained at least once every five weeks of all general client accounts and separate designated client accounts, together with those accounts which are not client accounts but are holding client money. The average statement or passbook balance is the total of all statement or passbook balances obtained in any accounting period, divided by the number of such balances in that period.

Inevitably, firms will move in and out of thresholds from year to year, and the SRA has made it the compliance officer for finance and administration’s (COFA) obligation to satisfy themselves and, if required, the SRA that the firm has properly applied the exemptions. Accordingly, they will be required to keep full records of their decisions.

In the event that the SRA decides the exemption will not be granted, the reporting accountant should now exercise their professional judgement in determining the work required. To assess the risks to client money arising from non-compliance with the rules, such that the safety of client money is at risk, then the accountant is required to ‘qualify’ the report and set out details of the areas where risks have been identified.

The SRA is further enhancing the role of the COFA as the accountant may also consider the number and type of breaches the COFA has recorded under their reporting obligations to assess any rise in the firm’s mishandling of client money. By being able to use their professional judgement, accountants will have more scope to work closely with COFAs to advise firms on how they handle client money.

If this can reduce administration and compliance costs while ensuring that client money remains protected, it can only be good news.

Exemption threshold

Over the past few years, the SRA has changed its stance on waiver exemptions. Given the recently published handbook, I wonder whether the regulator is following a trend in the auditing world.

There is talk of audit thresholds for companies increasing, due to changes made in the EU Accounting Directive which mean that more companies would be exempt from requiring an audit report. The changes proposed are that the turnover limit increases from £6.5m to £10m or more, and that the gross assets limit increases from £3.26m to somewhere in the region of £5m or more.

If these audit threshold changes are made in the UK, the SRA may follow suit and increase its threshold for the requirement of an accountant’s report. This could lead to an increase in self-reporting, an area where the SRA is trying to improve, and save money for both the practice and the SRA.

The SRA has already changed its definition of a ‘small firm’ by doubling the annual turnover limit from £200,000 to £400,000. This has meant the number of practices that can access the regulator’s small firms services has increased from 3,600 to 5,200. This is more than half the total number of law firms.

If the SRA were to increase its limits further, to more than £400,000 or £600,000, approximately 2,000 more firms could benefit from the small firms regime.

For those firms that did not quite qualify for exemptions this time, it could simply be a case of ‘watch this space’. SJ

Gavin Hooker is a professional practices supervisor at Kreston Reeves

@KrestonReeves

www.krestonreeves.com