How the Accounts Rules can assist with compliance

Given the recent changes made by
the Solicitors Regulation Authority (SRA)
to the Accounts Rules, the reporting accountant will give an assessment of the risk of misappropriation of client funds when examining the systems and controls in place.

Therefore, the reporting accountant has more scope to work alongside the compliance officer for finance and administration (COFA) so that the internal systems and controls meet the required guidelines to protect client funds.

Previously, the reporting accountant provided their findings in a management letter, concluding on the systems and adherence to the rules, but they were unable to make specific recommendations. So, what advice is already in place to assist with systems and controls?

The rules themselves state what should happen to client money, but they give no recommendation as to how. This can, however, be found in appendix 3 to the rules, which is entitled 'SRA Guidelines - Accounting Procedures and Systems'.

These guidelines do form part of the rules - it is stated in rule 26 that 'the SRA may from time to time publish guidelines for accounting procedures and systems to assist you to comply with parts 1 to 4 of the rules' - but they are often overlooked. These guidelines are deemed to be 'best practice', but the fact that the recommendations are mentioned within the rules indicates the level of assistance they provide.

Client transfers

One area that is often overlooked is rule 27.2 on client-to-client transfers. This rule states that if a private loan is to be made by (or to) joint clients, the consent of each client must be obtained. Often, these instructions are made orally and usually by the lender. However, it is important that at the point of instruction the client is told they have to provide written authority, from both the lender and the borrower, which should be retained on the file.

When a payment from a client account on behalf of a client is made, it is rule 21 that applies. This rule states that a withdrawal from a client account may be made only after a specific authority in respect of that withdrawal has been signed by an appropriate person. If a client-to-client transfer is to occur under rule 27, then the authority given by both clients negates the need for an appropriate individual to give authority under rule 21. This stresses the importance of complying with rule 27 and ensuring both client files hold the required documentation to support the transfer.

Another area that the guidelines highlight is rule 17, under which the firm must first send a bill of costs or other written notification of the costs incurred to the client, and the funds earmarked for costs must then become office money and be transferred out of the client account within 14 days. The firm should establish systems for the transfer of costs from client account to office account and these normally should only be made on the basis of rendering a bill. Often, fee earners overlook the costs due to the firm and these can fall outside the 14-day rule. This stresses the need to have a policy in place so that as soon as a cost is earmarked, this is settled appropriately.

Procedures in place

Appendix 3 also assists practices in areas outside those covered by the rules. For example, paragraphs 4.4, 5.5, and 5.7 detail how the firm should have policies, systems, and procedures in place with regards to controlling access to funds, computerised records, and client account cheques. The guidelines suggest differing user rights, with those responsible for the input of data having 'write to' abilities and those who only need to view the information having 'read only' access.

The guidance also mentions that firms should ensure that unused client account cheques are stored securely to prevent unauthorised access, and that blank cheques should not be pre-signed. Such controls will not only help the practice to comply with the rules, but will also act as a control against the risk of fraud. This could have a positive effect on professional indemnity insurance policies.

The guidelines set out in appendix 3 can be a useful tool, not only when looking at a prospective new system, but also for regular internal review of existing systems as part of the COFA's responsibilities. The change in the rules allows reporting accountants to make comments on ways the systems and controls can be improved, which ultimately allows for a closer working relationship
with the practice to prevent
the misappropriation of
client funds.

Gavin Hooker is an accounts and outsourcing supervisor at Kreston Reeves @KrestonReeves www.krestonreeves.com

Copyright & permissions