Missing a trick: SRA should utilise its Accounts Rules

With the current concentration on ‘firms in financial difficulty’, there’s
an interesting – by which we mean potentially damaging – tension between the requirements of the SRA, the obligations of reporting accountants, and the position of
the COFA.

The reporting accountant and the COFA both have prescriptive obligations to the regulator, yet one wonders whether the SRA makes enough use of existing SAR mechanisms to protect consumers and well-run firms from the costs and disruption of those in financial difficulties.

The SRA has a duty to protect consumers, especially in the event of liquidation or default. Yet their recent research into firms in financial difficulties (‘Steering the Course’) shows disturbing trends in management of client monies, identified as one key indicator of firms with problems.

We were surprised at the counter-intuitive claim that: “Breaches of the SRA Accounts
Rules were only present in a small proportion of cases. This illustrates that simply relying on identification of breaches of accounts rules will not allow a regulator to adequately identify law firms in financial difficulty.”

Yet Mike Haley, SRA director of supervision, said: “Tough economic times can sometimes lead ethical and upstanding solicitors to stray from the straight and narrow. They think that because they are breaking the rules for the best of intentions – to keep the firm afloat – that this is somehow acceptable.”

We’re concerned that the ongoing and increasing likelihood of firms in financial difficulties will cause potential issues to be overlooked and opportunities to act will be limited. Whatever the intention of the report,
we question whether SAR requirements are a missed opportunity.

The COFA perspective

Many law firm partners who were appointed as COFA only one year ago are still learning their trade. You would hope their regulator is going to be understanding and supportive, and that’s certainly the message coming out of the Cube.

Yet while that may be so, many COFAs are understandably nervous about approaching the SRA with concerns, given the potential for further enquiries and investigations.

Principle 8 of the Code of Conduct expects firms to run their business effectively, in accordance with proper governance and sound financial and risk management principles. Chapter 10 gives clear Outcomes and Indicative Behaviours for the more obvious reporting instances, including where the COFA has to report ‘serious financial difficulty’, ‘serious failure to comply’ and ‘serious misconduct’.

There follows a list of indicative behaviours, including some real humdingers such as not paying salaries, or as we’ve recently seen from
the SRA in their ‘Steering the Course’ report,
misuse of client monies.

So far, so good. We have no problem in agreeing that these are likely to evidence financial problems – and so should be reported.

All of which leads to fear among some COFAs about the risk of reporting something to the SRA which in truth will not be a cause for concern, and the potential for consequences far beyond what might be considered proportionate.

We’re sure the SRA will deny such accusations – they should – yet the fact that some COFAs perceive that unnecessary reporting of minor issues will cause problems is the reality with
which the SRA must deal. Because forgoing
those reports might increase the likelihood of missing warning signs.

Whilst there will be errors in meeting SAR through administrative oversights, missed mixed money payments and late transfers of perfectly legitimate payments for invoices, are these indicative of the sort of events which must be reported? When some, because of quantum or cause or oversight, only might, in the greater scheme of things, not be considered anything other than human error?

This concern is more applicable, we appreciate, to the smaller firms who might not have a finance director and responsibilities rest with partners who have never had reporting responsibility before.

The reporting accountant perspective

The reporting accountant (RA) has some, yet perhaps insufficient, reporting obligations under the SAR (rules 35 and 38 through 40), which can be mitigated under rule 41. Indeed, reporting accountants are obliged to report things they’ve seen (rule 35) whether trivial or not.

How the SRA will view any differences in what the RA reports and the COFA records in a breaches register to include minor breaches, remains to
be seen.

If ‘Steering the Course’ considers SAR breaches to be present in only a small proportion of cases, is there any link to the fact that the reporting accountant is not obliged to fully audit the firm’s books? Under rule 41, the firm is not obliged to provide, nor the reporting accountant to ask for, documents beyond those provided by the firm.

Indeed, that dispensation extends under rule 41.1 to include stocks, shares, other documents of title, whether accounting records are written up, or to make a detailed check on compliance.

Good news for the RA, but less so for the clients, perhaps, and the properly run law firms who have to pick up the tab for failure.

The SRA perspective

And so to the SRA perspective. Remember that its interest is safeguarding the client, including identifying those failing firms that will cause problems for the sector. Our worry is that there are holes in the SRA supervision process for identifying failing firms – and thus a contingent cost on those firms not in financial difficulty.

SJ

John Wade and Chris Robinson are partners at consultancy firm Wade Robinson www.waderobinson.co.uk. Contact john.wade@waderobinson.co.uk