Over and above

The current Solicitors Regulation Authority (SRA) Accounts Rules only strictly expect us, as reporting accountants, to establish that client money reconciliation statements are being performed and that they are retained for at least six years.

It would appear that this confirmation is sufficient to enable us to complete that
part of our examination work. However, we pay far more attention to these reconciliations than merely confirming their production and retention.

The rules require that,
in respect of general client accounts and separate designated client accounts,
a reconciliation between the client cash book, the client
bank statements, and the ~matter balance listing must
be undertaken at least once every five weeks. A statement
of reconciliation between these three sources must be produced, reviewed, and retained.

In general, we have found
that most accounting software packages for managing client money undertake the reconciliation between cashbook and bank statement easily, at the click of a button. It is the third step which is often missed – the reconciliation with the total of the client money held by the practice, as shown on the matter balance listing. It is not enough to simply check that it agrees – the rules
say that a statement must be produced, and to do this may require some extra work and
the maintenance of a separate spreadsheet outside the client accounting package.

Paragraph 5.4 of Appendix 3 to the Accounts Rules, ‘SRA Guidelines – Accounting Procedures and Systems’, provides further details of
the minimum requirements
to be met in respect of these reconciliations. As the last step, the guidelines suggest that a manager of the practice or the compliance officer for finance and administration (COFA)
should check the reconciliation statement and take any corrective action.

System check

If this is all being undertaken
by the practice, then why do we spend more time looking at client money reconciliations than the testing rules would indicate
that we need to? The answer
is because they can provide us
with a wealth of information about whether the client money function of the accounting system is working effectively.

With the reconciliations providing us with a list of client ledger balances, outstanding cheques, and outstanding lodgements, as well as an overall balanced statement, there
are many areas of the client accounting function that we
can check from this source.

The matter balance listing can easily lead us to debit balances on individual client ledger accounts. A review of the ledger account will reveal to us why the account became overdrawn and what remedial action was taken. A vast number of debit balances on the listing will tell us whether there
is a fundamental problem with the system in place for the withdrawal of funds from
client accounts.

The matter balance listing will also identify to us whether any suspense ledger accounts are
in use. Suspense accounts are permissible under the Accounts Rules, provided their use is temporary. Any prolonged use
of a suspense account would highlight to us that either there is a portion of unidentified client money being held or the practice is not opening an individual client matter account for each client.

When reviewing the reconciliation between the client cashbook and bank statements, we review the list of outstanding cheques and lodgements.
The age of the outstanding cheques can tell us whether
the firm is poor at chasing up, clearing, or reissuing stale cheques. The length of time taken for the outstanding lodgements to clear the bank can highlight to us whether there are issues with regard to the prompt banking of incoming receipts.

Three-way reconciliation

Our review of the overall three-way reconciliation statement will identify whether the system is out of balance
or whether balancing figures are being used to make the statement agree – a clear indication that postings have gone adrift.

Finally, we can easily see
if a manager or the COFA has been involved in reviewing the reconciliations by evidence
of his or her signature on it.
A lack of review might indicate that controls are lax in the accounting function.

The three-way reconciliation statements are a fantastic tool for demonstrating that the client money accounting function is working as it should. Although
it may appear that our review of the reconciliations is over and above what is expected by the SRA, we have seen clear evidence from SRA practice
unit visits that they place just
as much importance on the three-way reconciliation as we do. Placing importance on these statements internally, therefore, will assist in maintaining a
clean bill of health in respect
of client money. SJ

Jennifer Martin is a business supervisor at Kreston Reeves

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