Preparing for changes to the SRA Accounts Rules

On 2 September 2015, the Legal Services Board approved ?the Solicitors Regulation Authority’s (SRA) application for changes to the SRA Accounts Rules 2011. This is ?the next step in the process of simplifying the Accounts Rules, which has been an ongoing project for the last couple of years.

The changes this time round include the removal of some of the prescriptive requirements relating to the tests that reporting accountants have ?had to conduct. There will be ?a greater reliance on the professional judgement of the reporting accountants, and the SRA has expressed some concern that accountants may therefore increase their charges to take account of the need to design more individual plans to test compliance. 

Accountants will be obliged to consider a number of factors, including the size of the firm, the nature of the work undertaken, the number of transactions, ?and the amount of funds held. Reporting accountants may also consider the firm’s existing systems and the compliance officer for finance and administration’s (COFA) register of material and non-material breaches. 

Firms that hold an average statement or passbook balance of less than £10,000 (or the foreign currency equivalent) in their client account during their accounting year, and whose balance held does not exceed £250,000 (or equivalent) at any time in the same year, will be exempted from obtaining an annual accountant’s report unless the SRA directs otherwise. The SRA estimates that this will relieve around 13 per cent of firms of the burden of obtaining a report. Such firms will still need to file ‘cease to hold’ reports if they stop holding client money altogether. 

Qualified reports

Changes have also been made that will affect the circumstances in which an accountant’s report should be qualified. The current description of a qualified accountant’s report is one that ‘the reporting accountant has found necessary to qualify’. ?The new description is where ‘the reporting accountant forms the judgement that these rules have not been complied with such that the safety of client’s money is at risk’. 

In some ways, this definition ?is problematic in that it requires the reporting accountant to take a view on risk to client funds. ?This may vary depending on the professional judgement of individual reporting accountants and the size and nature of a firm, so that breaches may not be reported consistently, particularly where the purpose of a particular rule is not directly related to the protection of client funds. 

The SRA is to issue specific guidance on this point, currently available in draft form only. ?The SRA’s draft guidance to reporting accountants makes clear that it expects reports should only be qualified where breaches are material and likely to put client funds at risk. This is likely to be where non-compliance has been intentional, or the result of serious failures in systems or controls such that there has been a systematic breakdown of controls designed to prevent breaches. 

This should mean that reporting accountants ?can take a more robust and proportionate approach to qualifying reports, based on their assessment of risk to client funds rather than technical compliance that does not increase risk. That said, the SRA has deliberately shied away from exhaustive or mandatory guidance and will expect reporting accountants to use their professional judgement. 

Other changes that are introduced are of specific interest to firms with overseas branches and registered European lawyers working in exempt European practices. 

Agreed approach

Firms should familiarise themselves with the changes ready for their formal introduction, in particular ?the changes related to record keeping since the mandatory period for which engagement letters and accountant’s reports must be kept is being doubled from three to six years. 

Firms may wish to enter into discussions with their reporting accountants and work together to develop an agreed approach to test procedures. Firms may also wish to ask reporting accountants to cover more than the minimum required areas as an added extra to assist with compliance more generally.

Given that reports will, in future, be submitted only when qualified such that client funds are thought to be at risk, it is a reasonably assumption that qualified reports will be considered in some detail by the SRA, and it is likely that firms submitting qualified reports will attract closer attention from the SRA once the new rules have been absorbed by firms and their reporting accountants. SJ

Susanna Heley is a solicitor at RadcliffesLeBrasseur @RLB_LAW www.rlb-law.com