Shifting the focus to prevention, not correction

The recent SRA regulatory reform begs the question whether a qualification on a practice’s annual accountant’s report will bring with it a greater sense of negativity than in the past.

Having made contact with only 200 firms out of a possible 5,000 who were issued with qualified reports in 2013, it is likely the aim of the revised regulation is to reduce the number of reports
the SRA receives which require further consideration. From this statistic, one can also deduce that what is deemed by the SRA as a serious ‘non-trivial’ breach is different to the definition applied by reporting accountants.

We are currently awaiting
the second phase of the reform, which it is hoped will address the disparity of what constitutes a material and qualifying breach. A move surely welcomed by all, and one without which the number of qualified reports would certainly remain unaltered, thereby rendering little benefit to either the SRA or solicitor practices.

By clarifying which breaches the SRA are most interested in, this will hopefully lead to only
the most serious issues being reported. A qualified report will therefore be a far more useful indicator of serious non-compliance than it currently is.

While useful for the SRA, will a qualified report bring further complications for a practice’s trading ability? A common question from professional indemnity insurers is whether a firm has received a qualified report in recent years. One would suppose that a revised approach to qualifications would result in higher premiums for those firms in serious breach of the rules.
A fair result, some might say,
but only so long as a consistent approach to qualification is applied.

Categorising breaches

For now though, the reporting accountant, and indeed the compliance officer for finance and administration (COFA), remains reliant on the current published guidance of what constitutes a material breach. This guidance indicates that a breach could be considered to be material if a client’s money was at risk, if there was a pattern of breaches (indicating a clear systems weakness) and if breaches are not corrected promptly on discovery.

When the revised regulation comes into force, a qualified report is surely what every practice will wish to avoid
in order to remain under the
radar from a time-consuming regulatory visit. How, therefore, can a practice ensure that they will not generate a qualification in the first instance? The solution lies within the systems.

There are two common and easily rectifiable breaches:

1) Overdrawn client money balances: a simple routine for fee earners such as checking the client ledger account balance before requesting the withdrawal of funds will prevent overdrawn client money balances for that particular client. This is a common breach. Such a routine for each and every fee earner will prevent a pattern of similar breaches, thereby assisting to persuade the reporting accountant that any such breaches identified are isolated and therefore do not warrant reporting to the SRA.

2) Delay in banking client money: systems such as recording all incoming client cheques in the post will assist the accounts department in providing them with certainty that all client money received that day is being banked promptly.

A simple solution to identify many other types of breaches is to put a standard policy in place which forces fee earners to review the transactions on
client ledger accounts on their portfolio on a regular basis.
This will help identify many anomalies by the person who is best placed to recognise that a problem has arisen.

In a busy practice, this may appear as yet another task to try to fit in during the already hectic day. However, in doing so, and confirming that no breaches have been identified, the COFA can rest assured that the fee earners they are relying on are playing their part in regulating the practice.

The key point to remember
is that breaches will inevitably occur but, when they do, prompt identification and correction
is vital.

Given the brief guidance currently in place, it is no surprise that an inconsistent approach is being applied. But by shifting focus to prevention, rather than correction, the COFA and reporting accountant will receive much needed comfort that the practice is doing all it
can to avoid a qualified report both now and under future regulation. SJ

Jennifer Martin is a business supervisor at Reeves

Copyright & permissions