Simplifying the accounts rules

New rules on independent oversight of how solicitors hold clients’ money seem a neat compromise between keeping the principle of using accountants and reducing unnecessary burden.

The whole issue has been vexed. The SRA had initially proposed abandoning the requirement to have an annual accountant’s report, leaving responsibility to individual compliance officers at firms.
But there was concern that
this would strain solicitors
and potentially undermine public trust.

The new simplified system retains the requirement for
an annual accountant’s report, within six months of their financial reporting period, but only requires practices that are ‘qualified’ in particular ways,
in other words in breach, to be reported to them. It comes into effect on 31 October, the start
of a three-phase introduction.

Phase two, which includes a new format for the accountant’s report, comes into force
next April.

Important safeguard

The changes have been welcomed by the Law Society and many solicitors, who see
the accountant’s report as an important safeguard of client money. They are certainly a positive step in balancing a desire to reduce the load on solicitors and the SRA while
at the same time offering reassurance that client money
is held properly.

The SRA has also announced that firms entirely funded by the Legal Aid Agency will be exempt from the requirement to obtain an accountant’s report, which will be welcomed.

A key question for everyone else must be whether every accountant adopts a consistent approach to examination and determining which breaches of the rules result in qualification of the report, the trigger for a submission to the SRA.

This is particularly important in the age of outcome-focused regulation, as it seems more likely that the SRA will rely on submitted reports as a risk indicator in their overall assessment of solicitors.

The SRA hopes that phase two of its plans will deal with this concern, aimed at ironing out inconsistencies by amending the accounts rules to reflect revised criteria for the circumstances that would trigger a report to be qualified.

An over-arching intention of the changes is that the SRA rely more on the accountant’s professional judgement in identifying significant risks
to clients monies and interests, and not just on box ticking, to make that clear.

A little more than 5,000 accountants’ reports were qualified in 2013, but the SRA only wrote to about 200 firms
as a result. The other 4,800 were plainly of no great concern. These figures alone suggest it seems right that the rules and the report should be revisited without being abandoned.

It is to be hoped, but remains unclear, that the changes will allow accountants to place more emphasis on considering the internal controls and financial stability of firms, which are likely to be of more value to practices than a focus on what are often just technical breaches.

The SRA has said that it wishes to be both more proportionate and targeted in its approach. The indications are that phase two will also see consideration of whether there are further categories of firms that can be excluded from the requirement to obtain an accountant’s report, although there is not
yet any clear indication of what criteria the regulator will be applying to determine further exemptions.

Full review

Finally, phase three, in April 2016, will see the SRA conduct
a full review of the accounts rules with the aim of reducing their length and complexity. This comes with an earlier stated intention to look at alternatives to the holding
of client money.

The ideal outcome from the changes being put forward by the SRA will be to reward compliant firms with robust procedures and training with reduced burden, while bearing down on those that continue to materially breach the rules.

The consultation procedure itself will have encouraged many solicitors to view the potential removal of the accountant’s report as an opportunity to consider internal procedures, especially since the SRA planned to rely on an annual declaration from each firm’s compliance officer to finance and administration (COFA) instead.

These steps have not been wasted, despite the actual changes being less revolutionary than initially proposed.

Solicitors should still take the opportunity to get added value from their accountant’s report and seek guidance on improvements to their internal procedures. This will reduce the likelihood of breaches. SJ

Jennifer Williamson is a business services partner at accountancy firm Reeves

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