The obligation to obtain an accountant's report

For solicitors who held little client money in an accounting period, previous versions of the SRA Accounts Rules were unclear about whether they would need to be subjected to a client money examination and require an accountant’s report.

The guidance notes stated that when a small number of client money transactions were undertaken or where a small amount of client money was held, then a waiver could be granted. However, the rules never gave any indication of what constituted ‘small’.

This meant that the waiver had to be applied for, together with a requirement to submit client bank account statements and client ledger accounts, and each case reviewed on an individual basis by the SRA.Greater transparency

Now, the SRA has attempted to be transparent by setting out specific circumstances under which a practice would not have to obtain an accountant’s report.

The rules state that if all the client money held or received during an accounting period is money from the Legal Aid Agency, then there is no requirement to obtain an accountant’s report.

Furthermore, there is also no requirement to obtain an accountant’s report if the client money held or received in an accounting period does not exceed:

• An average of £10,000; and

• A maximum of £250,000.

The SRA continually says that its key objective in relation to its reform programme is to keep regulation proportionate and to reduce the red tape experienced by solicitors. While definitely more specific, has this revision to the rules benefited anyone?

Presumably, there is now less paperwork to be sifted through by the SRA compared to when it previously had to assess a waiver to the obligation to obtain an accountant’s report on a case-by-case basis. This is an obvious win.

Clarity with regard to what the SRA considers to be a small volume of client money is also surely useful, and prevents solicitor practices that hold little client money having to submit their client bank statements and records to the SRA year on year, and then wait to hear back about whether they need to instruct an accountant to perform some work. This is definitely a reduction in the administrative burden.Increased costs

However, as reporting accountants, this year we have experienced the frustrations of having to perform a client money examination for a practice that used to repeatedly be successful in obtaining a waiver, because in this accounting period, the average client balance was marginally above £10,000. So while the intention is there to help reduce red tape, in this particular case, it has not been successful. The specific limits in the rules actually feel rigid and result in an increased cost to this particular practice.

In this case, the practice only holds money on account of fees and then transfers that money across to office account when work has been undertaken and a fee note raised. In these circumstances, it is difficult to see how obtaining an accountant’s report is beneficial to the practice, the SRA, or the public.

Unless the new rules explore the nature of the client money held and length of time it is held on client account, several practices may find that, while they used to be granted a waiver, they now cannot avoid having to obtain an accountant’s report.

The SRA, however, appears to be proposing a change to the definition of client money which may benefit the aforementioned practice. This change is detailed in the third phase of its ‘Looking to the Future’ consultation.

In the consultation, the SRA proposes to simplify how money received for fees is treated, through discarding the current contradiction in the banking requirements for money received in respect of fixed fees, which is office money, and payments on account, which is client money.

Under the new proposed rules, all fees would be regarded as office money – the idea being that the practice that holds little client money would then hold even less of it than before, once it can start banking payments on account of costs straight into office account.

This is welcome news for such practices and will definitely go some way to assisting with the reduction of the regulatory burden currently imposed upon them. We can see that the SRA is trying to help practices by further reducing the amount of client money that they will hold in the future. The feeling is that this cannot come soon enough.

Jennifer Martin is an accounts and outsourcing manager at Kreston Reeves

@KrestonReeves www.krestonreeves.com