What to expect from your accountant this year
In light of the amendments to the Accounts Rules, Samantha Mason reviews the steps accountants will take to assess firms' risk levels and test compliance
Many solicitor firms have financial year ends of 31 March or 30 April and these firms will be getting ready to welcome their accountants for their annual examination on the Accounts Rules 2011.
Firms should already be aware of the amendments made to the 2011 rules. As a reminder, the deletion of rule 39 removed the list of prescribed work and test procedures that accountants had to undertake each year to perform the ?annual examination, and the new rule 43A.1 introduced the requirement for accountants ?to exercise their ‘professional judgement’ in determining ?the work required for the solicitor firm.
So, should solicitors be concerned about their next annual examination?
First, let us consider ?the amount of work to be undertaken. The level of ?work required will always ?be determined by the level ?of risk associated with the engagement. Accountants will have to consider a large number of factors to determine ‘risk’ and many of these are inherently embedded within the business itself, for example:
The number of fee earners;
The type or nature of work undertaken;
The volume of transactions undertaken; and
The value of client funds held.
Residual risk is also taken into account. This is the amount of risk attributable to the firm after its controls have been taken into account. The accountant will have to evaluate the firm’s systems and controls to establish how well they work ?to protect client money. Initial indicators of residual risk are ?as follows:
The previous year’s compliance history;
Problems recorded within the register of the firm’s compliance officer for finance and administration;
Monitoring visits made by the Solicitors Regulation Authority (SRA) in the year;
The firm’s attitude to risk; and
The financial performance of the firm in the year.
Once the level of risk is determined and the amount ?of work considered, the accountant will want to ?test compliance.
In the absence of rule 39, a systematic approach towards the examination is required. Many accountants will already have incorporated systems-based testing into the procedures outlined by rule 39 to ensure the examination is performed accurately and comprehensively. Where this ?is the case, solicitors should ?not see too much change.
Bank reconciliations are an excellent indicator of good compliance. Your accountant will ask for copies of your reconciliations and will perform a number of detailed checks upon these. You should expect to be able to explain any differences or adjustments on the reconciliations and have reasons for any uncleared transactions or any longstanding balances.
General client accounts, designated deposit accounts, ?and office account reconciliations will be looked at during the course of the examination.
Your accountant will place a strong emphasis on file review testing as this is the most comprehensive way to test a firm’s systems and controls, ?and its compliance with the Accounts Rules.
The accountant will read through these files in detail, to ensure that receipts, payments, and transfers are made and recorded in accordance with ?the rules, and that all financial transactions included within the file are recorded on the ledger and vice versa. The accountant will also review general compliance with the rules and ensure there is a legitimate reason for all client money transactions.
File reviews provide the accountant with an opportunity to check whether there has been appropriate authorisation of payments, any instances of overdrawn client accounts, whether residual balances remain at the end of the matter, and so forth.
Receipts and payments
Your accountant will test receipts and payments by comparing bank statements to your cashbook and/or client ledgers as necessary, to ensure accounting records are accurate, and to check that payments are authorised and receipts are banked promptly.
Bills may be reviewed to ensure that the fee is properly required, and that transfers from client account to office account are made in accordance with the rules.
So, to conclude, while ?the Accounts Rules have of course been updated, it will be changes in the risk associated with the engagement that cause your accountant to vary the amount and type of work performed when completing the annual examination, rather than the change in the rules themselves.