Why we love a three-way client money reconciliation
By
Emphasis on the comparison between the cashbook balance, bank statements, and matter balance listing will help firms comply with the Accounts Rules, explains Samantha Mason
Many solicitor practices have March or April financial year ends and, as a result, spring is the joyous time of year when firms will be preparing to welcome the accountants for the annual SRA Accounts Rules examination.
Most partners, managers, and accounting staff within the solicitor firm will be well aware of the rule changes introduced last year, which shifted the requirement of the accountant to undertake prescriptive testing to that of utilising ‘professional judgement’ to decide what work is required and what information we examine.
One of the key areas we accountants love to test, and exercise our professional judgement upon, is a thorough examination of a firm’s three-way reconciliation. This is the comparison between the balance of client money recorded in the firm’s cashbook, the bank statements, and the matter balance listing.
Three-step process
Most accounting software packages will undertake a comparison of the cashbook balance and the bank statements as part and parcel of the standard bank reconciliation process. However, in this world of ever changing technology, it is surprising that most software packages fail to then undertake the third step of the three-way reconciliation, as the matter balance listing will not normally be included in the electronic reconciliation process.
It is not enough for the accounts department to simply check that it agrees – the rules say that a statement must be produced, and doing this may require some extra work and the maintenance of a separate spreadsheet outside of the client accounting package.
So, if all is undertaken correctly by the practice and a three-way reconciliation statement is produced, you may question why your accountant places so much emphasis on examining the reconciliation itself.
The answer is that we love a three-way reconciliation. The reconciliation statement is a fantastic indicator of whether the controls and systems in the firm’s accounting function are operating as they should. With the reconciliations providing us with a list of client ledger balances, outstanding cheques, and outstanding lodgements, as well as an overall summary of all client balances in the bank accounts themselves, there are many areas of the client accounting function that we can check from this source.
Identifying issues
The list of client ledger balances should show all the client money held on a particular matter. Often the computer software will be able to identify where balances have not moved for a long period of time – which may prompt further investigation as to why the funds have been held on account for so long. The list will also highlight any negative balances and therefore allow overdrawn client accounts to be identified quickly and easily.
A review of the matter names included on the list of balances will allow us to identify whether any suspense accounts have been in existence. While suspense accounts are permitted by the Accounts Rules so long as their use is temporary, any longstanding balances or over-use of the suspense account itself are likely to represent breaches of the rules and therefore further investigation may be required. A review of the list may also highlight whether any partners have had any private matters dealt with through the client account, which would be another area we would want to ensure was compliant with the rules.
The bank reconciliation itself will list all outstanding cheques and lodgements at the reconciliation date. Ideally this should include only the most recent transactions which would not have cleared the bank. Longstanding unbanked cheques could be an indicator that the cheque has been sent to an incorrect address, incorrect individual, or in fact not been sent out of the office door at all despite being drawn up on the client ledger. You would be surprised how often this occurs in practice. The age of outstanding items can tell us at a glance whether the firm is poor at chasing up, clearing, or re-issuing stale cheques.
The length of time taken for the outstanding lodgements to clear the bank can be an indicator of any issues with the prompt banking of incoming receipts.
Any breaches identified by reviewing the three-way reconciliation are of course now viewed in the context of ‘materiality’ and only ‘significant’ breaches need be reported to the SRA. The issues highlighted in this article demonstrate that placing internal importance on the three-way reconciliation will greatly assist firms in complying with the Solicitors Accounts Rules.
Samantha Mason is a chartered accountant with Kreston Reeves