Claire Ambrose, Chartered Accountant with Bishop Fleming, provides timely guidance on a few common breaches of the SRA Accounts Rules.
- Residual balances:
Under Rule 2.5 of the SRA Accounts Rules 2019 the solicitor must:
“ensure that client money is returned promptly to the client, or the third party for whom the money is held, as soon as there is no proper reason to hold those funds”.
So, what is promptly? Is it a week, a month or even 6 months?
The SRA leave that for the judgement of the practice, and we would advise that the firm sets out clear targets and procedures to be followed to ensure this is achieved.
It is also a judgement for the Reporting Accountant: are the policies the firm has opted for adequate?
The SRA are of the opinion that this is a key area – as the longer funds are retained by the solicitor at the end of a matter the higher the chance that the client will become untraceable.
The SRA state that ‘all reasonable steps’ should be taken to find the client. This is subjective and will largely depend on the amount of funds remaining on client account at the end of a matter. In this day and age, we are seeing solicitors resorting to social media to trace clients where the more traditional methods have failed.
It is apparent that many firms take a far more relaxed view of individual residual balances below £500 as they do not need to contact the SRA for specific consent to pay these to charity. It does beg the question as to what is a reasonable effort for a smaller balance – and whether the £500 limit is correct.
Firms should be aware that just because a balance is under £500 it does not mean that it will automatically escape qualification.
When there are residual balances and efforts to trace the client have been unsuccessful, the solicitor should record all steps taken to find the client.
This is not always being done and can prove to be the difference between a qualification and a management letter point at the end of the audit.
Evidence that the firm have been making a concerted effort to return funds within a reasonable timescale from the end of the matter is unlikely to give rise to a qualified report.
However, where no evidence of attempted contact has been retained, then not returning funds within a reasonable timeframe may prompt a qualification.
Generally, the balances that cause the most concern are those where the solicitor has had little to no contact and the case seems to be forgotten about. Some solicitors seem to have a list of ‘problem balances’ where all forms of contact have been attempted but they have been unsuccessful and the solicitor has left the balance on client account rather than dealing with it. I have come across balances left like this for several years. Quite often it comes down to having the time to deal with these troublesome balances – especially where they are over £500 and specific permission from the SRA is required. Obtaining permission involves completion of a three-page form detailing all the steps taken to trace the client to enable to SRA to make judgement.
Reporting of a breach is more likely where there are a number of residual balances where little or no action has been taken. This would then suggest a poorer control environment where residual balances are not isolated cases and client money is, therefore, at risk.
How to avoid this common breach of the SRA Accounts Rules
What can the solicitor do to prevent issues returning residual balances?
- Take as many forms of contact details as possible.
- Circulate inactive balances quarterly – and follow these up
- Have clear policies on closing clients and returning residual balances, with target dates
- Ensure any client account unpresented paid cheques are followed up on a monthly basis to identify at an early stage any which may become a problem – so further steps can be taken quickly
- Obtain client bank details so that payments can be transferred electronically, rather than relying on the postal system and the client banking the funds
- Bank reconciliations
Rule 8.3 states:
“You complete at least every five weeks, for all client accounts held or operated by you, a reconciliation of the bank or building society statement balance with the cash book balance and the client ledger total, a record of which must be signed off by the COFA or a manager of the firm. You should promptly investigate and resolve any differences shown by the reconciliation.”
With the impact of covid-19 from March 2020 there was a sudden move to working from home. We have, therefore, seen an increase of breaches in this area where the reconciliations have been done but they have been done late or not reviewed by the COFA (or an appropriate manager).
Solicitors have been battling with the new challenges of working from home where in some instances their systems were not geared up for this. Couple that with a key person – such as the legal cashier – being taken ill and there is a perfect cocktail for breaches to happen.
How to avoid this common breach of the SRA Accounts Rules
To avoid a breach most solicitors have been operating new ‘covid policies’ to cover remote working practices.
An example of this is using email authorisation instead of internal ‘chits’ for payments into and out of client account. The same with the bank reconciliation. If evidence is shown of a review by the COFA then there is no breach. It doesn’t need to be a ‘wet signature’ authorisation.
Another breach we have seen recently is that of Rule 10.1(b), in respect of the operation of a client’s own account, where bank statements are received but the 5-weekly bank reconciliations are not being carried out. This was not previously a requirement under the old rules, and firms where there are not many client-own accounts are often missing this new requirement.
Firms may be relying on the SRA’s exemption to do this so long as they keep a register of client-own accounts that are operated, keep a separate record of the transactions on the client-own account and record the bills and other notification of costs in relation to these matters.
Where all the records are available, the reconciliations need to be completed or there is a breach of the rules.
SRA Accounts Rules breaches: To report or not to report…
Whether to qualify on a breach – or number of breaches – will come down to the opinion of the Reporting Accountant, having used their professional judgement, as the SRA have steered away from setting clear parameters on this.
Factors that will be considered when deciding whether any breach is reportable will include:
- The nature of the breach – deliberate/ fraudulent activity is always going to be taken very seriously, but clerical errors may need further consideration to decide whether to report
- How the breach arose and whether it has / hasn’t been dealt with – and, if so, how quickly.
- Is the breach an isolated event or part of a pattern of poor internal control?
- Has the breach already been reported to the SRA by the solicitor?
- Does the firm have a history of previous similar breaches?
- What is the firm’s attitude towards the breach, and compliance in general?
- How much client money was placed at risk? Some breaches are clearly ‘trivial’ and do not need reporting. It then begs the further question as to what is ‘trivial’ of course….
Ensuring clear policies are in place and accounts are closely managed will reduce the chances of being in breach of the SRA Accounts Rules. Covid has certainly created challenges, but they are manageable.
Claire Ambrose is a Corporate and Business Services Manager with Bishop Fleming and has extensive experience of audits under the SRA Accounts Rules. She is able to advise on the application of the rules for solicitor practices.
Click here to view the original post