Further to the SRA’s Compliance Conference this year, it became apparent that misuse of suspense accounts irritated them!
Whether you are in legal finance as a Legal Cashier, or a COFA, hopefully this short guide will offer you confidence, knowledge and/or clarification of what the Solicitors Regulation Authority expects from you. Have you seen evidence of your practice failing to return client monies promptly at the end of the matter? Do you see various accounts with a couple of random receipts sitting there?
This article is predominantly for a law firm’s Compliance Officer for Finance and Administration (COFA) and other managers who work with their reporting accountant.
What is a Suspense Account in a Law Firm?
A suspense account is an account used to temporarily record items that are unidentified or cannot be recorded to the accounts yet. In a legal practice, “miscellaneous” accounts are not allowed, and each client must have their own individual ledger account, so it’s a red flag is you come up against “miscellaneous”.
Such an account should only be used as a short-term holding account and any funds placed therein should be investigated, at least monthly.
What is your internal policy on suspense accounts? Do you regularly review that policy to ensure that all the suspense accounts are regularly being cleared?
To clarify, suspense accounts can only be used where the solicitor could justify their use, e.g., temporary use on receipt of an unidentified receipt whilst there is a timely need to identify the client concerned. Once a receipt is identified, it must be transferred immediately to the correct account.
What is Suspense Account Good Practice?
Good practice should see suspense accounts cleared down by month end, if not before.
It may be useful to look at the suspense ledger in your own firm to ascertain what entries are usually within it and “why?”. Large volumes of the same type of entries recorded to the account consistently, could be an indicator of systematic failure, poor systems, and controls within the business.
The Sole Practitioners amongst you who have a freelance Legal Cashier on your books need to receive any cheques in adequate timing and have processes adhering to online banking. Or maybe you are in the accounts department and frequently find that partner receipts are not being passed to you in a timely manner? To ensure you are all compliant with Rule 2.3:
"You must ensure that client money is paid promptly into a client account"
SRA and Suspense Accounts
The SRA’s Compliance Conference speakers confirmed that they are seeing too many suspense accounts being used inappropriately. Improper use of a suspense ledger could lead to your reporting accountant* qualifying their report to the SRA.
Although the SRA only expects accounting reports to be qualified where there has been a significant breach of the Accounts Rules, the authority does not expect continuous breaches arising from persistent administrative errors when it comes to lack of controls or breakdown of existing controls and have put client money at risk.
*Reporting accountants are under a statutory duty as set out in section 34 of the Solicitors Act 1974 and section 5, schedule 2 of the Administration of Justice Act 1985, to immediately report to the SRA the following:
- any evidence of theft or fraud in relation to money held by a solicitor or a law firm for a client or any other person or in a client account or an account operated by the solicitor
- if they have concerns about whether a solicitor or a law firm is fit and proper to hold money for clients or third parties or operate any such accounts.
The SRA’s guidance has all the information you would need for “Planning for and Completing an Accountant’s Report”; and when a suspense account can be used, and how they are indicative:
- Above adequate
- Adequate
- Below adequate
Below is the key’s terminology being succinct words.
SRA Guide - Above Adequate
Where suspense accounts are used, items are usually no more than, for example, five days old.
SRA Guide - Adequate
Where a suspense account is used, items are usually no more than, for example, 30 working days old.
SRA Guide - Below Adequate
Widespread unjustified use of suspense accounts.
No process for clearing suspense accounts or outstanding items not followed up.
Suspense Accounts Summary
We would say that if you are aware that there have been several accounts set up as “suspense ledgers”, whether they are called “miscellaneous”, a under a fee earner or partner’s name, make sure you know that those accounts should only be used for temporary items (such as an unidentified receipt), and therefore have the confidence to stand up to a partner or fee earner in your firm to explain why you need their clarification of which client matter that receipt should be on, in a swift manner.
The SRA sees these types of accounts repeatedly and although not on their high-risk radar, will want to know if there are several that are persistent.
To summarise, make sure you allocate those “temporary” funds and make sure you do it accurately. Make sure you transfer them away from the suspense ledger BEFORE 30 days at the very least.
Being proactive is best practice, by consistently reviewing any suspense accounts. If you are a COFA or in Legal Finance and not a member of the Institute of Legal Finance & Management, then please consider gaining membership HERE for on-going support and training.
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