The Institute of Legal Finance and Management’s response to the Solicitors Regulation Authority’s consultation on reporting accountant requirements
Proportionate regulation: reporting accountant requirements
Do you agree with the proposal that we should rely more on the professional judgement of the accountant completing the report? Do you see any specific issues or concerns with this approach?
The ILFM recognise and value the professional judgement of the reporting accountant as an independent check of compliance for firms and support that the requirement to have such a report plays an integral part in the protection of client money. We therefore support the SRA’s decision to retain this requirement.
The value of relying on the professional judgement of the reporting accountant will like any profession rely on the experience and expertise that the reporting accountant has in reviewing solicitors practice. With a complete removal of defined test procedures that emphasis will increase. It is our view that in the absence of such defined guidance there could be inconsistency in the value of any reporting accountants report between providers. We recognise that the necessity for sampling will vary from firm to firm according to size, structure and type of work undertaken etc. and agree that systems and procedures should be tailored towards the needs of the firm however we would recommend that when the reporting accountant is forming an opinion around systems and procedures that there should remain some core checks that promote consistency between accountancy practitioners forming a basis of standard across the profession.
The report with some testing at least would continue to act as a deterrent for some firms and provides the finance team with some leverage to encouraging the firm to deal with issues such as residual balances, unpresented cheques, suspense balances if they have been unsuccessful in doing so throughout the period.
Like any business there will be competitive price structuring for the delivery of an accountants report. The ILFM therefore consider that in the event of complete removal of set test procedures there is a danger that the amount and type of sampling could vary significantly and that this could bring risk to the protection of client money across the profession as a whole and reduce standards previously maintained from firm to firm.
We continue to have concerns that the SRA rely on the opinion of the reporting accountant in assessing compliance with the accounts rules where the audit is not overseen by a professional holding a relevant qualification in the SRA Accounts rules. We hear from members that have experienced difficulties with their own reporting accountants making qualified reports where the firm considers, based on their own qualifications around the accounts rules, that there is in fact no breach.
It is our experience that many COFA’s are not happy to complete a declaration on firm compliance within the reporting accountants report however a section for optional firm response to a qualified report would allow the firm to highlight differences of opinion around qualified reports and allow the SRA to monitor the knowledge and effectiveness of the reporting account.
The ILFM also consider that the skill set for making such reports could be expanded out further; in particular many ILFM members are both qualified accountants and have additional qualifications in the SRA accounts rules. It is our view that the SRA should explore opening up this expertise to bring further innovation and competition which we feel would raise the standards across the reporting accountant’s role.
Do you agree with the revised criteria for qualification as reflected in amendments to the format of the accountant’s report located at Annex 1?
Generally yes but refer you to our points made in question 1
Do you have any specific comments on the proposed revisions to the format of the accountant’s report in particular do you think:
* that the wording covers the main areas accountants should be reporting on?
* that the level of detail we suggest is given by the accountant in the report if deficiencies are found is right?
We would expand point three to include:
‘the segregation of client and office monies as required by the accounts rules’
to incorporate the allowance of unpaid professional disbursements and mixed receipts
point 5 should be expand to include the proper use of a ‘three’ way bank reconciliation
We would amend point six to:
‘appropriate authorisation of transfer and withdrawals from client account this should also include consideration of rule 14.5 and the appropriateness of withdrawals in relation to the legal transaction.
We would advise that specific guidance for each element listed in point 3 is accompanied by some specified testing procedures by the reporting accountant to establish a standard of testing that reaches across the whole profession.
We feel value could be gained to include, in addition to the SRA COFA number, the registration number of any other professional organisations. This could serve two purposes; firstly to increase communication between the SRA and other professional bodies to ensure any disciplinary action is communicated between the two bodies and secondly as an annual indicator which could be used to consider risk of the individual in the COFA role. Someone who is part of a profession is likely to have to undertake annual CPD training and other forms of development to ensure their suitability as part of another profession.
Do you think that the revised approach will have an impact on fees charged by accountants to do the work?
We refer to our points raised in Q1.
In the absence of core test procedures there could be a reduction of standards across the profession with the amount of checks by accountants being cost led. We accept that with the retention of core test procedures that there may be cost implication to the firm but it is our opinion that this is necessary to ensure consistent standards across the profession as a whole. There is a danger that firms will opt for a reporting accountant due to cost competitiveness rather than a compliance culture and ultimately this could lead to increased risk to the protection of client money.
We would however consider that the move to decrease rather than eliminate test procedures will have positive impact on firm cost in this area and allow more flexibility suited to the firm enabling firms to benefit from a visiting accountant according to the size structure work type etc. of the firm.
Do you consider that the revised approach will have any impact on attitudes to compliance by COFAs/the firms?
The proposals set out should reinforce the emphasis on systems and procedures however those acting as COFA should already have the correct attitude to this method and its effect on the protection of client money.
Do you think that the proposed changes should be supported by separate guidance to aid the accountants in the work they should be undertaking?
Yes but this should still include core testing to ensure consistency across the profession.
Do you consider that it would be helpful to require a declaration of compliance by the firm with their obligation to obtain/deliver a report in accordance with the Accounts Rules as some stakeholders have suggested to us? If you do it would be helpful if you could explain why.
We understand that there is an argument that there could be false declaration where firms have chosen to ignore the necessity to obtain a reporting accountants report however it is our opinion that false declaration would increase the seriousness of any non-compliance and support any disciplinary action taken by the SRA. It would place the emphasis on dishonesty. We would recommend incorporating a signed declaration by a partner of the firm rather than a COFA perhaps as part of the practising certificate renewal process. Declaration will diminish any possibility of firms using the defence of lack of knowledge. A simple one or two sentence declaration is considered a sizeable reduction in SRA administration in comparison to receiving unqualified reports which we have seen historically.
We would expect the SRA to ‘spot check’ compliance with this obligation however we are concerned with new entrants entering the market where the SRA have no previous history on which to assess risk, there is also a considerable danger that firms which have historically fared well and shown strong compliance could suffer difficulties or changes in resources that result in diminishing responsibility in this area and that such firms may fall under SRA radar.
Do you think that the existing obligations on reporting accountants to notify us immediately of significant concerns during the course of preparation of their reports should be tightened or enhanced in any way?
The accountants will be covered by their own professional obligations and the duty of care to the SRA. The existing obligations should therefore prove adequate in the notification of significant concerns to the SRA around the accounts rules. However there is an argument that historically it has been unclear where the reporting accountant’s duties end, and traditionally with the relationship being between firm and accountant there has been reluctance to whistle blow. This is an ideal opportunity for the SRA to provide defined clarification is this area.
The financial stability of firms in relation to client money protection should be covered by the reporting accountant’s necessity to assess effective oversight by management.
We therefore consider that the existing obligations are generally sufficient.
Do you think we should be exploring the option to require reporting accountants to deliver reports to us as opposed to leaving the obligation on the firms?
With firms having a requirement to report these to the SRA there should be no conflict with the report being directed to the SRA by the reporting accountant. This could quicken the reporting of qualified reports to the SRA where there are substantive concerns over firm controls and elevate any non-disclosure.
There is however the potential for difficulty where the reporting accountant may change from year to year.
We understand that this would require additional access to the SRA portals at a cost to the profession and so our view is that the delivery of qualified reports is better left as the responsibility to the firm with a declaration by the firm on annual renewal of practising certificates.
Do you agree with the proposal to introduce risk-based criteria that will exempt firms with a certain profile from the requirement to obtain and deliver an accountant’s report?
It is the ILFM’s view that although we recognise that to the legal professionals firms holding smaller amounts of client funds could pose a reduced risk we consider that any loss to client money has a substantive impact on the trust of the profession as a whole. We consider that loss to any individual client can have an impact irrespective of the amount.
Do you agree that our proposed criteria capture a lower level of risk to client monies? Are there any concerns that these criteria pose an unacceptable level of risk to client monies? Or do you think we have missed other criteria?
It is the view of the ILFM that there should be no further exclusion to reporting on client funds held. There are ways of adapting your balances to reduce the amount held below the required threshold for example drawing client cheques. There is also no consideration being made for money held by other parties on behalf of your client. We also feel that issues such as residual balances would be in danger of being over looked.
If the SRA are to move forward on the proposed criteria of removing the necessity for a accountants report where firms hold client funds of below a certain amount it is our believe that this should be restricted to under £10k. We would be interested to establish whether this average balance is one that is taken from balances held at period end over the year as it is our experience this can differ substantially from average client balances as a whole.
We do not consider that a risk based assessment on the number of client transactions can be appropriate where those transactions can be of significant value and higher risk, combined criteria of a set number of transactions together with an average client balance held would appear more appropriate.
We would consider that endorsing a cheque over to a client or employee would be very rare due to banking requirements and due to that rarity that this would be considered suitable for reduced reporting requirements.
We would consider that where firms only receive funds on account into a client account there remains necessity for independent checks as such funds are still open to abuse around billing procedures.
Do you have any suggestions for themes or specific areas or issues we should consider in our forthcoming review of the Accounts Rules as a whole?
We have a number of suggestions regarding changes to the accounts rules which we feel will better reflect the profession as a whole going forward;
The accounts rules could be significantly reduced with the meaning of terms used being moved to the SRA Handbook Glossary. There should remain a reference to the glossary in the account rules.
For example the meaning of client money.
The meaning of client money could be significantly reduced by distinguishing that any money not belonging to the firm by default will be client money. Similarly office money is money that is due to the firm in relation to legal services.
The matters covered in Rule 6 are already substantially set out in the SRA Handbooks Code of Conduct; there should be no necessity for repetitiveness.
Rules 8, 9, 10, 15 & 16 could be combined under one section of client money not held in a client account. There should also be consideration given that not all money held under these rules will necessarily fall as money due to the firm’s own client and whether this should therefore fall within client money at all for example funds held in a joint account pursuant to an escrow agreement may be due to another firms client on the fruition of certain requirements.
Rule 14.1 should be changed to include having a procedure to bank client money as soon as reasonably possible following receipt.
Rule 17 could be simplified to ensure that the firm has a system for dealing with funds received accordingly; this would eliminate the necessity for rule 14.1 completely.
Removal of the 14 day rule which brings little benefit to client money protection and should form part of effective management to promoting good cash flow procedures.
Misdirected payments should not be considered a breach of the rules regardless of circumstance providing that they are corrected on the same day, this is often out of firm control and client led.
Rule 20 could be consolidated to relay that any withdrawal must be properly due and in accordance with the transaction. There is also an argument that this is already covered by rule 14.5 and that rule would also cover the validation of receipts into client account.