Jason Mitchell looks at how the latest changes to the accountant’s reporting regime impact on the COFA role.
On 30 October 2015 the SRA published the latest round of changes made to the accountant’s report regime (updated on 17 December 2015), which have also been reflected in version 15 of the SRA Accounts Rules 2011.
These changes included:
- Notification of further exemptions introduced for firms holding small client balances
- A new format and condensed accountant’s report
- Removal of the reporting accountant’s checklist
- Additional guidance on the classification of material breaches leading to a qualified accountant’s report
- Details of significant changes in the scope, the approach and the work undertaken to prepare the accountant’s report.
In addition to the above, the ICAEW has recently issued a detailed technical release note with supporting guidelines, as approved by the SRA for reporting accountants, to assist in the key changes that are being implemented. These can be found on the ICAEW website under “Audit and assurance technical releases – AFF 16/15.”
While this may seem a topic for reporting accountants, the procedural changes here have some fundamental implications for legal practices. Their COFAs will need to be aware of them and be ready for potential change.
What are the key changes the COFA should be aware of?
SRA Accounts Rule 39 previously included a prescriptive framework of testing that reporting accountants would need to use when undertaking their work to complete the accountant’s report.
This rule and its contents have now been removed. It is now reporting accountants’ responsibility to form an opinion on the legal practice’s compliance with the SRA accounts rules. They must use a risk-based approach to formulate their own test procedures, as now stated within SRA Accounts Rule 43A.
SRA accounts rule 43B has been introduced to state that firms must provide documentation to the reporting accountant as required, enabling them to complete the accountant’s report.
These changes apply for reporting periods ending on or after 1 November 2015.
A concern is that reporting accountants will now increase the level of their work and processes in order to mitigate their risk, placing a more onerous process on legal firms and their COFAs.
The intention of the changes is not to increase the risk for the reporting accountant, which has been highlighted by the SRA and the ICAEW guidance. In fact, the intention is for the assurance process to become specifically tailored to the individual practice. The new regulations should mean that the accountant’s report processes and checks are streamlined and focused, to bring more benefit to the individual legal firm.
So what is the impact of the changes on the COFA?
I. Reporting accountants - planning approach
With a risk-based approach, the key for the reporting accountant is in the planning. It is this area which will potentially see the most significant change in terms of the COFA’s involvement in the accountant’s report process.
Where reporting accountants undertake the planning process before they undertake their detailed checks of compliance etc, they will be required to assess the risk areas for compliance by the practice. This should include discussions with the COFA or COLP and a review of documents which, as an example, could cover:
- Review of the breaches register to look at the nature and volume of current year breaches
- Review of client complaints and PII claims received in the year to check their nature and volume
- Obtaining details of the firm’s cashier team, their qualifications, level of experience and training
- Review of financial performance of the law firm
- Details of any SDT cases or findings against the fee earners or managers
- Review of internal controls and processes.
Some or all of the above may already be familiar, as some accountancy firms already include an element of a risk-based approach in their processes to direct their prescriptive testing.
Under the previous regime, the legal practice could rightly refuse to provide some of the above documents and information. Technically, they could be deemed to be outside the reporting accountant’s remit for the purposes of the prescriptive requirements etc within the SRA Accounts Rules.
The new SRA Accounts Rule 43B states that any information or documents requested must be provided to allow reporting accountants to undertake their work properly. If reporting accountants were prevented from receiving any relevant information to assess the practice for risk, they would need to increase their risk assessment and level of work.
Consideration would then be given to whether such an omission needed to be documented as a qualification in the accountant’s report as a limitation of scope.
II. Review of control processes
One of the key responsibilities of the COFA is to ensure firms have appropriate procedures and controls. These should be documented to safeguard client money and to maintain the financial stability of the practice.
Under the new regime for reporting accountants, a review of these systems and procedures is essential to enable them to identify any potential risk areas in which to direct their work. In theory this should be a one-off exercise and be revisited annually for any changes. In this review the reporting accountant should:
- Document the control systems
- Assess their adequacy and effectiveness
- Test the application of the control system.
While COFAs may feel they are under additional scrutiny, a review of the systems and procedures should be welcomed to provide them with additional confidence that they are undertaking their responsibilities effectively. If any weaknesses or deficiencies are identified, reporting accountants should be providing feedback to the practice to help strengthen those areas and to assist the COFAs.
It is worth highlighting that both the SRA and ICAEW guidance comments that the SRA does not wish reporting accountants to base their overall opinion within the accountant’s reports on a controls-based approach only. Their testing should continue to be primarily focused on transactional testing to check for compliance.
This removes some concern previously raised by COFAs etc that controls-based testing alone would not be sufficient to give them an element of the limited assurance which also comes from transactional testing.
III. Qualifications within the accountant’s report
As firms should now be aware, only qualified audit reports are required to be sent to the SRA in most circumstances. In practice there has still been ambiguity over areas which should lead to a qualified accountant’s report.
The SRA guidance notes issued on the new accountant’s report regime provide more specific details on areas and examples which would lead to a qualified report. These have provided further clarification to the legal sector and the reporting accountant.
The ICAEW technical release also supports the qualification guidance; and provides further specific examples of matters identified by the reporting accountant which could lead to a qualified accountant’s report. These examples should be of interest to the COFA, both in terms of their own internal reporting requirements and in understanding the basis of a qualified accountant’s report.
Overall the changes in the accountant’s report regime should be seen as a positive step into outcomes-focused regulation. While the process is continually evolving, the result will be that the reporting accountant’s work will be more specific to the individual legal practice. It will potentially lead to a more efficient approach and an increased level of constructive feedback.
First Published In Legal Abacus Mar/April 2016
By Jason Mitchell ACA, Legal Sector Specialist
Francis Clark LLP is a top 25 UK accounting firm, which provides taxation, accounting and commercial advice to over 100 law firms nationally.
Francis Clark Chartered Accountants
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