How can law firms strengthen compliance with the Solicitors’ Accounts Rules?

Audit & Assurance
Governance
Insight
Planning
Professional services

In this article we consider how both management and owners of law firms can strengthen governance around the Solicitors’ Accounts Rules (SAR). We provide areas of consideration to allow for self-evaluation and reflection on how firms are operating in relation to these topics.

In providing accountants’ reports on the Solicitors Accounts Rules for many firms, we see a variety of practices and approaches in regards to the oversight of these rules, allowing us to highlight some of the key issues that we regularly come across that may help management in considering how well these processes are completed at their own firms.

Are reconciliations and record keeping being treated as a priority?

Accurate and timely record keeping remains fundamental. Client account reconciliations should be completed and reviewed by the COFA or a Manager of the firm, at least every five weeks. Any differences should be promptly investigated and resolved.

While reconciliations are fundamental to safeguarding client money, it is the timely investigation of differences, adjustments and transactions appearing across reconciliations that provides assurance that client funds remain protected.

The primary focus is around rule 8.3 for the core client account, however, it is important not to overlook obligations surrounding the operation of joint accounts and clients own accounts.

Joint account bank statements should be obtained every five weeks, whilst client own accounts bank statements should be obtained and reconciled every five weeks.

Note that the SRA issued further advice in November 2019 for those unable to obtain the bank statements for client own accounts.

The SRA’s accountant’s report guidance specifically highlights areas reporting accountants may test, including:

timely banking of client money,
three-way reconciliations
and the overall effectiveness of systems and controls.

Reconciliations are a key safeguard and one of the most effective ways to identify issues early.

Where reconciliations are delayed, the risk of material breaches increases.

Are residual balances being managed proactively?

Residual client balances continue to feature in regulatory findings. In many cases, firms have a policy in place but fail to apply it consistently.

There should be a clear process for identifying residual balances, returning funds promptly and escalating cases where repayment is not straightforward.

This should be reviewed on a regular basis to avoid balances building up; the task becomes more onerous with a larger list of balances to clear and creates more difficulty in contacting individuals.

This is the most reported area in accountants’ reports to the SRA.

Are roles and responsibilities clearly defined?

Being a professional firm ourselves, we understand how busy solicitors can be, and often the closing of old matters and returning of small balances may not be considered the most urgent task in the diary – as it is often viewed as an admin task.

We often see that responsibility for these compliance tasks is considered to sit with the finance team or COFA. Although the COFA may well be accountable for compliance with the rules, fee earners need to be responsible for their individual matters. The finance team and COFA often need the support of the Board, Managing Director or Senior Partner for action to be taken.

Firms that we see with the most effective governance, are those where fee earners are held accountable by those charged with governance, for their part in ensuring the Solicitors’ Accounts Rules are followed.

Are breach registers and root cause analysis taken seriously?

Although most firms maintain a breaches register, how it is used is key to its value. Firms should ensure issues are recorded consistently and regularly. In our experience, seeing a breaches register with no or trivial entries suggests a lack of oversight or knowledge, rather than controls being so strong that they have prevented any breaches.

The nature of human error suggests that mistakes will be made during the year, but it is the ability and knowledge to identify and record them, which provides confidence that staff have been sufficiently trained and have a good understanding of the rules.

As an example, we often identify several minor breaches, within the samples we select from across the year. All of these should have already been listed on the breaches register and too often this is not the case.

Keeping the register up to date and demonstrating an understanding of the rules, being realistic that mistakes will be made, should give management more confidence that a major breach would therefore be detected.

Having small breaches detailed can also allow for patterns to be identified and analysed, to spot weaknesses in systems and controls or highlight training needs amongst the team that can then be addressed. This root cause analysis of breaches found is more effective as a preventative measure.

Is training sufficiently provided?

Compliance with the Solicitors’ Accounts Rules is not confined to the Finance team. Fee earners and support staff play a key role in ensuring funds are handled correctly.

Regular training should reinforce:

Processes and policies in place.
When money should and should not be paid into client account.
The rules around transfers between client and office account.
The importance of returning client money promptly.

Training should be held regularly to reinforce and remind employees of the core principles of the rules and ensure that all personnel take collective responsibility for ensuring compliance. New joiner inductions also provide an opportunity to not only educate or refresh, but to explain how the firm applies the rules in practice and in accordance with company specific policies and procedures.

Are management letters and audit findings acted upon?

Accountants’ reports and management letters provide valuable insight into how effectively systems are operating.

Repeated findings may indicate procedural weaknesses rather than isolated oversights. Addressing recommendations promptly, and documenting the steps taken, demonstrates a proactive approach to compliance and reduces the risk of escalation of a weakness into a significant issue in future years. This includes an understanding of why such breaches had not already been picked up by the firm and documented on the breaches register.

In our view, those firms who assess the findings and use recommendations as a basis for implementing change and tailoring controls, are those less likely to have a major breach in the future.

Are systems and controls keeping pace with firm growth?

As firms expand, processes that were once sufficient may no longer be adequate. Increased transaction volumes, multiple offices and more complex structures can strain existing controls.

Older systems may no longer be fit for purpose and as firms have grown, some bolt on processes to adhere to regulations or utilise new technology may have led to duplication.

Balancing the drive for advances in technology and AI whilst ensuring that the business remains compliant is not always straight forward.

We recommend a periodic review of systems to ensure they remain proportionate and effective.

Are client accounts being properly used?

An important area covered by rule 3.3 of the Solicitors’ Accounts Rules, is to ensure that client accounts are not providing banking facilities to clients or third parties. If money is held within the client account, it must relate to a regulated service, being ‘the legal and other professional services that you provide that are regulated by the SRA and includes, where appropriate, acting as a trustee or as the holder of a specified office or appointment’.

The rule is considered within the work completed for the accountant’s report and often ties in with residual balance work, it is important that funds received directly relate to the service provided. If operating a retainer, the firm should be clear on the reasons for doing so, and consider the increased risk of money laundering and risk factors that could indicate that this may be the case.

Closing thoughts: are your controls working in practice?

The SRA’s accountant’s report guidance provides a clear indication of what the SRA expect to see to ensure that client money is properly safeguarded. Examples of adequate controls are provided within the guidance, as well as both below and above average processes and controls within key risk areas.

Many of the areas discussed in this guide stem from gaps identified in governance, oversight and consistency, rather than deliberate non-compliance. Firms that embed structured processes, encourage empowerment of responsible individuals and regularly review their controls, are far better placed to withstand scrutiny.

Owners and management being open and willing to identify and investigate breaches to improve underlying knowledge and controls within their teams, are able to provide evidence of actioning issues that have arisen, and reduce their exposure to risk and non-compliance.

How can Price Bailey help?

At Price Bailey, our Audit & Assurance team provide independent, partner led audit and assurance services that not only ensure compliance with SRA requirements but also give you confidence in your internal systems and controls.

We work closely with your team to understand your firm’s structure, risks, and reporting obligations, helping you identify weaknesses and strengthen governance before issues arise. Working with many legal firms of different sizes provides us with a benchmark to consider and compare processes, to identify and suggest areas which may warrant further management consideration.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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