Cometh the hour, cometh the accountant to review the client account….The annual visit to just about every law firm to test client account transactions has been an unwelcome ritual for many years (even if the SRA coyly describes it as predating the SRA Handbook of 2011).
The comment from the SRA in May 2014 that this requirement was “neither sufficiently targeted nor proportionate” and accordingly it planned to abolish it was a surprise to almost everyone. The fact the abolition was scheduled for five months time was a further shock. In summary, the bases for the SRA proposal were:
• It costs firms to have the reports prepared (although the SRA was unsure on the total cost to the profession).
• The reports offer little value to the SRA (of the 9,000 reports received annually, over 4,500 are qualified yet only 200 are “referred for further examination” and a staggeringly meagre 10 reports per year are actually passed to the SRA’s supervision team).
• It costs the SRA £200,000 a year to process, assess, store and ultimately destroy the accountants’ reports (it is storing hard copies of the last six years’ returns)
• The reports do not give useful information on the current situation at the firms being reported upon (they usually reflect transactions between six & 18 months before the submission date).
The SRA considers that instead of the annual accountants’ report, the Compliance Officers for Finance and Administration (COFAs) should self-certify compliance with the Rules each year.
The abolition proposal is a startling opening gambit in the “more general review of the [accounts] rules” which the SRA is undertaking. It is a remarkable step to identify that the Accounts Rules are overly prescriptive and may not meet their purpose (in SRA speak; “may not satisfactorily or optimally support the requirement to meet desired outcomes”) and simultaneously remove a widely accepted check designed to support that purpose.
Even in these straitened times at the SRA the prospect of saving £200,000 a year a few months sooner cannot be the prime motivating factor which makes me wonder whether the proposal is a tactical move to convince firms that it is open to change and hence improve engagement? On reading the consultation document my key observations were that there seemed to be little consideration of:
• What consumers of legal services (“clients”?) might want (either individuals or corporates) in terms of reassurance that client money procedures are standard; or
• How the proposed timing of changes would work with the consultation process or with the process of giving alternative comfort to COFAs, clients and regulators on client money procedures.
From my personal point of view as an accountant sending in annual returns to the SRA, my key thoughts on the Accounts Rules and the annual reporting process are:
• The Accounts Rules are too complex, restrictive and prescriptive for the purpose of protecting client money in today’s legal and banking environment;
• The annual reporting processes and requirements are poorly designed; for example with time being wasted on debates over whether points are “trivial” rather than used to discuss the genuine issues around protecting client money;
• Changing requirements is very welcome but needs to happen in a controlled way with a clear timetable; and
• It is reasonable to expect a COFA to require some external support on reviewing client money procedures and compliance.
I don’t think I am out of step with the wider legal and accounting world in my views, and indeed I think the SRA would in substance agree with me. However, its initial proposals were a strange first step and I am not surprised its Board has deferred any decision until the autumn.