Compliance

Question 1

What is the main purpose of the SRA Accounts Rules, and how does the SRA enforce compliance?

Answer 1

• Purpose: To ensure client money is handled safely and transparently, protecting clients from financial risk.Enforcement Mechanisms:
  1. Accountant Inspections: Periodic audits by independent accountants to verify compliance with the Accounts Rules.

2. Risk-Based Targeting: Only firms with substantial client money or risk indicators are mandated to submit accountants’ reports.
3. Qualified Reports: Firms must submit reports if breaches are identified that may jeopardize client money.

Question 2

What are the conditions under which a firm must obtain and submit an accountant’s report to the SRA?

Answer 2

Obtain Report:
* Required for firms that during any part of an accounting period:

1. Held or received client money.
2. Operated a joint account.
3. Acted as a signatory on a client’s own account.
   Submission:
   * Reports must be submitted within six months of the accounting period’s end if they are qualified, meaning they show breaches of the Rules that risk client money.

• Responsibility: The obligation lies with the firm and its managers, not the accountant.

Question 3

What factors might lead to a qualified accountant’s report being submitted to the SRA?

Answer 3

• Serious Factors (Likely to Lead to Qualification):

1. Significant or unreplaced shortfalls in client accounts.
2. Billing for unincurred fees or disbursements and payments directed to business accounts.
3. Fraud or dishonesty by firm employees or managers.
4. Missing or deficient accounting records.
5. Failure to reconcile client accounts regularly.
6. Using client accounts improperly as banking facilities (violating Rule 3.3).
7. Non-compliance with documentation requests by accountants.

• Moderate Factors (May Lead to Qualification):
• Minor breaches repeated over time.
• Lack of corrective actions for identified issues.
• Breaches depending on firm size, complexity, and impact.

Question 4

What exemptions allow firms to avoid obtaining accountants’ reports?

Answer 4

A firm is exempt if:
1. Legal Aid Funds: All client money during the period is received exclusively from the Legal Aid Agency.

2. Small Balances:
   * The total balance of client accounts (including joint and client-owned accounts) averages £10,000 or less during the accounting period.

• The maximum balance at any point does not exceed £250,000.

Question 5

What information must a firm provide to an accountant preparing a report?

Answer 5

• Account Details: Information about all accounts held at banks, building societies, or other financial institutions during the accounting period.
• Supporting Documentation: All relevant records necessary for the accountant to complete the report, including reconciliations, transaction histories, and client account details (Rule 12.8).

Question 6

What are the SRA’s powers regarding accountants and their reports?

Answer 6

1. Disqualification of Accountants:
   
   • The SRA may disqualify an accountant if:
     * They are found guilty of professional misconduct.

• They fail to exercise due care and skill when preparing reports.

2. Final Reports:
   * The SRA may require a firm to submit a final accountant’s report upon ceasing practice, particularly when closing client accounts.
3. Audit and Oversight:
   * The SRA can inspect a firm’s financial records and review submitted reports to ensure ongoing compliance.

Question 7

What are the rules for the retention and storage of accounting records?

Answer 7

• Retention Period: All records must be securely stored for at least six years (Rule 13.1).
• Types of Records: Includes:
  1. Bank statements and reconciliations.
  2. Accountant reports.
  3. Documents related to third-party managed accounts.
  4. Electronic and paper financial records.
     * Purpose: Facilitates accountability and compliance reviews, enabling audit trails if needed.

Question 8

How does the SRA evaluate risk to client money in accountants’ reports?

Answer 8

• Professional Judgement: Accountants assess compliance based on the firm’s:

1. Size and Complexity: Larger firms or those handling diverse work areas are scrutinized more rigorously.
2. Compliance History: Repeated breaches increase the likelihood of qualification.
3. Impact of Breaches: Consideration of the harm to clients if money is mismanaged.

• Examples of Risk Indicators:
• Systematic issues in account management.
• Significant delays in reconciliation or missing documentation.
• Evidence of financial mismanagement or misconduct.

Question 9

What steps must accountants take when preparing a report, and what are their responsibilities to SRA

Answer 9

• Preparation Steps:

1. Review financial records for compliance with SRA Accounts Rules.
2. Investigate any irregularities or breaches, considering the severity and impact on client money.

Reporting to the SRA:
* Accountants have a statutory obligation under the Solicitors Act 1974 to report any evidence of theft, fraud, or concerns about a firm’s fitness to manage client money.

Question 10

How does the SRA guidance influence the qualification of accountants’ reports?

Answer 10

• Guidance Overview: The SRA relies on accountants’ professional judgment but provides criteria to assess risks.
• Examples of Serious Factors:
• Significant client account shortfalls.
• Misuse of client accounts for banking activities.
• Systematic failure to reconcile accounts.
• Examples of Moderate Factors:
• Isolated breaches without a systemic pattern.
• Breaches corrected promptly by the firm.
• Context-Based Evaluation: Firm size, complexity, and control systems influence the severity of findings.