Solicitors Accounts - Unit 1 - Chp 1, 2

Question 1

What is double entry bookkeeping?

Answer 1

Double entry bookkeeping is a system of recording financial dealings built upon a series of rules.

Based on the premise that every financial transaction has 2 aspects to it and both need to be recorded.

Question 2

What are some examples of the double entry principle?

Answer 2

1) The firm pays cash to buy premises.
Aspect 1: The firm has less cash.
Aspect 2: The firm has acquired an asset in the form of premises.

2) The firm pays staff wages.
Aspect 1: The firm has less cash.
Aspect 2: The firm has incurred an expense.

3) The firm bills a client for work done.
Aspect 1: The firm has earned income.
Aspect 2: The firm has a debt (the amount of the bill owing to it).

4) The client pays the firm the money owed:
Aspect 1: The firm has lost the debt that was owing to it.
Aspect 2: The firm has more cash.

Both aspects of a transaction are recorded in the books. But must be recorded in a separate account e.g. one for cash, one account for each type of asset, each type of expense, one for each person to whom the firm owns money, one for each debtor that owes money to the firm.

Question 3

What are the rules for recording transactions?

Answer 3

See textbook, can’t insert pics

Question 4

What is the rule about the business owner?

Answer 4

The business owner is regarded as COMPLETELY SEPARATE from its owner or proprietor.

So when a proprietor sets up a business and puts in cash, the transaction has to be recorded from the POV of the business.

E.g. left hand side - gaining cash and right hand side - incurring a liability (as it now owes money to the proprietor).

This liability to repay its proprietor is normally referred to as the ‘capital’ of the business.

Question 5

What is debit and credit for the two sides of the account?

Answer 5

Debit used on the left hand side (DR) and credit used on the right (CR).

Question 6

How does making entries work?

Answer 6

Need to have different accounts for each entry e.g. a capital account, a cash account, an asset account for the computer, an expense account for rent.

Question 7

What is a cash account?

Answer 7

A record of receipts into and payments out of the bank account.

Question 8

What is petty cash?

Answer 8

Petty cash is a small amount of cash kept in the office to cover small, day to day expenses.

A petty cash account is required to record the periodic receipts of cash from the bank and the various payments made from petty cash.

Question 9

What are the ledger accounts?

Answer 9

The ledger accounts are all of the accounts apart from the cash accounts and, where there is one, the petty cash account.

Question 10

How are the SRA account rules different?

Answer 10

Law firms frequently hold money that belongs to other people.

Question 11

What is the purpose of the SRA account rules?

Answer 11

To ensure that money belonging to the client is safe and kept separately from money belonging to the firm.

Designed to reduce the risk of accidental or deliberate misuse of clients’ money and

To protect clients from the risks of accidental and deliberate mishandling of their money,

Question 12

The SRA Rules adopt a risk-based approach. What does this mean?

Answer 12

This means the rules are more prescriptive in the areas where the risk to clients’ money is higher.

Question 13

What are the consequences for breaching the SRA Accounts Rules?

Answer 13

This is a disciplinary matter which may result in the SRA taking actions against individuals and/or firms in accordance with its Enforcement Strategy.

Takes a proportionate approach to disciplinary matters, focusing on substantial breaches. - E.g. dishonesty or misuse of the client money being very serious.

Question 14

What are the key principles of the current rules?

Answer 14

Keeping client money safe by:

1) Keeping it separate from the firm’s own money
2) Ensuring client money is promptly returned at the end of a matter
3) Using client money only for its intended purpose and
4) Proportionate requirements for firms to obtain an annual accountant’s report.

Question 15

What are the principles that must be adhered to when following the Rules?

Answer 15

Acting in a way that:
1) Upholds the constitutional principle of the rule of law and proper administration of justice
2) Upholds public trust and confidence in the profession and in legal services
3) With independence
4) With honesty
5) With integrity
6) In a way that encourages EDI
7) In the best interests of each client.

Question 16

Who is bound by the Rules?

Answer 16

Authorised bodies, their managers, employees.

The authorised bodies’ managers are joint and severally responsible for compliance with the Rules by the authorised body, managers and employees.

However, in relation to a licensed body, the Rules apply only in respect of activities regulated by the SRA in accordance with the terms of its license.

Question 17

What is the rule linked to client money?

Answer 17

It must be kept separate from the money belonging to the firm (usually in a separate client bank account).

However, client money means money held/received by a firm:

1) Relating to regulated services delivered by you to a client

2) On behalf of a 3rd party relating to regulated services delivered by you (such as money held as agent, stakeholder or held to the sender’s order)

3) As a trustee or as the holder of a specified office or appointment

4) In respect of your fees and any unpaid disbursements if held or received prior to the delivery of a bill for the same.

A solicitor has a duty to clarify any ambiguity as to whom client money is held for.

Question 18

What must be done with money received for all fees and disbursements (payments to third parties) paid to the firm?

Answer 18

It is considered client money UNLESS AND UNTIL BILLED so must be held in a client bank account - called money ‘generally on account of costs’.

Question 19

Is money received for disbursements which have already been paid considered client money?

Answer 19

No as it’s already been paid so should be called ‘business money’ by the firm and paid into a business bank account.

Question 20

Where should money received for unbilled fees and disbursements be paid into?

Answer 20

Can be put into the firm’s business account but firms need to be cautious about billing for future items.

Question 21

What is a client bank account and what requirements need to be followed regarding it?

Answer 21

A client bank account is one opened by the firm IN THE NAME OF THE FIRM but used for client money.

Must be at a bank or building society in England and Wales and must include the word ‘client’ in its title to distinguish it from the firm’s business accounts.

Including the word client means a bank doesn’t have any right against money in a client bank account in respect of any liability of the solicitor to the bank.

Firms must ensure that client money is available on demand unless an alternative arrangement is agreed IN WRITING with the client/third party. Means firms shouldn’t tie up client money in deposit accounts which have extended notice periods.

Question 22

What is the rule about paying client money into the client bank account?

Answer 22

That it is must be paid PROMPTLY into the client bank account.

No official definition so this will depend on the particular circumstances of the matter and the nature of the firm.

However should act in the client’s best interests - meaning the need to act quickly is important.

In many instances, the expectation is that payment must happen immediately.

Question 23

What are 3 exceptions to the general rule that client money must be paid promptly into the client account?

Answer 23

1) If the client money is held as a trustee/holder of a specified office or appointment and paying it into a client bank account would conflict with the obligations of the specified office or appointment.

2) The client money represents payments received from LAA (Legal Aid Agency) for the firm’s costs - firms can instead hold this in their own business bank accounts

3) The firm agrees an alternative arrangement in writing with the client/third party for whom the money is held.

Question 24

What does the exception for legal aid payments allow firms to do and what are the limitations to this?

Answer 24

1) Allows firms to receive legal aid payments directly into their bank accounts, even if these payments include advance amounts for services from third parties.

However, while there is no strict time limit for paying these parties, firms mustn’t delay payments in a way that negatively impacts the client’s matter.

Failure to pay promptly could breach SRA rules including the requirement to act with integrity & in the client’s best interests.

Question 25

What is the limited exception in Rule 2.2 regarding client money and what conditions must be met for this exception to apply?

Answer 25

It allows firms to hold client money for fees and unpaid disbursements received before billing outside a client bank account but only if:

1) The firm is liable for the disbursement.
2) The firm doesn’t have a client bank account for any other reason.
3) The firm informs the client in advance about where and how the money will be held.

This cannot apply if the firm receives any other types of client money e.g. funds to complete the purchase of property or funds held for the beneficiaries of a trust or estate.

Question 26

What is the rule about returning client money?

Answer 26

Needs to be returned promptly to the client/third party for whom the money is held as soon as there is no proper reason to hold those funds.

Shouldn’t delay this.

Question 27

What should solicitors do in the case of aborted transactions? (E.g. when a solicitor holds funds for a client, their purchase falls through and the client asks them to hold onto the money whilst they look for a new purchase)

Answer 27

To avoid breach, it will usually be advisable to return the money to the client unless the new transaction is actively being put into place or there are other factors e.g. client history which would justify the solicitor continuing to hold the funds.

Question 28

What is the rule on mixed receipts? What is this and how should this be dealt with?

Answer 28

Mixed receipts are when a firm contains a mixed payment e.g. client money & money to pay the firm’s bill.

The firm must allocate funds promptly to the correct bank account.

(Usually, this will be made more difficult by the fact it is paid by one cheque or one online payment transfer. If this happens, the money will be paid into one account and the firm will need to transfer funds out promptly. Doesn’t matter whether it’s initially paid into the firm’s client or business bank account).

Question 29

What are the rules about withdrawing money from the client accounts?

Answer 29

General rule = money on account of costs (money requested to cover firm’s fees and its future disbursements) is client money and must be paid into the client bank account until a bill is issued.

However, when you are holding client money and some/all of it will be used to pay your costs:

1) You must give a bill of costs, or other written notification, to the client or paying party

2) This must be done before you transfer any client money from a client account to make the payment and

3) Any such payment must be for the specific sum identified in the bill of costs/other written notification and covered by the amount held for the particular client or third party.

This money should be transferred promptly.

Question 30

What happens if the bill includes an item for a future disbursement which hasn’t yet been paid?

Answer 30

Moving the money for those items to the business bank account would incur a risk to the client if the firm was to go insolvent.

Therefore, for billed anticipated disbursements, this should be left in the client bank account until such time as they are paid.

Have to think in the best interest of the client - if the firm does make the judgement call that billing for advance disbursements is proper, client must be fully informed of the risks around their money being received into firm’s business account.

Question 31

When can firms withdraw money from the client bank account?

Answer 31

Money can be withdrawn from the client bank account ‘for the purpose it is being held’.

As long as the firm has made it clear that the client money may be used to reimburse the firm for payments made, this will be permitted WITHOUT ISSUING A BILL or other written notification of costs.

This explanation can be made in a client care letter, terms of engagement or in another communication with a client.

Doesn’t permit a transfer where disbursements have not yet been incurred or have not been paid by the firm.

Question 32

What are the 3 circumstances that allow client money to be withdrawn from the client bank account?

Answer 32

1) For the purpose for which it is being held
2) Following receipt of instructions from the client/third party for whom the money is held or
3) On the SRA’s prior written authorisation or in prescribed circumstances.

All withdrawals need to be appropriately authorised and supervised.

Withdrawals can ONLY be made from the client account for a client if SUFFICIENT FUNDS are held. - If they take out money when there isn’t enough, the balance represents money held for other clients. Not allowed to use money held for one client for the purpose of another.

Question 33

What can a firm do if the money in the client account is less than the money they need to pay a disbursement?

Answer 33

The firm must NOT make the payment from the client account.

1) It can make the payment from the firm’s business bank account. Money can’t be transferred from the client bank account to partially reimburse the firm unless a bill is issued or the firm has made the client aware it’s going to be used in this way.

2) The firm can advance its own money to the client in such cases - useful where there is almost enough client money to make the payment. The advance becomes client money and is subject to the Rules on client money.

Question 34

What are residual client account balances?

Answer 34

A residual client account balance is money that the firm has NOT returned to the client at the end of the retainer and now finds it difficult to return the money to the client e.g. because they can’t trace them/because they’ve died and their executors are unknown or because they refuse to accept it.

Question 35

What should be done with residual client account balances?

Answer 35

For residual client balances of £500 or less, this can be withdrawn without authorisation from the SRA AS LONG AS THIS IS PAID TO CHARITY.

The firm should have also taken reasonable steps to return the money to the client & keep proper records of what has been done.

For residual client balances over £500, the firm must apply to the SRA for authorisation to make the withdrawal.

Question 36

What is the rule against using a client bank account as a banking facility?

Answer 36

Should not be used as a banking facility for clients and third parties - must relate to the provisions of regulated services.

The firm should only hold money for the purpose of facilitating legal transactions, not for the client’s convenience.

Therefore, they should only receive money and make payments which relate to a legal transaction.

Question 37

What is the risk of solicitors blindly complying with a client asking for example to use the leftover funds to settle a bill?

Answer 37

1) Will fall foul of the Accounts Rules
2) Could be a breach of professional conduct/ethical standards
3) Could be the client using the firm for money laundering (want to hide illicit funds in legitimate businesses). - However, this isn’t the only reason, there could be concealing the ownership of funds during a divorce and avoiding money being caught in an insolvency.

Question 38

What factors should be thought about when considering whether a client should be paying out of their own bank account vs whether the firm should hold money for them?

Answer 38

• Throughout the retainer, you should question why you are being asked to receive funds and for what purpose. The further the details of the transaction are from the usual legal/professional services, the higher the risk of breach.
• Why are you being made to make a payment vs why the client can’t make/receive the payment themselves - client’s convenience isn’t a legitimate reason nor is not having a bank account in the UK.
• There is a separate obligation to return client money to the client/third party promptly as soon as there’s no longer any proper reason for you to hold onto these funds. If you retain funds in client account after completion of a transaction, there is a risk of breach.

Question 39

What do firms need to maintain accurate records of in relation to each client?

Answer 39

• All receipts and payments of client money (need a client ledger account with the client’s name and an accurate description of the matter)
• All payments made on behalf of the client from the firm’s own money and
• Bills issued to the client.

Question 40

What must firms do with the above to comply with the Rules?

Answer 40

1) Has to maintain a client ledger account for each client and an appropriate description of the matter. This will record all receipts and payments of client money as well as any payments made by the firm from its own money.

2) The firm has to maintain a list of all the balances shown by the client ledger accounts of the liabilities to clients (and third parties).

3) Requires firms to have a separate cash book which shows all transactions through client bank accounts.

4) Firm must obtain bank statements for all client bank accounts and the firm’s own business bank accounts at least every 5 weeks & carefully check the figures (reconciliation). Any discrepancies need to be investigated promptly.

5) Need to keep a central record of bills and other written notifications of costs to be kept in a readily accessible form - firms that don’t have client bank accts need to be compliant with this (but not the other rules above).

Question 41

What is the rule for two sets of accounting records?

Answer 41

As firms can be thought of as carrying on 2 separate businesses with 2 separate sets of accounts, the law firm would need 1 set (Set A for business which handles client money) and 1 set (Set B for the business which handles ordinary business accounts).

The two sets of accounts are entirely separate. This means a firm cannot enter a debit on one set out accounts and a credit on the other.

Question 42

Books should be maintained on the double-entry principle. What does this mean?

Answer 42

Every transaction relating to client money should be recorded in at least the client cash book and the client ledger.

Question 43

How should the books be kept and ordered?

Answer 43

Books should be legible, up to date and contain narratives about the entries which allow them to be identified and provide adequate info.

The current balance should be readily ascertainable.

Entries should be made in chronological order and record the date of the underlying transaction.

Question 44

What should ledger accounts have?

Answer 44

Name of the client/other person or trust for whom the money is held and contain a heading which provides a description of the matter or transaction e.g. Client: Mr J Smith Matter: Sale of 1 Property Road, London.

Question 45

What must be done with business account entries (e.g. money due to your firm for costs)?

Answer 45

Must be kept up to date - important that any credit balances on the business side of the client ledger in respect of client or trust matters are reviewed on a regular basis.

Question 46

What is the dual cash account?

Answer 46

Businesses need to keep a record of cash received and spent.

Therefore, they will need 2 separate cash accounts.

On the page when writing this down, the normal format is to have the two individual cash accounts next to each other.

Question 47

What is the dual ledger account for each client?

Answer 47

Deals with client money on behalf of a client to be recorded.

It also requires the issue of bills to a client, payments of the firm’s own money on behalf of clients and receipts in payment of bills to be recorded.

This requires 2 separate ledger accounts although, as with the 2 cash accounts, normally have them side by side.