Legal Focus Autumn 2015 – Will you be exempt from an audit?
The SRA has recently announced that it will be making major changes to the requirement for practices to have an audit under the SRA Accounts Rules, following a consultation on the role of the Reporting Accountant held at the end of last year.
Proposals included within this consultation included the following:
- A redefinition of the circumstances in which accountant’s reports are qualified, so that far fewer reports are qualified in future;
- Changes to the format and content of the accountant’s report;
- Removing rule 39 of the Accounts Rules (Test Procedures) in its entirety, and replacing it with a new rule requiring reporting accountants to use their professional judgement to decide whether a practice was compliant; and
- Exempting more practices from the requirement to obtain an accountant’s report.
On 15 July 2015 the SRA Board decided to adopt the majority of these proposals.
With effect from 1 November 2015, reporting accountants will be required to use their professional judgement to produce a suitable work programme to decide whether their accountant’s report should be qualified. The SRA has produced 20 pages of draft guidance to reporting accountants, detailing the sections of the Accounts Rules that should be focused on, the sort of factors that might lead to qualification of a report, and example tests procedures that might be undertaken in future. Many of these test procedures are similar to the testing currently performed by reporting accountants.
The SRA expects that far fewer accountant’s reports will be qualified in future as a result of these changes. Reports should only be qualified where the breaches identified are material and likely to put client money at risk. Material is defined as “likely to arise as a result of an intention to break the rules and/or as a result of a significant weakness in the firm’s systems and controls.” Example factor that would lead to a qualification include:
A significant and/or unreplaced shortfall on client account;
Evidence of the wilful disregard for the safety of client funds;
Actual or suspected fraud or dishonesty by individuals within the practice;
A lack of adequate accounting records;
Incorrect client account reconciliations; and
Client account used as a banking facility.
Example factors that might lead to a qualification include:
Material breaches not reported to the SR in accordance with the Authorisation Rules and SRA Handbook (i.e. material breaches not reported to the SRA by the COFA);
A poor control environment;
Longstanding residual client balances; and
Improper use of suspense accounts.
Finally, the SRA has decided to exempt practices from the need to obtain an accountant’s report if, during the relevant accounting period, they had an average client account balance of £10,000 or less and a maximum client account balance at any point in the period of £250,000 or less. The average balance and maximum balances are calculated/ identified based on the total of all client accounts held, including designated deposit accounts, at each reconciliation point (usually month end, but in theory this could be calculated on a daily basis). The SRA anticipates that some practices will fall into and out of the requirement for an audit from year to year.
The SRA estimates that around 1,000 practices, or 13% of all practices that hold client money, will be exempted as a result of this change. These are in addition to the 120 or so practices that are already exempt because they are wholly legal aid.
The new exemptions will also apply to brand new practices that meet the criteria, not only existing practices. However, all practices will need to obtain and deliver a final report to the SRA should they cease to hold client money, irrespective of whether they meet the criteria and whether the report is qualified or unqualified. This includes final reports for sole practitioners and partnerships converting to LLP or limited company (and vice versa).
If approved by the Legal Services Board, the changes will be included in version 15 of the SRA Handbook, due for release on 1 November 2015. Revised accountant’s report forms will be available for use after 1 November 2015 and will apply to all practices with accounting periods ending on or after that date.
Please see the full Legal Focus – Autumn 2015 here.
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