New SRA consultation on accountant’s reports

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16 March 2015

Hazlewoods200On 19 November 2014 the SRA issued its latest consultation document on the SRA Accounts Rules and the role of the Reporting Accountant. In short, the SRA is now proposing the following:

  • A redefinition of the circumstances in which accountant’s reports are qualified
  • 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
  • Exempting some practices from the requirement to obtain an accountant’s report

Why is the SRA doing this?

First of all, the SRA feels that too many accountant’s reports are qualified for fairly trivial reasons, and as a result most do not reveal any significant risk to client monies. The SRA acknowledges that much of this is due to the levels of precision required by the Accounts Rules, and also the fact that reporting accountants are currently required to report on what they see, rather than reporting only the most concerning items.

The SRA is therefore proposing to redefine the circumstances in which accountant’s reports are qualified, so that far fewer reports are qualified in future. Presumably, most of the breaches that are currently considered “material” will in future be deemed “trivial”.

Secondly, the SRA wants reporting accountants to use their professional judgement when carrying out their audits and completing their accountant’s reports. Currently, Rule 39 lists over 20 tests that reporting accountants have to perform, such as reviewing two sets of client account reconciliations, testing a sample of client money receipts and testing a sample of client money payments.

Under the SRA’s proposals, the whole of Rule 39 will be removed, and replaced with the following:

The accountant should exercise his or her professional judgement in adopting a suitable work programme for the firm they are instructed to obtain the report on. This should cover the checks and tests that the accountant considers is appropriate to enable completion of the report referred to in Rule 42 below.

In their report, accountants will be required to examine whether a practice has incorporated the following elements into its client money accounting system:

1. The segregation of client and office monies
2. A robust system of controls and checks to ensure accuracy and protect against fraud
3. Effective oversight by management
4. Appropriate authorisation of transfers and payments out of client account
5. Ledgers and other entries are maintained on a timely basis
6. An appropriately designed double-entry accounting system
7. That proper office and client bank account reconciliations are performed
8. Adequate segregation of duties (for example, one person to prepare the client account reconciliation, but another person to check and sign it off)
9. Controls over incoming funds

Any significant deficiencies in any of the above will need to be flagged up in the report.

Finally, the SRA wants to remove more lower risk practices from the requirement to obtain an accountant’s report. According to the consultation document, the SRA is keen to ensure that they strike the right balance between retaining a degree of oversight of client money while minimising unnecessary burden on firms.

What will a qualified report mean in the future?

Presumably, once the SRA has redefined the term “qualifying breach”, far fewer accountant’s reports will be qualified. Where reports are qualified in future, it will be because the practice has insufficient internal control procedures, or there is concern that client funds may not be properly safeguarded.

Therefore, if your report is qualified, you may be more likely to hear from the SRA.

I’m a COFA. How will this impact on me?

COFAs will need to have a very close look at their internal systems to ensure that they are as water-tight as possible. This should involve a review of each element of dealing with client monies, including actions taken by everyone in the practice. The COFA should also go through the above list of elements that reporting accountants are going to be asked to report on and ensure that they do not have any exposure there.

Is it possible that my practice won’t need an audit anyway?

Yes. As part of the consultation the SRA are proposing the introduction of risk-based criteria to exempt practices with a certain profile from the requirement to obtain and deliver an accountant’s report. The changes introduced in October 2014 exempted 115 pure Legal Aid practices, and the SRA are looking to exempt many more.

According to the consultation document, the SRA has calculated that if they were to exempt practices that held an average client account balance of less than £10,000, then a further 995 practices could be removed from the requirement to obtain and submit an accountant’s report. If the threshold was increased to £50,000, then 1,957 practices would be exempted.

The consultation closed on 28 January 2015.

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