Law firms face financial management duty

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By Legal Futures

18 February 2010

Good accounting: firms to be required to disclose if they are in trouble

There should be a new core duty on financial management, along with requirements that firms disclose financial problems to their regulator, in the Solicitors Code of Conduct, the SRA has been advised.

The SRA board was told last month (January) that it is in both the public and consumer interest to take a series of measures that focus on the financial stability of the law firms it regulates.

The work forms part of the SRA’s financial assurance project, which also includes revising the Solicitors Accounts Rules to take account of the move to alternative business structures (ABSs).

KPMG is advising the SRA on this and in a presentation to the board explained how financial instability has a significant impact on both the profession and the public in terms of dishonesty, financial mismanagement, reputational risk, costs of intervention and access to justice.

It identified various pressures bearing down on law firms, including ABSs, economic issues (such as reduced activity and margins, as well as redundancies and partner exits), technological change and tougher credit conditions. KPMG urged a more proactive approach to make the SRA aware earlier than now of firms’ financial positions. This would include firms providing the SRA with more information and disclosing the fact that they are in financial difficulties.

KPMG recommended a series of measures:

  • Changes to duties and disclosure
    • A new core duty on good financial management and disclosure; and
    • A requirement for ‘living wills’ – that is, succession planning.
  • Changes to firms’ responsibilities
    • Self-certification (burden needs to be proportionate but much data is already provided to professional indemnity insurers and banks);
    • Some regular training in financial management;
    • Mandatory preparation of business plans for new firms ahead of licensing; and
    • A duty of notify the Sra when a firm is in difficulties.
  • Changes to how the SRA works
    • Better identification of firms at risk – develop more sector-based economic analysis;
    • Better use of data provided already;
    • Addition of questions used by the Law Society of Scotland into the accountant’s report; and
    • More support and advice to firms.

However, Marcus Sephton, head of regulatory services at KPMG, said that after consultation with various stakeholders, it had decided against recommending capital adequacy requirements for law firms. He said it would be very difficult to devise an approach that would apply to all firms and would not be proportionate.

After further work, these proposals will go out to consultation with the profession later in the year.

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