This month should see the SRA making a final decision about its direction of travel in relation to the proposed changes to the Reporting Accountants Requirements; COFAs in particular are waiting with bated breath to see how this is likely to affect how they discharge their roles.
At the last meeting of the SRA Board it was decided to defer a decision on the proposal until its meeting in July. The Board recognised the need to ensure that, where firms chose to hold client money, appropriate safeguards were in place to assure the safety of that money. The SRA also wanted to carry out further analysis of the consultation responses and give due consideration to the options available before making a final decision.
Riliance [1] submitted a response to the SRA consultation on the proposed changes, which was based on responses from a survey of the Riliance subscriber base; the data and comments provided in the survey gave an interesting insight into what firms thought of the proposals and may have given the SRA some food for thought, which may have played a part in its decision to postpone a final decision on the matter!
One of the first questions we asked to try and get a picture of regulatory awareness was, “Were you previously aware of the SRA’s proposal to remove the reporting requirements?” 48% of those surveyed said they were not. Whether this was as a consequence of a poor focus on messaging by the SRA, or firms not reading the messages coming out of the SRA, is unknown, but clearly those responsible for compliance in firms need to ensure they keep abreast of proposed changes so they can act accordingly.
We next asked the question, “Do you think the SRA’s proposal to remove the requirement for an annual accountant’s report is a positive one?” 56.38% believed it was. The fact that 43.62% said they didn’t shows that the SRA will need to do quite a bit of work to turn this negativity around should the proposals become reality. This question drew the most comments from those being surveyed, with a range of responses from those who thought it would reduce costs, others who thought it was just the SRA passing the buck, and others who said that the independent accountants report process provided a good level of oversight in relation to accounts compliance. The two main issues for firms were the amount of red tape involved and the high level of accountants’ charges.
John Verry, Risk Director at Top 100 law firm TLT, commented:
“Dropping the annual accountants report requirement would give firms choice. Either they can carry on as before and have a backward looking annual review of accounts compliance by accountants, or they can invest the money saved in a forward looking internal financial audit review process undertaken on an on-going basis throughout the year. Used in conjunction with an effective reporting system this should enable the firm to identify at an early an early stage any breaches, which if not addressed may become systemic and thus reportable to the SRA. Any change which gives firms the choice of how they manage their risk profile should be welcomed as it enables the firm’s approach to risk to be targeted and proportionate.”
The answers to one question will give some comfort to the accountants who believe they will see a potential loss of business if the proposals are implemented; we asked, “Will the firm still maintain the services of an accountant to provide an independent assessment of SAR compliance?” 77% said they would. This not only provides comfort for accountants, as long as their charges are fair and reasonable, but also for the SRA in terms of the control and protection of client monies.
Our next question was aimed at the abilities of COFAs to take on the proposed new roles; we asked,
If the new proposals come into force, how confident do you feel that you, or your firm’s COFA, will be able to:
a. Ensure the firm is managing its client accounts in accordance with the SARs, and sign a SRA declaration to that effect – 83.70% said they were confident/highly confident
b. Interpret the firm’s general business accounts (P&L, cashflow, balance sheet) – 89.13% said they felt confident/highly confident
c. Identify financial instability indicators within your accounts – 89.13% said they were confident/highly confident
Clearly, the vast majority of respondents felt they were competent to carry out the new roles, which would indicate that the current COFA roles are in good hands!
We then focused on the support firms would give to their COFAs should the new roles be implemented; we asked, “In order to assist the COFA in the new role, would your firm consider:
a. Providing training to support the COFA? – 55.32% said they would
b. Hiring a specialist COFA or deputy COFA? – 8.51% said they would
c. Employing the services of an accountant who could advise the COFA? – 61.70% said they would, which is another piece of comfort for the accountants!
d. Speaking with the SRA to see what guidance it could provide? – 36.17% said they would; perhaps there is a message here for the SRA in terms of engagement with firms?
e. Implementing specialist software that automates key aspects of financial management? – 42.55% said they would. It is worthy of note that separate data indicates that many firms don’t have effective systems in place to monitor their cashflows over a rolling 13 week period, which is a critical part of assessing financial risk and stability
Many of the risks relating to the handling of client money would be eliminated if the SRA adopted the same system as the Bar, and some other jurisdictions around the world, that operate escrow accounts where all client monies are managed and controlled via such accounts rather than by individual firms. Although it is considered a good move from a risk mitigation perspective it would meet with real resistance from the profession in terms of the logistical issues it would create, especially those involved in conveyancing work.
The SRA recently published its Risk Outlook 2014/15, in which it still sees misuse of money and assets as a real risk and one that is linked to financial instability. It is imperative that firms ensure they have the appropriate systems and processes in place to mitigate these risks, whether or not the proposed changes come into force.
We asked Tony Guise, a Director of GUISE Solicitors Limited (the specialist law firm advising solicitors) for his views about our survey results. Tony commented:
a) “If rule 32 of the SRA Accounts Rules 2011 goes (the obligation to deliver an accountant’s report within 6 months of the end of your accounting period) the burden of regulation is unlikely to be eased, in my view, as it is highly likely the SRA will issue an amended set of rules 32-40 (and relevant appendices) substituting the COFA for the accountant. Arguably given the COFAs’ existing reporting obligations they need not add yet further rules however they are likely to retain the forms of report (to be found in the appendices to the SRA Accounts Rules 2011). I consider that this change will have the following principal effects: The decision to report a material breach will become all the more fraught with personal liability if the wrong call is made without firstly undertaking the most careful of investigations including, if necessary, seeking appropriately qualified legal advice and establishing information barriers;
b) If this change goes ahead then COFAs’ lives will become much trickier and will lead to greater cost and non-chargeable time not less as they must ensure the resulting void is filled. The Court of Appeal held in Law Society v KPMG [2000] EWCA Civ 5563 that KPMG (as reporting accountants for a firm of solicitors) was liable to the Law Society for failing to report breaches of the Accounts Rules. Damages would be measured by at least the loss to the Compensation Fund (ca £8.5m in that case). The KPMG case may be found here: http://www.bailii.org/ew/cases/EWCA/Civ/2000/5563.html [2]
and,
c) COFAs will rush (or should!) to ensure they are personally insured against such claims and any claims from fellow owners.
To have any chance of coping the COFA must have information presented in an intelligent way to enable the COFA to protect the firm’s clients, the firm itself and themselves”.