Staight: Evidence of improper use of suspense ledgers
A leading firm of accountants says two-thirds of law firms whose books it examined for regulatory reports had broken the rules on residual balances.
However, Jenny Staight, director at Hazlewoods, said that in only 7% of cases were the breaches serious enough for firms’ accountants’ reports to be qualified.
Ms Staight said law firms that removed responsibility from fee-earners for clearing residual balances, “particularly the older ones”, tended to “fare better”.
She went on: “It seems to be a persistent challenge to get fee-earners to dedicate time to resolving residual balances, regardless of how significant the issue may be”.
In a round-up of accounts rule audits Hazlewoods conducted for around 150 law firms regulated by the Solicitors Regulation Authority and the Council for Licensed Conveyancers, Ms Staight said 90% of them in 2024 were unqualified and 23% had no breaches at all.
“The most common reason for needing to qualify reports was residual balances, which will come as no surprise. Only two of the firms we audited had more than one qualifying breach.”
Residual balance rule breaches which resulted in qualified accountants’ reports typically arose “where there has been no notable improvement on previous years, or where the firm has no clear plan to deal with the balances”.
Breaches included the improper use of suspense ledgers, where historic balances had not been cleared, and law firms using charity ledgers to transfer small balances before donation but failing to donate regularly, “or at all”.
Ms Staight said suspense ledgers should only contain current balances and charity ledger balances should be donated to charities at least annually.
Reports also had to be qualified because audits were not completed by the six-month deadline for filing, or because of “serious issues” which put client money at risk, for example “miscellaneous ledgers being used for multiple clients, providing banking facilities, and significant issues around office ledger credit balances”.
Breaches categorised as “significant but not reportable” included further problems with office ledger credit balances.
These were caused mainly by receipts directly into office account, such as clients paying directly into office account in excess of the balance due, but also when funds were transferred from client to office accounts in excess of the sum due.
Incorrect withdrawals were the next most common problem, usually relating to money transferred from client to office accounts in excess of the balance due or held.
“These instances become more serious depending on the number of occurrences, amounts involved and how long it takes for them to be identified and corrected.”
Further common breaches involved bank reconciliations, including reconciliations not being reviewed and signed off by managers within the deadline of one month, and “potentially acting as a bank”.
Firms were at risk of acting as banks where they transferred funds between matters in the absence of underlying legal transactions, retained commercial lease deposits or held funds at a client’s request for future instructions, “without an active matter ongoing”.
Other accounts rule issues related to incorrect postings, overdrawn client ledgers, failing to ensure accounts teams were aware of all client accounts, miscellaneous ledgers containing transactions for multiple clients and “client accounts without ‘client’ in the title”.
These often related to foreign currency accounts, but “the same rules apply to all client accounts”.
Ms Staight added that, as Hazlewoods actively worked with clients to help improve controls and procedures, it was likely that the picture at law firms more generally was worse than this.
