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Blog - Published 9th May 2014

SRA Abolishes The Annual Accountant’s Report For Law Firms

Menzies Peter Noyce legal blog

The SRA’s proposal to abolish the annual accountant’s report is no surprise. It is undoubtedly a burden on smaller law firms, and the SRA’s proposal could save the legal profession up to £30 million a year. The move cannot fail to be popular with lawyers and law firms in the present climate. Accountants will not be quite so happy, but as a profession we have only ourselves to blame.

Abolishing the report brings almost no downside for the SRA. It expects to save £200,000 a year in administration costs. The only potential negative is that if in the future it has to resolve more client account problems (and there will be some), it may eventually have to pass the cost onto lawyers through higher practising certificate charges. At worst, it will not quite deliver the eye-catching savings that were first announced.

External regulation will be replaced by self-regulation as law firms’ compliance officers, the COFAs, will be required to sign a declaration stating they are satisfied that client accounts are being managed in accordance with SRA Account Rules. This is undoubtedly the cheapest way to oversee protection of client funds, and the SRA’s consultation paper is simply a natural extension of its own outcomes-focused regulation.

Of course, there will be those who question the effectiveness of self-regulation. But the existing system only provides an effective deterrent if you believe that (a) there are a lot of crooked lawyers stealing client funds and (b) that external auditors pick up on all irregularities. I would hazard a guess that this point of view is more commonly held in the accounting profession than the legal profession.

Pros & Cons of the annual accountant’s report

The harsh fact is that, at some point, the accountant’s report went from being a valuable external check to being a pointless piece of red tape. The harsher fact is that blame for its fall from grace lies squarely at the feet of the accountancy profession. For years it has taken a one-size-fits-all approach towards the reporting assignment and missed the obvious point – that adopting a risk-based approach would have been far more valuable and effective.

If proof were needed, look no further than the SRA’s consultation document, which suggests that many accountants have been charging £800 for the assignment. I seriously doubt that any firm could treat the assignment seriously for such a low fee. There are simply too many important tests of systems, balances and the operation of a firm’s client account. The picture that emerges is one of accountants providing a light-touch review, with little or no guidance on risk and governance for law firm compliance officers. If the SRA believes that the clients’ account review only cost £800, they must have thought it was not worth the paper it was written on. No wonder they took it in-house.

Why continue with a process that provides no meaningful feedback regarding risk and governance, but costs £200,000 a year to administer? In addition, by the time any information regarding anomalies comes to light, it is so old that those horses would have well and truly bolted.

There will doubtless be gripes from some sections of the accountancy profession, but we have only ourselves to blame. We should have focused on adding value, not minimising costs. Better to spare a thought for the people who have been let down most by this affair – the COFAs who should have received independent opinion and guidance in the first place.

Therefore, RIP the accountant’s report, but I believe that the £30 million saving is a massive opportunity for accountants to get closer to their clients, not only to assist the COFA, but also to provide much more valuable practice management advice. Something the legal profession desperately needs right now.

Comments written by Peter Noyce – Partner and Menzies Business Services Sector team member.

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Peter Noyce - FCA

Partner

Peter Noyce is a Menzies Partner in the Woking office specialising in legal firms, corporate tax advisory services and financial solutions.