The Solicitors’ Regulation Authority has issued its second consultation on the Accountant’s Report. The document reveals a structured thought process and the SRA, keen as always to ensure that client money is protected, wants there to be a “proper degree of oversight and control”. This results in a number of questions being posed on this subject and also on the upcoming wider review of the Clients’ Accounts Rules themselves. However it also wants to reduce administration costs as much as possible, particularly for smaller firms where there is less risk to client money.
One proposal is that firms with client-account balances under £50,000 be exempt from the Accountant’s Report. This is a step in the right direction. It would affect 25% of law firms and so would take out of the regime many assignments for which there is no benefit or protection. Unfortunately, it is unclear how a register of such firms would be maintained.
Another proposal is that, where a report is required, the accountant should use their professional judgement to determine its scope and depth. As accountants, we are acutely aware that demands to employ our “judgement” tend to also increase the level of risk that we take on. However, human nature dictates that when there is more to lose there’s a greater incentive to co-operate. So we would hope that the proposal encourages a mutually beneficial relationship between COFAs and accountants.
A combined approach does offer the best outcome for both parties. Accountants and COFAs working closely together can review the firm’s systems and controls, and then agree a risk-based approach to establish if everything is in order. The accountants will be able to employ their judgement with greater confidence, and the consultation will assist the COFAs in their role.
There are spin-off benefits as well. By becoming involved in the management of the practice, accountants gain a better understanding of how to drive efficiency in the “office” side of the business. I have seen many instances where closer working has resulted in a more profitable legal business. I have also seen these benefits follow through to the client side of the business. It is a role we have tried to adopt for many years, and I am pleased that it now appears to be very much a natural extension of the SRA consultation.
For example, whilst all accountants will have undoubtedly issued a management letter of sorts, how much reference, if any, is ever made back to the now defunct Reporting Accountant’s Checklist (can you remember which drawer it is filed in?). Then there is the breaches register. This document is of paramount importance in understanding how the law firm identifies, evaluates and acts upon possible breaches. Along with the bank reconciliation, it is one of the few pieces of evidence that show how seriously the solicitor or law firm takes the Rules. The COFAs need to take these elements of their role seriously and demonstrate it with signed monthly reconciliations and a detailed record of their systems and controls.
Solicitors Accounts’ Rules are, presently, very prescriptive. Many see this as an advantage, but with accountants being asked to use professional judgement and outcomes-focused regulation already with us, the one-size-fits-all Accountant’s Report had to become a thing of the past.
The SRA consultation ends in January and changes will come into effect in April 2015. COFAs can look forward to a more enhanced, interactive, mutually beneficial relationship with their Reporting Accountant. Both sides will have to focus on managing their risks, which is always a good thing.
For more information about Menzies LLP or to talk to us about this blog piece in more depth, contact your Menzies Relationship Partner or contact Menzies directly.