Following on from our first article looking at the role of the COFA (Compliance Office for Finance and Administration), in this second guidance we will look at the breaches of SRA accounts rules, the term material in more detail, financial instability and some helpful guidance on those areas which are regularly highlighted in our accountants report review and management letters.
Reporting requirements
In our last article we discussed the requirement for a breaches register. Both COLP’s and COFA’s will be required to report all material breaches in compliance to the SRA as soon as reasonably practicable. Under the original drafting (Rule 8.7 of the Authorisation Rules) the firm would be deemed compliant if the non-material breaches were reported as part of the annual Information Report.
However, the SRA have recently announced it will look to remove the requirements for firms to report non material breaches. Firms will need to continue to record such breaches so patterns can be identified. This change will be consulted in the next stage of the SRA’s red tape initiative and is likely to come into force in October 2013.
Material breaches
All material breaches will need to be reported to the SRA as soon as reasonably practicable, but just what are material breaches? Materiality can be very subjective; what is material to one person may not be to another. So when deciding if a breach or series of breaches are material one should consider the following:
- The detriment or risk of detriment to clients
- The extent of any risk to loss of confidence in the practice or in the provision of legal services
- The scale of the issue
- The overall impact on the practice, its clients and third parties.
It is important to note that while a single breach may be trivial, if part of a series then it may be material. It is therefore important to record all breaches trivial or otherwise and this will help identify patterns of breaches.
This poses a risk that the SRA may suspect that you have deliberately or otherwise failed to report what they consider to be a material breach. So how can the COFA rebut any suspicion? We would recommend that for any breaches you consider borderline or material, a second opinion is sought from:
- Your fellow Partners
- Experts, or even other Compliance Officers
- The SRA’s professional ethics department (on a discrete basis)
- Your local law society if it provided a guidance service
- Your accountants.
The thought processes, discussions, the steps you have taken to remedy the situation and prevent its reoccurrence, should be recorded as part of the register. This will be the cornerstone of your defence, if required.
Financial instability
The COFA role covers a wide range of issues including business management and financial stability and the compliance officer will need to notify the SRA if they believe the practice is in serious financial difficulty. Five years ago it was rare to hear of firms becoming insolvent. In recent issues of the Law Gazette the number of interventions has increased considerably and the total for 2013 is likely to exceed the 30 firms intervened last year.
The SRA have recently (March 2013) outlined three key warning signs. The three indicators forming the basis of the SRA’s risk assessment are drawings exceeding profits, borrowing exceeding net assets and borrowing over a certain limit. What limit we will have to wait for more guidance on.
Those firms showing two or three of these indicators will be given a red rating. Those with one indicator are rated amber and those with none are given a green. Red rated firms are therefore identified as high impact firms in serious financial risk and will receive intensive supervision.
More importantly, with one of the roles of COFA being to notify the SRA of financial difficulty, these three indicators are a starting position for firms to consider their financial stability
How to avoid common SAR breaches
1. Are your client account reconciliations prepared on a monthly basis? Make sure the reconciliation includes all client bank accounts (general and designated) and is prepared on a timely basis. The reconciliation should be reviewed and signed by the designated partner or COFA and any unresolved differences investigated and, where appropriate, corrective action taken. Ensure you retain either a hard or soft copy of the reconciliation and client listing.
2. Do you reconcile your office bank accounts on a monthly basis? Quite often, during an SRA inspection, the office bank reconciliations are the first documents to be requested.
3. Ensure your client bank accounts are correctly titled. The full word client must appear in the title.
4. Each month do you review your office listing balances for any overdrawn accounts that may hold client money?
5. Do you review your client listing balances for any overdrawn client accounts? If these arise at the month end reconciliation date then the total of any debit balances cannot be netted off against the total of credit balances and should be shown as a difference on the monthly reconciliation.
6. Are you dealing with old balances? Many firms are not addressing this issue despite the rule changes in 2008. Consider donating balances under £50 to a charity and applying to the SRA to donate balances over this amount.
7. Have you reviewed your last reporting accountant’s management letter? Many qualifications appear on a recurring basis and are not addressed. A copy of the management letter (or the salient points) together with any changes to the practice systems should be sent to all partners.
8. Do you have suspense/miscellaneous accounts? They should only be used on a temporary basis.
9. Are your office and client ledgers regularly reviewed for any balances on both? This may highlight potential transfers required under the 14 day rule.
10. Are you recording any breaches discovered? In our first article (part one) we highlighted the need to keep a breaches register.
All of the above are easily and quickly rectified as long as your internal systems and procedures operate on a timely basis.
Further information
If Menzies LLP can be of assistance in regard to any of the points raised above or in respect of any compliance and tax issues, please contact your local office or the firm’s legal team representative Peter Noyce at pnoyce@menzies.co.uk
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