My previous blog on this subject suggested that the SRA’s second consultation on the Accountant’s Report was positive and very much hoped that they would listen to some (anticipated) worthwhile, proactive observations from interested parties.
The SRA has published the results of the consultation into the “changes to reporting accountant requirements” and this has now been approved by the Legal Services Board on 2nd September. This details which firms will still need an Accountant’s Report; what the form will look like, but most pleasing for both accountants and COFAs is some decent guidance now exists as to what are “material breaches” and analysis of “serious” and “moderate” factors that, if present, would indicate “a risk to client money”. This is an excellent step forward along with the provision of a detailed overview of the key rules and areas that the Reporting Accountant may wish to cover when planning the work he/she will undertake.
The proposal (in addition to the previously announced 100% Legal Aid practice exemption) is that firms with client account balances under £10,000 on average be exempt from the Accountant’s Report. This is a step in the right direction, although setting the threshold at £50,000 would have taken an estimated 25% of law firms out of the regime, so perhaps this does not actually go far enough?
The main proposal carried forward from the consultation is that, where a report is required, the Reporting Accountant should use their professional judgement to determine the scope and depth of the Accountant’s Report assignment and, therefore, can adopt a much more risk-based, focused approach. Whilst this may well be perceived as an increased risk for accountants, it should encourage a mutually beneficial relationship between COFAs and accountants. And as mentioned above, the SRA have given a decent steer of the tests expected.
Benefits of SRA Announcement
A combined approach from all interested parties offers the best outcome for all. Accountants and COFAs working closely together can review the firm’s systems and controls, and then a risk-based approach establishes, based upon testing performed, if everything is in order. The accountant will be able to use their judgement with greater confidence, and the consultation will assist the COFAs in their role.
As I mentioned in my earlier blog, there are spin-off benefits as well. By becoming involved with the management team of the practice, accountants will gain a better understanding of how to drive efficiency in the “office” side of the business as well and I have seen many instances where closer working has resulted in a more profitable legal business. It is a role we have tried to adopt for many years, and I believe this is very much a natural extension of the SRA consultation, thereby potentially benefitting both clients’ account risk management and profitability in harmony, wow!!
Returning to the positives of the SRA announcement, 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 most important pieces of evidence that show to accountants performing a review 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. I am pleased that the SRA guidance on what processes and procedures the Reporting Accountant would expect to see has specific reference to the breaches register; the extent to which breaches are recorded, followed up, reviewed and what action is taken. This is an excellent inclusion in my opinion.
Solicitors Accounts’ Rules are, presently, very prescriptive (although also up for review). 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 already become a thing of the distant past.
As I previously hoped for, COFAs can look forward to a more enhanced, interactive, mutually beneficial relationship with their Reporting Accountant with both sides having to focus on managing their risks, which is never a bad thing.