Solicitors Accounts Rules and Reporting Accountants: the importance of risk management

Solicitors, and indeed reporting accountants, who act for law firms for the purposes of preparing the Solicitors Accountants Report and Reporting Accountants Checklist are aware that there is a new compliance regime that has been introduced from 6 October 2011.  Significant changes were made to the Solicitors Accounts Rules from this date to reflect the ‘outcomes-focused’ regime which I covered in a previous article.

Unfortunately change comes at a price, and in many cases the price paid is the lack of awareness of the significance of such changes.  For reporting accountants, there will be two sets of accounts rules to consider where a law firm’s accounting period spans the transition period between the 1998 rules and the 2011 rules, illustrated as follows:

Risk

It is widely understood that law firms are considered ‘high risk’ where accountancy firms are concerned.  There is no derogatory reasoning behind this risk classification; solicitor clients are merely high risk because of the duty of care that is owed to the Solicitors Regulation Authority (SRA) by the reporting accountants.  For this reason, professional bodies place a high level of emphasis on regulated clients to make sure that member firms are carrying out the work to an appropriate standard.

The accounts rules themselves fall under the ‘umbrella’ of the Handbook issued by the SRA which came into effect on 6 October 2011, but now form part of Edition 2 of the Handbook which was published, and came into effect on 23 December 2011.

The work of the reporting accountant is not the same as that of an auditor (despite many law firms referring to the work of the reporting accountant as the ‘audit’).  As the reporting accountant is not expressing an opinion on the truth and fairness of the financial statements, there is no requirement to apply UK and Ireland International Standards on Auditing (ISAs).  However, some of the principles contained within the ISAs will be applied (such as sampling methods and planning the assignment).

Unfortunately, it is evident that there are many law firms that are simply not taking on board the importance of risk management, particularly in light of the new outcomes-focused regime.  Not only is this detrimental to the law firm in terms of compliance with the SRA’s Handbook, but ignoring risk management at practice level undoubtedly has an impact on compliance with the accounts rules, which will more than likely have an impact on the accountants’ report so ignoring risk management can, in fact, have a ‘snowball’ effect.

Outcomes-Focused Regulation

The SRA has defined what the term ‘outcomes-focused’ IS where law firms are concerned.  The SRA have said it is:

• designed to enable you to put clients first, where this does not prejudice public interest;
• about achieving the right outcomes for clients;
• flexible; and
• a move away from the prescriptive rules wherever this is appropriate.

The SRA goes on to say that the outcomes-focused regime is NOT:

• light-touch regulation;
• a tick-box approach to regulation; or
• a one-size-fits-all approach to regulation.

Adèle Warchester, a leading quality management consultant and former managing partner of a law firm, says ‘good risk management underpins quality.  It also underpins Outcomes-Focused Regulation – the way providers of legal services are now regulated.’

Adèle stresses that appropriate risk management at practice level cannot be over-emphasised:  ‘the identification and management of risk is at the heart of the SRA’s approach and firms will need to understand risk within the context of their own individual firm – its identification, causes and management and will need to communicate with the SRA in an “open, timely and co-operative manner”’.

Clearly, law firms have a duty to ensure that issues which are giving rise to risk in their practice are dealt with promptly.  Adèle warns law firms, ‘the repercussions of not doing so can be drawn from the following quote from the SRA:

“The intention is that firms who actively manage risk by achieving relevant accreditation or by demonstrating effective risk management will experience a less intrusive relationship with us than would otherwise be the case.”‘

Adèle’s final words of advice to law firms are that a ‘less intrusive relationship’ should be the aim!

For advice, of if you are a law firm concerned about how to approach risk management, Adèle can be contacted at: adele@warchester.com

Impact on reporting accountants

Clearly if a law firm is not exercising good risk management, this should be carefully considered in the reporting accountant’s approach to completing the Solicitors Accountants Report.  If a law firm is not willing to manage risk appropriately, the chances are that the accountants’ report will be qualified because of a breach in the rules.  While many firms encounter a qualified report (some with no follow-up by the SRA), the SRA do review such qualified reports and if they see a pattern emerging year after year, this is highly likely to result in a firm moving up the ‘risky’ list at the SRA.  Indeed, during any routine practice montoring visits, firms will be asked to justify any repeated failings which have given rise to a qualified accountants’ report.

Reporting accountants cannot forget the duty of care they owe to the SRA when compiling the accountants report and professional bodies that monitor the quality of the work by reporting accountants will always want to see a sample of files to make sure that the work is being undertaken correctly.  Reporting accountants must also be aware of the powers of the SRA. If it can be demonstrated that a report has been compiled negligently, i.e. that the SRA is satisfied that the solicitor/firm has not complied with the rules in respect of matters which the reporting accountant has negligently failed to specify in a report, the SRA has the power to disqualify a reporting accountant from dealing with any accountants’ reports (Rule 34).  Where the SRA do disqualify a reporting accountant, the accountant can also expect to be reprimanded by their professional body (and it will not be a light-touch reprimand!).

Conclusion

Law firms and reporting accountants are both subjected to a new regime from 6 October 2011, and law firms are strongly advised to take risk management seriously because if the firm fails to address issues which increase risk appropriately, the chances are this will have an impact on the way the firm applies the accounts rules and affect the opinion of the reporting accountant.  Reporting accountants must also consider the law firm’s attitude to risk during the planning phase of an assignment because sample sizes may have to be increased if it is concluded that risk is higher.

Category: Accounting and standards