Solicitors Accounts Rules: latest FAQs

Steve Collings considers some of the emerging questions that are being asked as part of the overhaul of the Solicitors Accounts Rules 2011 and the ‘outcomes-focused’ regime which now governs the way providers of legal services are regulated.

I am a reporting accountant for a law firm with a 31 March 2012 year-end.  Do I just use the new 2011 rules?

The new rules came into effect on 6 October 2011 and where a client has a year-end that spans this date there will be two sets of rules to consider.  You will use the old 1998 rules for the period 1 April 2011 to 5 October 2011 and the new rules from 6 October 2011 to 31 March 2012.  For the accounting period ended 31 March 2013, the only rules to be considered will be the new 2011 rules.

My client has received client money which it has invested in stocks and shares.  Is this money still client money?

When a firm invests client money in stocks and shares, it ceases to be client money because it is no longer money held by the firm.  Where the stocks and shares are sold at a later date, the proceeds from disposal will become client money.

A solicitor’s client paid a cheque to the practice which was subsequently paid into client account.  This cheque then bounced and was debited to the client account.  Is this a breach of the rules?

Yes, a breach of SAR 2011 rule 20 has occurred because other client monies will have been used to make the payment in respect of the dishonoured cheque.  Your solicitor client should be advised to instruct their bank to charge any dishonoured cheques to the office account to avoid further breaches of the rules.

My client lost their bookkeeper at the start of the financial year and the bookkeeping is now significantly behind.  Is there anything I need to report to the SRA in my accountant’s report?

While reporting accountants are not required to carry out a detailed check for compliance with the Guidelines in Appendix 3 of the 2011 rules, the reporting accountant does have a duty to report to the SRA on any substantial departure from the Guidelines (as per rule 26) that they may discover during the course of their work.  The fact that the law firm has not completed their bookkeeping on a regular basis (at least weekly for smaller firms and daily for larger firms in accordance with the guidance notes in rule 29) would more than likely be classed as a substantial departure from the Guidelines.

I have recently had a regulatory visit from my professional body who has stated that whilst I obtained copies of cheques from my solicitor client, such photocopied cheques are not permissible.  Is this really the case?

Your regulatory inspector is correct – the cheques in your sample must be paid cheques i.e. they must have gone through the banking system.  Photocopied cheques from a law firm’s internal records are not appropriate.  The bank should supply you with a copy of both the front, and the back, of the cheque and digital images of such are permissible under the rules.

I act as both bookkeeper and reporting accountant for my solicitor client.  I am worried that there may be a breach in the rules?

Guidance note (i) in rule 34 confirms that it is not a breach of the rules for a reporting accountant to also act in the capacity of a bookkeeper.  However, you will have to disclose these circumstances in the accountants’ report.

Is it permissible for my solicitor client to drop off their files, books and records to my office rather than me attend their premises to undertake the work required for the accountants report?

Only in exceptional circumstances can the place of examination of your client’s accounting records be done at your offices.  Rule 37.1 requires the work to be completed at the law firm itself but does recognise that electronic transmission of information can be sent to the accountant’s office to try and reduce the time spent at the client’s premises.

I am preparing the accountants report for a newly-formed firm of solicitors.  The bank did not include the word ‘client’ in the name of the bank account for a short period of time after the account was opened.  Am I correct to treat this as a trivial breach and not qualify my report in this respect?

No you must qualify your report.  This is a breach of 1998 rule 13.3 and a breach of 2011 rule 14.3 and such a breach cannot be treated as a trivial breach because the word ‘client’ must be present in order that the protection to clients under section 85 of the Solicitors Act 1974 can apply.

On 1 November 2011 my sole practitioner solicitor client died and the client account was subsequently frozen resulting in some overdrawn client accounts. Would this result in a qualified report?

In the unfortunate event that a sole practitioner dies, it is permissible under 2011 rule 20.9(b) for client accounts to become overdrawn but only to the extent of the money held in frozen accounts.  Any overdrawn balances in excess of the money held in frozen accounts would result in a breach of the rule.

My solicitor client has been unable to raise a bill of costs to a client because the client is untraceable.  Can he simply do a transfer from the client account   to office account as he has raised the bill of costs?

This will not be permissible in the circumstances as the solicitor is not able to make the transfer in accordance with rules 17.2-17.3.  Where the client has vanished without trace, the solicitor must apply to the SRA, regardless of the amount involved.

I have heard that solicitor clients are ‘high risk’ – why is this?

In 1999, it was ruled in the case of The Law Society v KPMG Peat Marwick and Others that there was a duty of care owed to the Law Society by the reporting accountants, KPMG Peat Marwick in the preparation of accountants’ reports.  KPMG had prepared annual accountants reports for a law firm where fraud was being committed.  Following the discovery of the fraud the firm’s senior partner received a custodial prison sentence and the losses were paid to the clients from the Law Society Compensation Fund.  It was ruled that there was a duty of care owed by KPMG to the Law Society and that the loss to the Law Society’s compensation fund was reasonably foreseeable as well as the fact that there was reasonable proximity between the Law Society and the reporting accountant.

The SRA also has their own monitoring unit that visits law firms to ensure compliance with the rules.  If the reporting accountant is found to be negligent in preparing the accountants’ report they can be prohibited from acting for any other law firms (rule 34).  This will also trigger a disciplinary process through the accountant’s own professional body, so the high risk element of acting in the capacity of reporting accountant cannot be over-emphasised.

Category: Accounting and standards, Audit