In May 2014, the Solicitors Regulation Authority (SRA) announced that they were considering removing the requirement for all firms of solicitors who hold client money to have an annual accountant's check, their argument being that this mandatory 'one size fits all' approach was neither proportionate nor targeted and added an unnecessary additional regulatory (and cost) burden onto the law firms. Given that it is the responsibility of the Compliance Officer for Finance and Administration (COFA) to maintain a list of breaches and self-report significant breaches, why the need for an external accountant?
Thankfully common sense prevailed and in September 2014 it was announced that whilst there is clearly a need for a fundamental re-think of the rules, a total removal of the requirement for a reporting accountant was not the answer.
A three-phase process was announced, the first of which took effect in October 2014.
On 31 October 2014 the limit for balances which can be paid to charity without prior SRA approval under Rule 20.2 was raised to £500. Solicitors still need to make a reasonable attempt to identify the owner of the money and repay it to them but if this proves impossible, for those balances between £50 and £500 the administrative burden of applying to the SRA has been removed.
To help solicitors ensure they have made reasonable attempts to return the money to its rightful owner the SRA have published guidance on their website. Whilst it is not a definitive list you would certainly expect more of an effort to be made if the amount was £499 than if it was £49.
Additionally, for periods ending on or after 31 October 2014 the requirement to have an external accountant's report was removed for those law firms that receive 100% of their client money from the Legal Aid Agency. All other firms will continue to need a report but only qualified reports need to be filed with the SRA.
Given that the responsibility for filing the report lies with the solicitor the last point does raise the question 'how will the SRA know an accountant's check has been carried out?'
The impact of phase one will reduce the number of reports submitted but given that approximately half are currently qualified...not by much.
Phase two raises a much bigger question which is - what should the accountant be reporting on? It seeks to re-examine the criteria for a qualified report amongst other things.
It looks likely that the accountant will be able (be required) to exercise more judgement in the tests that they undertake and ultimately the report will be an opinion as to whether the client money system enables the solicitor to substantively comply with the rules rather than the current 'breach' or 'no breach' report.
This would allow a much more risk focussed approach to be taken and may require accountants to apply more of an 'audit style' approach to such work. If substantive deficiencies are found the report will be regarded as qualified and will need to be submitted to the SRA.
It also raises the question as to whether the responsibility for submitting the report should be transferred to the reporting accountant but this doesn't seem to be something the SRA view as necessary.
At the same time the SRA are considering exempting a further tier of 'low risk' law firms from the mandatory requirement to have an external accountant's report.
A consultation draft is out at the moment so if you want to make your views known you have until 28 January 2015 to submit your responses, after all 'what else will you have to do in January?!'
If enacted (and it seems inevitable that it will be at least to some extent) it is envisaged this will come into force in April 2015 so watch this space for the impact on your work and responsibilities.
Phase three will be a fundamental rethink of the rules themselves and is planned for April 2016. It may be that the very prescriptive and detailed rules are replaced with a more outcomes focussed approach.
Whatever the outcome of phases two and three, the next couple of years are likely to be a period of change both for accountants and their solicitor clients which may present both threats and opportunities, however these proposed changes certainly looks likely to keep us all busy for some time to come.
Sally will be chairing our Solicitors Conference on 12th May 2015 (more details to be published on our website in due course - www.mercia-group.co.uk/Courses/Conferences)