Looking back over the audits completed by Hazlewoods over the last three years under the 2019 SRA Accounts Rules, and in the shadow of COVID-19, Jenny Staight, a director in the Hazlewoods legal sector team, reveals what the common breach issues have been. (8 March 2023)
In 2020, nearly a third of the Accountant’s Reports that we prepared were qualified. This fell to 20% in 2021 and to 15% in 2022.
The most common reportable breach in all three years was residual client balances (rule 2.5), and in all cases this was where firms had not done enough to deal with historic balances. We expect this number to continue to fall, as firms introduce more robust systems and processes to ensure new residual balances do not arise.
The second most common breach, which represented around a third of all qualified reports for those three years, was rule 3.3 (providing banking facilities). Instances of providing banking facilities are usually reportable by their nature. In most cases, the breaches of rule 3.3 related to funds being retained where there was not a clear ongoing underlying legal transaction.
- a client asking a firm to hold onto a balance of funds because they intended to instruct the firm on another matter at some point in the future;
- holding funds because a client or beneficiary did not have a bank account;
- there not being sufficient controls in place to ensure retained funds, such as a road retention, were released at the appropriate time.
Other issues that were not as common, but worthy of note, were:
- transactions for multiple clients being recorded on the same ledger;
- suspense accounts not being reconciled and/or cleared regularly;
- bank reconciliations not being prepared and/or reviewed properly.
Around three-quarters of our audits in the last three years identified breaches that we considered to be significant but not reportable. For example, breaches where something fairly serious had happened, but was identified and corrected promptly; or breaches that could become reportable if action was not taken.
On a brighter note, around 20% of our reports in the last three years found no issues at all.
So, with this is in mind, what are our predictions for the future?
Firstly, the number of qualified reports will continue to reduce as firms really get to grips with the serious issues. Unnecessarily holding retentions will fall as historic lease agreements and similar arrangements come to an end and as lessons from the past are learned.
Secondly, firms will focus more on their controls over clients’ own accounts. This is the only area where the SRA introduced more requirements in the latest version of the rules, after solicitors who were acting as signatories on these types of account were found to have misappropriated funds. As more time passes, reporting accountants are likely to become less lenient in regard to weaknesses in this area.
Lastly, the SRA opened a consultation on 14 December 2022 that proposes some minor amendments to the SRA Standards and Regulations and, in particular, some clarification around parts of the SRA Accounts Rules. Can we expect a little more clarity around some notoriously cloudy areas? Let’s hope so.
(Note: This edited item was first published in the Hazlewoods e-magazine Legal Focus, March 2023)