A big decision for law firms?

16 December 2015

Important changes to the SRA Reporting Accountants Requirements

As announced in November 2015, the second phase of the Solicitors Regulation Authority (SRA) consultation on the changes to SRA Accounts Rules 2011 has recently been implemented.

For accounting periods ending 1 November 2015 onwards, reporting accountants are no longer required to carry out the detailed testing that was previously set out in Rule 39 of the SRA Accounts Rules 2011, but instead are able to use their professional judgement in adopting a suitable work programme and in deciding whether their subsequent report needs to be qualified. In addition the SRA has exempted very small firms from the requirement to obtain and deliver accountant’s reports:-

 A firm is not required to obtain or deliver an accountant’s report if:

  • All of the client money held or received during an accounting period is money held or received from the Legal Aid Agency (or from a third party in the specific circumstances set out in rule 19.3); or
  • In the accounting period, the statement or passbook balance of client money held or received does not exceed:
  1. An average of £10,000; and
  2. A maximum of £250,000,

or the equivalent in foreign currency.

What does this mean for reporting accountants?

For the most part, the rules themselves have not materially changed. If something was a breach before, it will still be a breach going forward, so no change there. What will change is how reporting accountants ultimately end up reporting.

The work that is carried out will become much more controls focussed, with the need to obtain detailed systems notes and test and assess the systems and controls in place to ensure that client money is not at risk. The SRA will only require firms to report material breaches and these are likely to arise as a result of deliberate intention to break the rules or due to significant weaknesses in the firm’s systems and controls such that there has been a systematic breakdown of the controls designed to prevent breaches. In all cases the work reporting accountants carry out should be proportionate, targeted to the size of the firm and to the nature of the work that they undertake.

Rather than having to report on the whole set of rules, the SRA now requires accountants to focus on 10 key rules. They have also issued some guidance for reporting accountants which sets out details of the rules that they should focus on, serious factors that must be reported and moderate factors that may lead to a qualification. There is also guidance on the tests that reporting accountants might wish to carry out along with indicators of processes and procedures in an above adequate, adequate and below adequate firm.

What does this mean for law firms?

Whilst initially there was a perception within the legal sector that the changes to Rule 39 may go some way in lowering a law firm’s SAR audit fee, as indicated above will not necessary be the case.

For those law firms that are required to submit an accountants report it is expected that in a firm that has strong controls and processes in place, the reports that accountants produce are not likely to be qualified.

The reporting accountants need to draw on their experience and expertise to advise law firms on potential risks as identified thereby delivering independent advice and ultimately value for money. To ensure that the removal of rule 39 doesn’t open the door to relaxed procedures and reporting, the advice to law firms, more than ever, is to work closely with a reporting accountant that knows the legal sector and has a focus on growth and financial stability, and not just the reporting processes within your practice.

“There have been many economic and legislation changes for the legal sector over the past five years and we’ve seen the firms that have a strong growth and diversity strategy backed up by the right controls and procedures have weathered the storm well. Essentially, the changes to Rule 39 should not change the way a firm views its financial reporting. To ensure our own reporting approach remains consistent and valuable to our clients, we have reviewed our own procedures for the work we undertake with our clients.” Harmy Gill, Head of Legal Services at MHA MacIntyre Hudson

Future changes

The final phase of the SRA consultation is due to take place in 2016, when they are intending to undertake a wider review of the Accounts Rules as a whole.

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