Accountants' reports and regulatory compliance - Obtaining and delivering accountants' reports

Learning Outcomes

After studying this article, you will be able to explain when a solicitor’s firm must obtain an accountant’s report, identify who can prepare such a report, describe the process and deadlines for delivering reports to the SRA, and recognise key exemptions and compliance requirements. You will also understand the consequences of qualified reports and the importance of accurate recordkeeping for SQE1.

SQE1 Syllabus

For SQE1, you are required to understand the regulatory requirements for accountants’ reports under the SRA Accounts Rules. In your revision, focus on:

• when a firm must obtain an accountant’s report and when exemptions apply
• who is qualified to prepare and sign an accountant’s report
• the process and deadlines for delivering reports to the SRA
• the meaning and consequences of a qualified report
• the firm’s obligations to provide information and retain records
• the role of the Compliance Officer for Finance and Administration (COFA) in this process

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which firms are exempt from obtaining an accountant’s report under the SRA Accounts Rules?
2. What is a qualified accountant’s report, and what must a firm do if it receives one?
3. Who is permitted to prepare and sign an accountant’s report for a solicitor’s firm?
4. What is the deadline for delivering an accountant’s report to the SRA after the end of an accounting period?

Introduction

Accountants’ reports are a key regulatory requirement for solicitors’ firms that hold or receive client money. These reports provide independent assurance to the SRA that client funds are managed in accordance with the SRA Accounts Rules. Understanding when a report is required, who can prepare it, and how and when to deliver it is essential for SQE1 and for compliance in practice.

The Purpose of Accountants’ Reports

Solicitors’ firms must safeguard client money and comply with strict financial controls. The SRA requires most firms that hold or receive client money to obtain an accountant’s report each year. This report is prepared by an independent, qualified accountant and confirms whether the firm has complied with the Accounts Rules and whether client money has been at risk.

Key Term: accountant’s report
A formal report prepared by an independent, qualified accountant confirming a solicitor’s firm’s compliance with the SRA Accounts Rules regarding client money.

When Must a Firm Obtain an Accountant’s Report?

A firm must obtain an accountant’s report if, at any time during its accounting period, it has held or received client money, or operated a joint account or a client’s own account as signatory.

However, there are important exemptions:

• If all client money held or received during the accounting period is from the Legal Aid Agency, no report is required.
• If the average client money balance during the period does not exceed £10,000 and the maximum balance at any time does not exceed £250,000, the firm is exempt.
• If the firm does not hold or receive client money at all during the period, no report is required.

Key Term: accounting period
The period (normally 12 months) for which a firm prepares its annual accounts and obtains an accountant’s report.

Who Can Prepare and Sign an Accountant’s Report?

The report must be prepared and signed by an independent accountant who is a member of a recognised chartered accountancy body and is, or works for, a registered auditor. The accountant must not be a partner, director, or employee of the firm being reported on during the accounting period.

Key Term: qualified accountant
An accountant who is a member of a recognised chartered accountancy body and is, or works for, a registered auditor, and is independent of the firm.

The Process and Deadlines for Obtaining and Delivering Reports

A firm must obtain the accountant’s report within six months of the end of its accounting period. If the report is qualified (see below), it must be delivered to the SRA within the same six-month period. If the report is not qualified, it does not need to be delivered unless requested by the SRA.

If a firm ceases to hold client money (for example, on closure), it must obtain and deliver a final report within six months of the date it stopped holding client money.

Key Term: qualified report
An accountant’s report that identifies material breaches of the SRA Accounts Rules or significant risks to client money.

What Is a Qualified Report?

A report is qualified if the accountant finds material breaches of the Accounts Rules or significant weaknesses in the firm’s systems and controls that put client money at risk. Only qualified reports must be delivered to the SRA. The SRA may take regulatory action if a qualified report reveals serious concerns.

Worked Example 1.1

A firm’s accountant discovers that, during the accounting period, the firm’s client account was overdrawn for several days due to a bookkeeping error. The accountant considers this a material breach and qualifies the report. What must the firm do?

Answer: The firm must deliver the qualified report to the SRA within six months of the end of the accounting period. The SRA may investigate further and require the firm to take remedial action.

Exemptions from the Requirement to Obtain a Report

A firm is exempt from obtaining an accountant’s report if:

• All client money held or received during the period is from the Legal Aid Agency.
• The average balance of client money held during the period does not exceed £10,000 and the maximum balance at any time does not exceed £250,000.

The firm must keep records to demonstrate that it meets the exemption criteria.

Worked Example 1.2

A small firm holds client money balances of £8,000, £9,000, and £11,000 at its monthly reconciliations during the accounting period. The maximum balance is £11,000 and the average is £9,333. Does the firm need to obtain an accountant’s report?

Answer: Yes. Although the average balance is below £10,000, the maximum balance exceeds £10,000, so the firm does not qualify for the exemption.

The Role of the COFA and the Firm’s Obligations

The Compliance Officer for Finance and Administration (COFA) is responsible for ensuring compliance with the Accounts Rules, including the obligation to obtain and deliver accountant’s reports. The firm must provide the accountant with all information and documentation needed to complete the report, including details of all bank accounts held during the period.

Key Term: Compliance Officer for Finance and Administration (COFA)
The individual in a solicitor’s firm responsible for ensuring compliance with the SRA Accounts Rules and reporting material breaches to the SRA.

Recordkeeping and Retention

Firms must retain all accounting records, including accountant’s reports and supporting documents, for at least six years. This requirement applies even if the firm ceases to practise.

Consequences of Non-Compliance

Failure to obtain or deliver a required accountant’s report is a serious breach of the Accounts Rules and may result in disciplinary action by the SRA. The SRA may also require a report to be obtained or delivered at any time if it considers it necessary in the public interest.

Exam Warning

If a firm fails to deliver a qualified accountant’s report to the SRA within the required deadline, this is a regulatory breach and may result in a financial penalty or further investigation.

Summary Table: When Is an Accountant’s Report Required?

Key Point Checklist

This article has covered the following key knowledge points:

• Most firms holding or receiving client money must obtain an accountant’s report each accounting period.
• Exemptions apply for firms holding only Legal Aid Agency money or with low client money balances.
• The report must be prepared and signed by an independent, qualified accountant.
• Qualified reports (identifying material breaches or risks) must be delivered to the SRA within six months of the end of the accounting period.
• The COFA is responsible for ensuring compliance and providing information to the accountant.
• Firms must retain all accounting records, including reports, for at least six years.
• Failure to comply with these requirements may result in regulatory action by the SRA.

Key Terms and Concepts

• accountant’s report
• accounting period
• qualified accountant
• qualified report
• Compliance Officer for Finance and Administration (COFA)