Learning Outcomes
After reading this article, you will be able to explain when an accountant’s report is required under the SRA Accounts Rules, identify who must prepare the report, describe the main contents and checks involved, and understand the consequences of qualified and unqualified reports. You will also be able to recognise exemptions, reporting deadlines, and the compliance obligations for solicitors’ firms and their managers.
SQE1 Syllabus
For SQE1, you are required to understand the requirements for accountants’ reports as part of solicitors’ regulatory compliance. Focus your revision on:
- the circumstances in which a firm must obtain an accountant’s report
- the qualifications and independence required of the reporting accountant
- the main contents and checks included in the report
- the distinction between qualified and unqualified reports, and the consequences of each
- exemptions from the reporting requirement
- the deadlines for obtaining and delivering reports
- the compliance duties of managers and the COFA regarding breaches and reporting
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.
- When must a solicitors’ firm obtain an accountant’s report, and who is responsible for ensuring this is done?
- What is the difference between a qualified and an unqualified accountant’s report, and what action must be taken if a report is qualified?
- Name two situations in which a firm is exempt from obtaining an accountant’s report.
- What are the main areas an accountant will check when preparing a report for a solicitors’ firm?
Introduction
Accountants’ reports are a key part of the regulatory system for solicitors’ firms in England and Wales. They provide independent assurance that client money is being handled safely and in accordance with the SRA Accounts Rules. This article explains when a report is required, who must prepare it, what it must contain, and the consequences for compliance.
When is an accountant’s report required?
Most solicitors’ firms that hold or receive client money during an accounting period must obtain an accountant’s report. The report must be prepared within six months of the end of the accounting period. The main purpose is to confirm that the firm has complied with the SRA Accounts Rules and that client money is not at risk.
Key Term: accountant’s report
A formal report prepared by a qualified, independent accountant, reviewing a solicitors’ firm’s compliance with the SRA Accounts Rules, especially regarding the handling of client money.
Who must prepare the report?
The report must be prepared and signed by an accountant who is a member of a recognised chartered accountancy body and is, or works for, a registered auditor. The accountant must be independent of the firm and cannot be a partner, employee, or owner of the firm during the period covered by the report.
Key Term: qualified accountant
A member of a recognised chartered accountancy body, such as ICAEW or ACCA, who is also a registered auditor and independent of the solicitors’ firm being reviewed.
What does the accountant’s report cover?
The accountant’s report is not a full audit, but it must cover specific areas of compliance. The accountant will use professional judgement to decide what work is necessary, but must check the firm’s compliance with key rules, including:
- whether client money is kept separate from business money
- whether client money is paid promptly into a client account
- whether withdrawals from client account are properly authorised and only made for permitted purposes
- whether the firm keeps accurate, up-to-date accounting records
- whether client account reconciliations are carried out at least every five weeks
- whether any breaches have been identified and remedied promptly
The accountant will also check for any significant weaknesses in the firm’s systems and controls that could put client money at risk.
Key Term: qualified report
An accountant’s report that identifies material breaches of the SRA Accounts Rules or significant weaknesses in the firm’s systems, such that client money is, has been, or is likely to be at risk.Key Term: unqualified report
An accountant’s report that confirms the firm has complied with the SRA Accounts Rules and that client money is not at risk.
Exemptions from the reporting requirement
Some firms are exempt from obtaining an accountant’s report. The main exemptions are:
- if all client money held during the accounting period is received from the Legal Aid Agency
- 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
If a firm is exempt, it does not need to obtain or deliver a report for that period, unless specifically required by the SRA.
Worked Example 1.1
A firm holds only Legal Aid Agency payments as client money during the accounting period. Is an accountant’s report required?
Answer: No. If all client money held is from the Legal Aid Agency, the firm is exempt from the reporting requirement for that period.
Deadlines and delivery
The accountant’s report must be obtained within six months of the end of the accounting period. If the report is qualified, it must be delivered to the SRA within the same six-month period. If the report is unqualified, it does not need to be delivered unless requested by the SRA.
Key Term: accounting period
The period (usually twelve months) for which a solicitors’ firm prepares its financial statements and obtains an accountant’s report.
What happens if a report is qualified?
If the accountant’s report is qualified, the firm must deliver it to the SRA within the deadline. The SRA will review the report and may require the firm to take remedial action, such as improving systems, replacing missing client money, or reporting further breaches. The SRA may also take disciplinary action if there is evidence of serious or repeated non-compliance.
Worked Example 1.2
A firm’s accountant’s report is qualified because client account reconciliations were not carried out for several months, and there was a shortfall in the client account. What must the firm do?
Answer: The firm must deliver the qualified report to the SRA within six months of the period end. The firm must also replace any missing client money immediately and take steps to ensure reconciliations are carried out as required. The SRA may investigate further or impose sanctions.
Who is responsible for compliance?
The firm’s managers and the Compliance Officer for Finance and Administration (COFA) are jointly and severally responsible for ensuring compliance with the SRA Accounts Rules, including the duty to obtain and deliver accountant’s reports. They must also ensure that any breaches are remedied promptly and reported to the SRA if material.
Key Term: Compliance Officer for Finance and Administration (COFA)
The individual in a solicitors’ firm responsible for ensuring compliance with the SRA Accounts Rules and for recording and reporting breaches to the SRA.
What does the accountant check in practice?
The accountant will typically:
- review a sample of client and office account transactions
- check that client money is kept separate and not used for business purposes
- confirm that withdrawals from client account are properly authorised and supported by evidence
- check that client ledgers and cash books are accurate and up to date
- verify that reconciliations are performed regularly and any differences are investigated
- review the firm’s systems for identifying and correcting breaches
If the accountant finds material breaches or significant weaknesses, the report will be qualified.
Worked Example 1.3
A firm’s accountant finds that a payment for the firm’s telephone bill was made from client account in error, but the error was identified and corrected the next day. Is this likely to result in a qualified report?
Answer: No. If the error was promptly identified and corrected, and there was no risk to client money, the accountant may treat this as a non-material breach and not qualify the report.
What are the consequences of non-compliance?
Failure to obtain or deliver an accountant’s report when required is a serious breach of the SRA Accounts Rules. The SRA may impose sanctions, including fines, restrictions on practice, or, in serious cases, closing the firm. Failure to replace missing client money or to remedy breaches promptly can also lead to disciplinary action.
Exam Warning
If a firm fails to obtain an accountant’s report within the deadline, or fails to deliver a qualified report to the SRA, this is a serious regulatory breach. The SRA may take enforcement action against the firm and its managers.
Exemptions and waivers
The SRA may grant a waiver from the requirement to obtain an accountant’s report in exceptional circumstances. Applications must be made in writing, and the firm must demonstrate that the exemption is justified.
Retention of records
Firms must keep all accounting records, including accountant’s reports, for at least six years. This includes ledgers, reconciliations, statements, and supporting documentation.
Key Point Checklist
This article has covered the following key knowledge points:
- Most solicitors’ firms that hold or receive client money must obtain an accountant’s report within six months of the end of each accounting period.
- The report must be prepared by a qualified, independent accountant who is a registered auditor.
- The report covers compliance with key SRA Accounts Rules, including the handling of client money, record-keeping, and reconciliations.
- Qualified reports (identifying material breaches or risks to client money) must be delivered to the SRA; unqualified reports are kept by the firm unless requested.
- Firms are exempt from the reporting requirement if all client money is from the Legal Aid Agency or if balances are below specified thresholds.
- Managers and the COFA are responsible for compliance and for remedying and reporting breaches.
- Firms must retain all accounting records and reports for at least six years.
Key Terms and Concepts
- accountant’s report
- qualified accountant
- qualified report
- unqualified report
- accounting period
- Compliance Officer for Finance and Administration (COFA)
