Accountants' reports and regulatory compliance - Requirement...

Learning Outcomes

This article outlines accountants’ reports for solicitors under the SRA Accounts Rules, including:

• Triggers for obtaining an accountant’s report and exemptions
• Professional status, independence, and engagement of the reporting accountant, including immediate reporting duties where fraud or theft is suspected
• Report contents, evidential checks, the five‑weekly reconciliation cycle, and assessment of material breaches
• Qualified and unqualified reports and the consequences of qualification, including delivery obligations and likely remedial actions
• Reporting deadlines, record‑keeping requirements, the SRA’s power to require a report (including at cessation), and the roles of managers and the COFA in recording, remedying, and reporting breaches

SQE1 Syllabus

For SQE1, you are required to understand the requirements and contents of accountants’ reports for solicitors under the SRA Accounts Rules, with a focus on the following syllabus points:

• 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.

1. When must a solicitors’ firm obtain an accountant’s report, and who is responsible for ensuring this is done?
2. What is the difference between a qualified and an unqualified accountant’s report, and what action must be taken if a report is qualified?
3. Name two situations in which a firm is exempt from obtaining an accountant’s report.
4. 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. The current framework is risk‑based: firms that hold or receive client money must usually obtain a report, while low‑risk firms benefit from targeted exemptions. Managers and the COFA remain responsible for lawful systems and controls, prompt remedy of breaches, and timely reporting to the SRA where significant issues arise.

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.

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 duty also applies if the firm has operated a joint account with a client or a client’s own account as signatory (even if money did not pass through the firm’s client account). The report must be obtained 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.

Under the SRA Accounts Rules, a firm must obtain a report if, at any time in the period, it:

• held or received client money in any client account (general or separate designated deposit client account)
• operated a joint account with a client or third party in the course of practice
• operated a client’s own account as signatory (for example, as attorney or Court of Protection deputy)

The SRA also retains a public‑interest power to require a report on reasonable notice where a firm ceases to operate a client account or if regulatory risk warrants oversight. Even where exempt (see below), the firm must still comply with all other Accounts Rules and keep accurate records.

Key Term: Legal Aid Agency (LAA)
The government body that funds eligible legal services. Money received from the LAA for costs may qualify a firm for an exemption from obtaining an accountant’s report if it is the only client money received in the period.

Key Term: accounting period
The period (usually twelve months) for which a solicitors’ firm prepares its financial statements and obtains an accountant’s report.

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. The SRA may disqualify an accountant from preparing reports if they have been found guilty of professional misconduct by their body or if they failed to exercise due care and skill in a previous report.

Reporting accountants are engaged under terms that preserve independence and impose immediate reporting obligations. The standard letter of engagement requires the accountant to report straight to the SRA if, in the course of preparing the report, they discover evidence of theft or fraud in relation to client money or obtain information likely to be of material significance in determining whether a solicitor or firm is fit and proper to hold client money. This statutory duty to report immediately derives from the Solicitors Act 1974.

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 (Rule 4.1), including correct handling of mixed receipts and timely transfers
• whether client money is paid promptly into a client account (Rule 2.3), and whether any permitted exceptions have been properly applied
• whether withdrawals from client account are properly authorised and only made for permitted purposes (Rule 5.1), and whether sufficient funds exist for the specific client at the time of withdrawal (Rule 5.3)
• whether the firm keeps accurate, contemporaneous, chronological accounting records (Rule 8.1), including maintaining separate client ledgers for each matter and a cash book showing all client money transactions
• whether client account reconciliations are carried out at least every five weeks (Rule 8.3), signed off by the COFA or a manager, and whether any differences are investigated and resolved promptly
• whether client money is returned promptly when there is no longer any proper reason to hold it (Rule 2.5), with appropriate steps for residual balances
• whether interest is accounted for in a fair sum on client money (Rule 7.1), or different arrangements have been agreed in writing with informed consent (Rule 7.2)
• whether the firm has avoided using the client account to provide banking facilities (Rule 3.3), ensuring payments relate to delivery of regulated services
• whether the firm has correctly operated joint accounts, clients’ own accounts, and any third‑party managed accounts (Rules 9–11), and obtained the required statements and reconciliations

The accountant will also check for any significant weaknesses in the firm’s systems and controls that could put client money at risk. This includes sample testing of receipts, withdrawals, bills, inter‑client transfers, cash transfers between client and business accounts, and interest payments; reviewing the firm’s breach log; and verifying that any breaches were remedied promptly and recorded.

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.

Key Term: reconciliation
The process of cross‑checking internal accounting records against bank statements for all client and business accounts; must be undertaken at least every five weeks and signed off by the COFA or a manager.

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 aggregated balance at any time does not exceed £250,000

The “average” is calculated using the total of the five‑weekly statement or passbook balances across all client accounts (including any designated deposit accounts and accounts holding client money outside a client account that the firm operates as trustee) divided by the number of balances in the period. Both the average and the maximum thresholds must be satisfied. Firms may move in and out of exemption year‑to‑year; they must document the assessment and retain the calculations.

If a firm is exempt, it does not need to obtain or deliver a report for that period, unless specifically required by the SRA (for example, when a firm shuts down and ceases to hold or operate a client account, or in the public interest).

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.

Worked Example 1.2

A small firm’s five‑weekly reconciliations show client money balances of £7,000, £9,000, £11,000, £8,000, £9,000, £10,000, £8,500 across the period. The highest aggregated balance at any time is £180,000. Does the firm need an accountant’s report?

Answer:
The average across the five‑weekly balances (here calculated across the period) must be at or below £10,000, and the maximum at any time must be £250,000 or less. The firm meets the maximum threshold and will be exempt if the average is at or below £10,000. If the computed average exceeds £10,000, a report must be obtained. Firms should retain the calculation to evidence exemption.

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.

The SRA may also require earlier delivery, more frequent reports, or a report on cessation where regulatory risk justifies oversight. Firms must provide the reporting accountant with details of all accounts used in connection with the practice (client, business, any accounts holding client money outside a client account, joint accounts, clients’ own accounts), and any information and documentation needed to complete the 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. Typical reasons for qualification include:

• persistent delays in paying client money into the client account
• failures to reconcile at least every five weeks or to investigate discrepancies promptly
• withdrawals without sufficient funds held for the relevant client (creating debit balances)
• using the client account to provide banking facilities unrelated to regulated services
• failing to return client money promptly at the end of a matter or poor residual balance processes
• weak record‑keeping and incomplete client ledgers or cash books
• widespread failures to account for interest where due

The SRA will review the report and may require the firm to take remedial action, such as improving systems and controls, training staff, revising authorisation procedures, rectifying bookkeeping, reperforming reconciliations, or replacing any missing client money immediately. The SRA may also take disciplinary action if there is evidence of serious or repeated non‑compliance.

Where, in preparing the report, the accountant identifies evidence of fraud or theft relating to client money, they must report to the SRA immediately (independently of the qualified report). Managers and the COFA must then cooperate fully, secure the position, and ensure prompt restoration of any shortfall from business funds.

Worked Example 1.3

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.

Worked Example 1.4

During testing for the report, the accountant finds two matters where client account withdrawals were made before the relevant cheques cleared, causing temporary debit balances on those matters. There was no overall account overdraft. Is this likely to lead to qualification?

Answer:
Using other clients’ money to fund a payment before cleared funds are available is a breach of Rule 5.3 and can put client money at risk. Whether the report is qualified depends on scale, frequency, and whether prompt remedial action and controls have been implemented. If the pattern is isolated, promptly corrected, and controls are strengthened, the accountant may not qualify the report but will usually flag the breach. Persistent or widespread occurrences are likely to warrant qualification.

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 recorded. Material breaches must be reported to the SRA as soon as reasonably practicable. The COFA should have access to all accounting records, monitor reconciliations and authorisations, conduct or oversee periodic file and ledger reviews, ensure the reporting accountant has prompt access to information, and maintain a breach log to identify patterns.

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, including mixed receipts and transfers between client and business accounts
• 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, for permitted purposes only
• check that client ledgers and cash books are accurate and up to date, including ledgers for separate designated deposit client accounts where used
• verify that reconciliations are performed at least every five weeks, signed off appropriately, and any differences are investigated and resolved
• review the firm’s systems for identifying and correcting breaches and confirm prompt remedy of errors (e.g., immediate replacement of funds from business account)
• check compliance with interest policies and payments to clients where due
• examine handling of stakeholder deposits, mortgage advances/redemptions, inter‑client transfers, residual balances, and third‑party managed accounts where applicable

If the accountant finds material breaches or significant weaknesses, the report will be qualified. They must report immediately to the SRA if evidence of fraud or theft is discovered.

Worked Example 1.5

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. If such errors recur, qualification becomes more likely.

Worked Example 1.6

A firm consistently completes reconciliations every five weeks but leaves small unreconciled differences on record for months. Is this compliant?

Answer:
No. Rule 8.3 requires not just the preparation and sign‑off of reconciliation statements but also prompt investigation and resolution of differences. Persistent unreconciled items indicate weak controls and may lead to qualification.

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, conditions on authorisation, restrictions on practice, or, in serious cases, closing the firm. Failures to replace missing client money immediately, to remedy breaches promptly, or to avoid using client account as banking facilities also attract enforcement. The SRA can require more frequent or earlier reports and may direct the firm to appoint external advisers to improve systems and controls.

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 (for example, the firm is closing and no client money is held or operated, or the firm’s work and risk profile make a report unnecessary). Separately, the SRA may require a report on cessation or where it considers it in the public interest. Exemption from obtaining a report does not relax any other Accounts Rules—firms must still maintain records, undertake five‑weekly reconciliations as applicable, and safeguard client money.

Retention of records

Firms must keep all accounting records, including accountant’s reports, for at least six years. This includes client ledgers, cash books, reconciliation statements signed at least every five weeks, bank statements and passbooks for all client, business, joint and clients’ own accounts operated, transfers journals, central records of bills or notifications of costs, and documentation evidencing the resolution of differences or breaches. Where electronic records are used, they must be saved in a format that cannot be altered and be capable of prompt reproduction in printed form.

Key Term: reconciliation statement
The record confirming that the five‑weekly reconciliation has been completed, identifying any differences and signed by the COFA or a manager.

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; operating joint accounts or clients’ own accounts as signatory also triggers the obligation.
• The report must be prepared by a qualified, independent accountant who is a registered auditor; immediate reporting to the SRA is required if fraud or theft is suspected.
• The report covers compliance with key SRA Accounts Rules, including separation of client and business money, prompt banking of client money, permitted withdrawals, five‑weekly reconciliations, interest on client money, avoidance of banking facilities, and returning client money promptly.
• 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 if all client money is from the Legal Aid Agency or if client money balances remain below both the average (£10,000) and maximum (£250,000) thresholds; exemption must be evidenced and documented.
• The SRA can require earlier, more frequent, or cessation reports where regulatory risk warrants oversight.
• Managers and the COFA are responsible for compliance, maintaining breach logs, ensuring prompt remedies, and reporting material breaches to the SRA.
• Firms must retain all accounting records, reconciliation statements, and reports for at least six years and ensure reporting accountants are given full access to records.

Key Terms and Concepts

• accountant’s report
• qualified accountant
• qualified report
• unqualified report
• accounting period
• Compliance Officer for Finance and Administration (COFA)
• Legal Aid Agency (LAA)
• reconciliation
• reconciliation statement