Accountants' reports and regulatory compliance - Role of accountants in ensuring compliance

Learning Outcomes

This article outlines the important role accountants play in ensuring law firms comply with regulatory requirements, particularly the SRA Accounts Rules. It details the purpose, requirements, and implications of accountants' reports. For the SQE1 assessment, you will need to understand the functions of accountants in legal practice, the process for obtaining and delivering accountants' reports, the exceptions to these requirements, and the consequences of non-compliance. This knowledge will enable you to apply the relevant rules and principles to SQE1-style single best answer MCQs.

SQE1 Syllabus

For SQE1, you need to understand the practical aspects of regulatory compliance and the role of accountants within that framework. You should be prepared to identify the requirements for obtaining and delivering accountants' reports, recognise situations where reports may be qualified, and understand the implications of breaches. Your revision should focus on:

  • The requirement to obtain and deliver accountants' reports (Rule 12).
  • The circumstances under which an accountant's report may be qualified.
  • Exceptions to the requirement for obtaining an accountant's report (Rule 12.2).
  • The duty to keep and maintain accurate accounting records (Rule 8).
  • The requirement for reconciliations (Rule 8.3).
  • The storage and retention periods for accounting records (Rule 13).
  • The role and responsibilities of the Compliance Officer for Finance and Administration (COFA).

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 Rule in the SRA Accounts Rules 2019 details the requirements for obtaining and delivering accountants' reports?
    1. Rule 7
    2. Rule 8
    3. Rule 12
    4. Rule 13
  2. Under what circumstances must a firm deliver its accountant's report to the SRA?
    1. Only if the report is qualified.
    2. In all circumstances within six months of the accounting period end.
    3. Only if the firm holds more than £1 million in client money.
    4. Only if requested by the SRA.
  3. For how long must accounting records generally be retained by a firm?
    1. Three years
    2. Five years
    3. Six years
    4. Ten years
  4. Which of the following firms is MOST likely to be exempt from the requirement to obtain an accountant's report under Rule 12.2?
    1. A firm whose average client account balance was £15,000 but never exceeded £200,000.
    2. A firm whose maximum client account balance was £300,000 but averaged £8,000.
    3. A firm whose only client money received was from the Legal Aid Agency.
    4. A large commercial firm handling multi-million-pound transactions.

Introduction

Solicitors and the firms they work in are subject to strict regulatory requirements concerning the handling of money, particularly client money. The Solicitors Regulation Authority (SRA) Accounts Rules 2019 ('the Rules') provide the framework for this. A key aspect of ensuring compliance with these rules involves independent scrutiny by accountants. Accountants play a key role in verifying that firms comply with the Rules, thereby safeguarding client money and maintaining public trust in the legal profession. This article focuses on the accountant's role, specifically concerning accountants' reports and associated regulatory duties.

The Role of the Accountant

While solicitors and their staff are responsible for the day-to-day handling of client money and maintaining accounting records, accountants provide an essential layer of independent oversight. Their involvement is primarily mandated through the requirement for firms holding client money to obtain an accountant's report.

Accountant's Report Requirement

Rule 12.1 of the Rules states that a firm which has held or received client money during an accounting period must obtain an accountant's report within six months of the end of that period. This report is prepared by an independent accountant who must meet specific qualification criteria set out in the Rules (essentially, being a member of a recognised accountancy body and a registered auditor).

Key Term: accountant's report
A formal report prepared by a qualified independent accountant following an examination of a law firm's accounting records, assessing compliance with the SRA Accounts Rules.

The purpose of the report is to provide the SRA with assurance that the firm is complying with the Rules and that client money is being handled appropriately. The accountant exercises professional judgment to assess risks to client money arising from the firm's compliance (or non-compliance) with the Rules.

Qualified Reports

The accountant is required to 'qualify' the report if they form the judgment that the firm has failed to comply with the Rules such that money belonging to clients or third parties is, or has been, or is likely to be placed, at risk.

Key Term: qualified report
An accountant's report that indicates non-compliance with the SRA Accounts Rules, highlighting issues that pose a risk to client money.

A qualified report signifies serious concerns about the firm's handling of client money or its accounting systems.

Delivery to the SRA

Under Rule 12.1(b), a firm is only required to deliver the accountant's report to the SRA if it is qualified. This must be done within six months of the end of the relevant accounting period. Unqualified reports (where the accountant finds no material breaches putting client money at risk) do not need to be submitted to the SRA, although the SRA retains the power under Rule 12.4 to request a report in certain circumstances, such as if the firm ceases to hold client money or if the SRA considers it in the public interest.

Worked Example 1.1

A firm's accounting period ends on 31st March. Their accountant completes the report on 1st September, finding several minor administrative errors but no significant risk to client money. The report is therefore unqualified. When must the firm deliver the report to the SRA?

Answer: The firm is not required to deliver the unqualified report to the SRA. They must simply obtain the report from the accountant within six months of the accounting period end (i.e., by 30th September).

Exceptions to Requiring a Report

Rule 12.2 provides two exceptions where a firm does not need to obtain an accountant's report:

  1. Legal Aid Agency Money Only: If all the client money held or received during the accounting period was from the Legal Aid Agency.
  2. Low Client Money Balances: If the aggregate balance of client money held during the period did not exceed:
    • an average of £10,000; and
    • a maximum of £250,000 at any one time.

Key Term: client money
Money held or received by a firm relating to regulated services, including money held for clients, third parties, as trustee, or for fees and unpaid disbursements prior to billing (Rule 2.1).

Exam Warning

Be careful with the low balances exception (Rule 12.2(b)). Both conditions (average ≤ £10,000 AND maximum ≤ £250,000) must be met for the exemption to apply. If either threshold is exceeded, the firm must obtain a report.

Worked Example 1.2

Premier Solicitors held client money throughout their accounting period ending 30 April 2023. Reconciliations showed the following total client money balances: May 2022: £8,000 June 2022: £9,000 July 2022: £15,000 Aug 2022 - Apr 2023: Balances fluctuated between £5,000 and £9,500.

Is Premier Solicitors required to obtain an accountant's report?

Answer: Yes. Although the maximum balance never exceeded £250,000, the average balance likely exceeded £10,000 due to the £15,000 held in July. Even if the average over the 12 months was below £10,000 (which we cannot be certain of without all monthly figures), the maximum balance condition seems met. However, the average condition appears breached by the July figure pushing the likely average over £10k. Correction: The calculation needs all reconciliation balances. If the average of all required reconciliations (at least every 5 weeks) is over £10,000 OR the maximum balance at any point exceeded £250,000, a report is needed. Here, the average might be over £10,000 because of the £15,000 balance. Without all data points, we cannot be certain, but if the average did exceed £10,000, a report is required. Assuming the £15k pushed the average over £10k, the firm needs a report.

Accounting Records and Reconciliations

The accountant's report relies on the firm maintaining accurate and up-to-date accounting records, as mandated by Rule 8.

Record Keeping

Rule 8.1 requires firms to keep accounting records properly written up, showing dealings with client money and any office money relating to client matters. This includes maintaining individual client ledgers and a cash account (cash book). Records must be accurate, contemporaneous, and chronological.

Reconciliations

Rule 8.3 mandates that firms must perform reconciliations between their bank statements and their internal cash account and client ledger records at least every five weeks.

Key Term: reconciliation
The process of comparing internal accounting records (like the cash book and client ledger balances) with external bank statements to ensure they match and to identify and correct any discrepancies.

These reconciliations must identify and explain any differences. The reconciliation statement must be reviewed and signed off by the COFA or a manager of the firm. This process is essential for identifying errors or potential misuse of funds promptly. The accountant will review these reconciliations as part of their examination.

Key Term: COFA (Compliance Officer for Finance and Administration)
The individual within a firm designated as responsible for ensuring compliance with the SRA Accounts Rules.

Retention of Records

Rule 13.1 requires firms to store accounting records securely and retain them for at least six years from the date of the last entry. This includes client ledgers, cash accounts, bank statements, and reconciliations.

Revision Tip

Remember the key timeframes: reconciliations at least every 5 weeks; accountant's report obtained within 6 months of the accounting period end; delivery of qualified reports to SRA within 6 months; retention of records for at least 6 years.

Accountant's Duties and Firm's Obligations

The accountant has specific duties, including reporting certain matters directly to the SRA (Rule 35). If an accountant discovers evidence of fraud or theft relating to client money, or information suggesting a solicitor or firm is not fit and proper to handle client money, they must report it immediately to the SRA.

Firms must provide the accountant with all necessary information and access to records to enable them to complete their report (Rule 12.8). Failure to cooperate can lead to the accountant qualifying their report.

Key Point Checklist

This article has covered the following key knowledge points:

  • Firms holding client money must generally obtain an accountant's report within 6 months of their accounting period end (Rule 12.1).
  • The report assesses compliance with the SRA Accounts Rules and risks to client money.
  • A report must be qualified if the accountant identifies material failures putting client money at risk.
  • Only qualified reports must be delivered to the SRA (Rule 12.1(b)).
  • Exceptions apply if only LAA money is held, or if client money balances are below average (£10k) and maximum (£250k) thresholds (Rule 12.2).
  • Accurate and contemporaneous accounting records must be kept (Rule 8.1).
  • Reconciliations between bank statements and internal records must occur at least every 5 weeks (Rule 8.3).
  • Records must be retained for at least 6 years (Rule 13.1).
  • Accountants have a duty to report theft, fraud, or serious concerns about fitness to hold client money directly to the SRA.
  • Firms must provide accountants with necessary access and information.

Key Terms and Concepts

  • accountant's report
  • qualified report
  • client money
  • reconciliation
  • COFA (Compliance Officer for Finance and Administration)
The answers, solutions, explanations, and written content provided on this page represent PastPaperHero's interpretation of academic material and potential responses to given questions. These are not guaranteed to be the only correct or definitive answers or explanations. Alternative valid responses, interpretations, or approaches may exist. If you believe any content is incorrect, outdated, or could be improved, please get in touch with us and we will review and make necessary amendments if we deem it appropriate. As per our terms and conditions, PastPaperHero shall not be held liable or responsible for any consequences arising. This includes, but is not limited to, incorrect answers in assignments, exams, or any form of testing administered by educational institutions or examination boards, as well as any misunderstandings or misapplications of concepts explained in our written content. Users are responsible for verifying that the methods, procedures, and explanations presented align with those taught in their respective educational settings and with current academic standards. While we strive to provide high-quality, accurate, and up-to-date content, PastPaperHero does not guarantee the completeness or accuracy of our written explanations, nor any specific outcomes in academic understanding or testing, whether formal or informal.
No resources available.

Job & Test Prep on a Budget

Compare PastPaperHero's subscription offering to the wider market

PastPaperHero
Monthly Plan
$10
Assessment Day
One-time Fee
$20-39
Barbri SQE
One-time Fee
$3,800-6,900
BPP SQE
One-time Fee
$5,400-8,200
College of Legal P...
One-time Fee
$2,300-9,100
Job Test Prep
One-time Fee
$90-350
Law Training Centr...
One-time Fee
$500-6,200
QLTS SQE
One-time Fee
$2,500-3,800
University of Law...
One-time Fee
$6,200-22,400

Note the above prices are approximate and based on prices listed on the respective websites as of May 2025. Prices may vary based on location, currency exchange rates, and other factors.

Get unlimited access to thousands of practice questions, flashcards, and detailed explanations. Save over 90% compared to one-time courses while maintaining the flexibility to learn at your own pace.

All-in-one Learning Platform

Everything you need to master your assessments and job tests in one place

  • Comprehensive Content

    Access thousands of fully explained questions and cases across multiple subjects

  • Visual Learning

    Understand complex concepts with intuitive diagrams and flowcharts

  • Focused Practice

    Prepare for assessments with targeted practice materials and expert guidance

  • Personalized Learning

    Track your progress and focus on areas where you need improvement

  • Affordable Access

    Get quality educational resources at a fraction of traditional costs

Tell Us What You Think

Help us improve our resources by sharing your experience

Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal