Learning Outcomes
After reading this article, you will be able to explain the record-keeping obligations imposed by the SRA Accounts Rules, including the requirements for client ledgers, cashbooks, reconciliations, and accountants’ reports. You will understand the purpose of these records, the minimum retention periods, and how proper record-keeping supports compliance, transparency, and the protection of client money—core for SQE1.
SQE1 Syllabus
For SQE1, you are required to understand the record-keeping requirements under the SRA Accounts Rules. Focus your revision on:
- the obligation to keep accurate, contemporaneous, and chronological accounting records for client and business money
- the specific records required (client ledgers, cashbooks, reconciliations, bills, etc.)
- the process and timing of bank reconciliations
- the retention period for accounting records
- the purpose and content of accountants’ reports and when they must be delivered to the SRA
- the consequences of inadequate record-keeping for compliance and client protection
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.
- What is the minimum period for which a law firm must retain client accounting records under the SRA Accounts Rules?
- Which of the following must be included in a law firm’s accounting records?
a) client ledgers
b) cashbooks
c) bank statements
d) all of the above - How often must a law firm reconcile its client bank account(s) with its internal records?
- True or false? Only qualified accountants’ reports must be delivered to the SRA.
Introduction
Accurate record-keeping is a central requirement of the SRA Accounts Rules. Law firms must keep detailed, up-to-date records of all financial transactions involving client and business money. These records are essential for demonstrating compliance, protecting client funds, and enabling effective supervision by the SRA. Failure to maintain proper records can result in regulatory action and puts client money at risk.
Record-Keeping Obligations under the SRA Accounts Rules
The Purpose of Record-Keeping
The SRA Accounts Rules require law firms to keep client money safe and to demonstrate compliance through proper records. Good record-keeping:
- enables firms to track all receipts and payments for each client
- supports the separation of client and business money
- allows for prompt identification and correction of errors or breaches
- provides evidence for regulatory inspections and accountants’ reports
Required Accounting Records
Firms must keep a range of records to comply with Rule 8 of the SRA Accounts Rules.
Key Term: client ledger
A record showing all receipts and payments of client and business money for each client and each legal matter, including running balances.Key Term: cashbook
A record of all receipts and payments through the firm’s client bank account(s), showing running totals.Key Term: reconciliation
The process of comparing the balances on the firm’s internal records (client ledgers and cashbook) with the balances on bank statements, to identify and resolve any differences.Key Term: accountants’ report
An independent report prepared by a qualified accountant confirming whether the firm has complied with the SRA Accounts Rules, focusing on the handling of client money and the adequacy of accounting records.
Types of Records Required
Firms must keep, as a minimum:
- a separate client ledger for each client and each matter
- a cashbook for all client bank accounts
- a cashbook for business bank accounts (strongly recommended)
- bank statements for all accounts
- a central record or file of all bills and written notifications of costs
- records of all inter-client transfers
- records of all reconciliations and supporting documents
Frequency and Process of Reconciliation
Firms must obtain bank statements for all client and business accounts at least every five weeks. Reconciliation of the client bank account(s) with the client ledgers and cashbook must also be completed at least every five weeks. Any discrepancies must be investigated and resolved promptly.
Retention of Records
All accounting records must be retained securely for at least six years from the date of the last entry. This includes ledgers, cashbooks, bank statements, bills, reconciliations, and supporting documentation.
Accountants’ Reports
Most firms must obtain an accountants’ report within six months of the end of each accounting period if they have held or received client money, or operated a joint account or a client’s own account as signatory. Only qualified reports (those showing a significant breach or risk to client money) must be delivered to the SRA. Firms holding only small amounts of client money or only Legal Aid Agency money may be exempt.
Worked Example 1.1
A law firm receives client money for a conveyancing matter. What records must the firm keep, and how often must it reconcile its client account?
Answer: The firm must keep a client ledger for the matter, a cashbook for the client account, and retain all bank statements. It must reconcile the client account with its internal records at least every five weeks, investigating and correcting any differences.
Worked Example 1.2
A firm’s accountant discovers that the client ledger balances do not match the client account bank statement at the five-week reconciliation. What should the firm do?
Answer: The firm must promptly investigate and resolve the discrepancy before signing off the reconciliation. If the difference cannot be resolved, the firm’s COFA should be informed, and the SRA may need to be notified if client money is at risk.
Exam Warning
If a firm fails to keep accurate, contemporaneous, and chronological records, or does not reconcile its client account at least every five weeks, this is a breach of the SRA Accounts Rules. Such breaches must be corrected promptly and may result in regulatory action.
Revision Tip
For SQE1, memorise the required records, the five-week reconciliation rule, and the six-year retention period. These are frequent exam topics.
Key Point Checklist
This article has covered the following key knowledge points:
- Law firms must keep accurate, up-to-date, and chronological accounting records for all client and business money.
- Required records include client ledgers, cashbooks, bank statements, bills, and reconciliation statements.
- Reconciliation of client bank accounts with internal records must be done at least every five weeks.
- All accounting records must be retained securely for at least six years.
- Most firms must obtain an accountants’ report within six months of the end of each accounting period; only qualified reports must be delivered to the SRA.
- Failure to comply with record-keeping obligations is a breach of the SRA Accounts Rules and may result in regulatory action.
Key Terms and Concepts
- client ledger
- cashbook
- reconciliation
- accountants’ report
