Record-keeping requirements - Reconciliation of client accou...

Learning Outcomes

This article explains the record-keeping and reconciliation requirements for client accounts under the SRA Accounts Rules, the purpose and process of client account reconciliation, the role of the COFA or a manager, and the importance of identifying and resolving discrepancies. It details procedures for maintaining accurate records and ensuring compliance for SQE1 assessment, including Rule 8 systems and controls, the five‑weekly timetable for obtaining statements and completing reconciliations, the content of reconciliation statements (including adjustments for outstanding items), and the steps to correct and document any breaches, including circumstances requiring immediate replacement of client money and sign‑off by the COFA or a manager.

SQE1 Syllabus

For SQE1, you are required to understand the record-keeping and reconciliation requirements for client accounts in legal practice, with a focus on the following syllabus points:

• the SRA Accounts Rules relating to client account reconciliation and record-keeping
• the process and timing of reconciling client accounts
• the role and responsibilities of the Compliance Officer for Finance and Administration (COFA) or manager in reviewing reconciliations
• identifying and resolving discrepancies between internal records and bank statements
• the importance of accurate, contemporaneous, and chronological accounting records for client money
• the Rule 8 requirements: obtaining bank statements every five weeks, completing and signing a three‑way reconciliation, keeping a central record of bills, and retaining accounting records for six years
• how separate designated deposit client accounts (SDDCAs), joint accounts, and clients’ own accounts interface with reconciliation duties, including five‑weekly statement and reconciliation requirements where applicable
• when and how breaches must be corrected promptly, including immediate replacement of any shortfalls from business money and escalation/reporting if material, and the conditions under which a firm may be exempt from obtaining an accountant’s report

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. How often must a law firm reconcile its client account records with bank statements under the SRA Accounts Rules?
2. What is a three-way reconciliation in the context of client accounts?
3. Who is responsible for reviewing and signing off client account reconciliations in a law firm?
4. What steps should be taken if a discrepancy is found during the reconciliation process?

Introduction

Accurate record-keeping and regular reconciliation of client accounts are essential duties for solicitors and law firms. The SRA Accounts Rules require firms to maintain up-to-date records and to reconcile client account balances with bank statements at least every five weeks. This process ensures that client money is safeguarded and that any errors or irregularities are identified and resolved promptly. Understanding these requirements is critical for SQE1 and for effective legal practice. In addition to reconciling client accounts, firms must obtain statements for business accounts on the same five‑weekly cycle. The COFA or a manager must sign off the reconciliation record, and any differences must be investigated, resolved, and documented without delay. Robust record-keeping underpins this control environment: a cash book with a running total, client ledgers for each matter, and a central record of bills and notifications of costs are all required.

Record-Keeping Requirements for Client Accounts

Law firms must keep accounting records that are accurate, contemporaneous, and chronological. These records must show all receipts and payments of client money, as well as the running balance for each client matter. Proper record-keeping allows firms to monitor client funds, comply with regulatory obligations, and provide transparency to clients.

Under Rule 8, systems and controls must include:

• client ledgers showing client‑side transactions and balances for each matter
• a cash book (cash sheet) with a running total of transactions through client accounts
• a list of client ledger balances (liabilities to clients and third parties) with a running total
• obtaining bank statements for all client accounts and business accounts at least every five weeks
• completing a reconciliation of the statement balance with the cash book balance and the client ledger total at least every five weeks
• a central record of all bills and other written notifications of costs that is readily accessible
• retention of all accounting records and reconciliation statements securely for at least six years

Key Term: client account reconciliation
The process of comparing a firm's internal client account records with external bank statements and client ledger balances to ensure all records match and discrepancies are identified and resolved.

Key Term: three-way reconciliation
A reconciliation method where the balance per the client cash book, the bank statement, and the sum of all client ledger balances are compared to ensure they agree.

Key Term: COFA (Compliance Officer for Finance and Administration)
The individual in a law firm responsible for ensuring compliance with the SRA Accounts Rules, including reviewing and signing off client account reconciliations.

The Reconciliation Process

Timing and Frequency

Under the SRA Accounts Rules, firms must obtain bank statements for all client accounts at least every five weeks. Reconciliation of the client account must also be completed at least every five weeks. This means that the firm's internal records (client ledgers and cash book) must be compared with the bank statements on a regular schedule. In practice, many firms reconcile monthly to maintain a predictable cadence within the five‑week maximum.

Where a firm operates separate designated deposit client accounts (SDDCAs), those accounts are client accounts and must be covered by the reconciliation process. For clients’ own accounts operated as signatory, Rule 8 requires statements to be obtained and reconciliations to be completed at least every five weeks, even though those are not firm client accounts. Joint accounts held with clients or third parties are not firm client accounts, but statements must still be obtained every five weeks and kept in a central register; good practice is to review those statements in the same cycle to safeguard money.

Steps in Reconciliation

1. Obtain bank statements for all client accounts (including any SDDCAs) and the firm’s business accounts.
2. Prepare a reconciliation statement comparing:
   • the balance on the client cash book (internal record)
   • the balance on the client account bank statement
   • the total of all client ledger balances
3. List and explain any timing differences, such as outstanding cheques (unpresented payments) and outstanding lodgements (deposits not yet credited).
4. Adjust for bank-originating items not yet recorded in the cash book or ledgers, such as bank charges, bank interest, direct debits or credits, and bank errors.
5. Investigate and resolve discrepancies promptly, updating the cash book and ledgers as needed and correcting any mispostings or omissions.
6. Have the reconciliation reviewed and signed off by the COFA or a manager, with the reconciliation dated and filed together with supporting reports (cash book printout, client ledger list/summary, bank statements).

A well-prepared reconciliation statement will identify the statement date, the reconciled figures for the cash book and ledger total, a detailed schedule of outstanding items, and a narrative to explain differences. It should be signed and dated by the preparer and by the reviewing COFA or manager.

Three-Way Reconciliation

A three-way reconciliation is best practice and often required. It involves comparing:

• the client cash book balance
• the bank statement balance
• the sum of all client ledger balances

All three figures should match after accounting for timing differences (e.g., outstanding cheques) and any bank-originating items posted to the cash book during the reconciliation. Any unexplained difference must be investigated and resolved. If a firm operates multiple client accounts (for example, a general client account and one or more SDDCAs), each account should be reconciled individually, and the firm should also ensure that the consolidated total of client ledger balances equals the combined balances of the client accounts.

Worked Example 1.1

A law firm’s client cash book shows a balance of £120,000. The bank statement for the client account shows £121,500. The total of all client ledger balances is £120,000. There is an outstanding cheque for £1,500 that has not yet cleared.

Answer:
The difference between the bank statement (£121,500) and the cash book (£120,000) is £1,500, which matches the outstanding cheque. The client ledger balances agree with the cash book. After accounting for the outstanding cheque, the records reconcile correctly.

Worked Example 1.2

During reconciliation, a firm finds that the client cash book balance is £50,000, the bank statement shows £49,800, and the total client ledger balances are £50,000. There is no record of any outstanding cheques or deposits.

Answer:
There is a £200 shortfall in the bank account. The firm must investigate the cause (e.g., a bank charge, error, or missing deposit). If client money is missing, the firm must replace it immediately from business money to make the client account whole, record the correction, and resolve the root cause.

Worked Example 1.3

A firm’s reconciliation shows a £50 difference between the bank statement and the cash book. After investigation, the firm discovers a bank charge that was not recorded in the cash book.

Answer:
The firm should record the bank charge in the cash book, update the reconciliation, and ensure the records now match.

Worked Example 1.4

The cash book shows £300,000 for the general client account and £500,500 held in an SDDCA for a probate client (original £500,000 plus £500 interest). The general client account bank statement shows £300,000, and the SDDCA statement shows £500,500. The total of client ledger balances is £800,500. The reconciliation is prepared only for the general client account.

Answer:
Each client account must be reconciled individually. The general client account reconciles at £300,000, and the SDDCA reconciles at £500,500 after posting interest to the deposit ledger. The firm should then ensure the consolidated total of client ledger balances (£800,500) equals the combined balances of all client accounts (£300,000 + £500,500).

Worked Example 1.5

The bank has credited £125 interest to the general client account. The firm’s policy is to treat interest on the general client account as business income and pay clients a fair sum in lieu of interest as appropriate. The cash book does not reflect the bank interest credit.

Answer:
Post the £125 bank interest to the cash book and transfer it promptly to the business bank account (as business money). If any client is due a sum in lieu of interest, record the interest payable expense and make the business‑to‑client transfer separately. Update the reconciliation to reflect the postings.

Worked Example 1.6

The sum of client ledger balances per the ledger listing is £410,350, whereas the cash book shows £410,550 and the bank statement shows £410,550. There are no listed outstanding items.

Answer:
The unequal client ledger total indicates a misposting or omission in the ledgers. Identify and correct the error (for example, a £200 entry recorded on the cash book but missing from the relevant client ledger). Once corrected, the client ledger total should equal the cash book and bank balances net of any timing differences.

The Role of the COFA or Manager

The SRA Accounts Rules require that each reconciliation is reviewed and signed off by the COFA or a manager. This provides an additional layer of oversight and ensures that any issues are escalated and addressed. The COFA must also ensure that any discrepancies are investigated and resolved promptly.

Specific responsibilities include:

• ensuring statements are obtained for all client accounts and business accounts at least every five weeks
• confirming that three‑way reconciliations are completed, explained, signed, and filed with supporting schedules
• maintaining a record of breaches, ensuring prompt correction (for example, immediate replacement of client shortfalls from business funds), and assessing whether any breach is material and requires reporting
• overseeing training and system controls so withdrawals are appropriately authorised and sufficient funds exist for the specific client before any payment (Rule 5.3)
• ensuring a central record of bills and notifications of costs is kept, so transfers of costs from client to business accounts are made only after delivery of a bill and for the specific sum billed

Key Term: discrepancy
Any difference found between the client account records, the bank statement, or the sum of client ledger balances during reconciliation.

Identifying and Resolving Discrepancies

If a discrepancy is found during reconciliation, the firm must:

• investigate the cause (e.g., data entry error, missing transaction, bank error)
• correct the records as necessary
• replace any missing client money immediately if a shortfall is discovered
• document the steps taken to resolve the issue
• consider whether the cause indicates a control weakness (e.g., unrecorded bank charges or delays in posting receipts) and strengthen controls accordingly

Prompt, documented correction is essential. Where the client account has been overdrawn for any specific client matter (a debit balance on the client side of the client ledger), the firm has used other clients’ money in breach of Rule 5.3. The breach must be corrected immediately by transferring business money to restore the client account, and the root cause must be addressed.

Exam Warning

If a discrepancy is not resolved promptly, or if client money is missing, this is a serious breach of the SRA Accounts Rules. The firm and its managers may be subject to disciplinary action.

Importance of Accurate and Timely Records

Accurate, up-to-date records are essential for effective reconciliation. All receipts and payments must be recorded promptly and in chronological order. Each client ledger must show the running balance for that client or matter. The cash book must reflect all movements in and out of the client account.

In addition:

• transfers of costs from client to business account must only occur after a bill has been delivered and for the specific sum billed
• ledger balances should not show a debit (overdrawn) on the client side for any matter
• inter-client transfers (between clients or between matters for the same client) must be recorded on the relevant client ledgers, noting that these are paper transfers with no movement of bank funds but they alter the ownership of money in the general client account
• bank-originating items (interest, charges, direct debits/credits) must be posted promptly so the cash book remains current

Key Term: client ledger
An individual record showing all receipts, payments, and the running balance for a specific client or matter.

Dealing with Common Reconciliation Issues

Outstanding Items

Outstanding cheques or deposits are common reasons for differences between the cash book and bank statement. These should be listed and explained in the reconciliation statement. Stale cheques (e.g., cheques outstanding for more than six months) require review: cancel and reissue where appropriate, or reverse and resolve with the payee.

Errors in Posting

Mistakes in recording transactions can cause discrepancies. Regular reconciliations help identify and correct such errors quickly. Typical errors include posting to the cash book but not to the client ledger, misallocations to the wrong matter, and incorrect amounts entered.

Unexplained Differences

Any unexplained difference, no matter how small, must be investigated and resolved. Persistent or large discrepancies may indicate serious problems with record-keeping or even fraud.

Bank Interest and Charges

Interest credited to the general client account belongs to the firm as business money. Charges on the client account must be posted to the cash book and reflected in reconciliations. Any bank interest or charges appearing on statements but not in the cash book will create differences that must be posted and explained.

Inter-client Transfers and Deposit Accounts

Inter-client transfers (paper transfers between clients or matters) and movements to or from SDDCAs must be reflected correctly in client ledgers and the cash book. Interest on SDDCAs must be posted to the deposit ledger. Reconciliations should include the deposit account statements and related ledger entries.

Worked Example 1.7

A cheque for £2,000 issued to a search provider remains outstanding after seven months. The cash book shows the payment; the bank statement does not.

Answer:
Treat the cheque as stale. Void the original cheque, reverse the entry if appropriate, and reissue payment or arrange an alternative method. Update the cash book and reconciliation, removing the stale item from the outstanding cheques list once resolved.

Documentation and Retention

Firms must keep all reconciliation statements, supporting documents, and records of investigations for at least six years. This enables the SRA and reporting accountants to review compliance and provides an audit trail for all client money.

The reconciliation file should include:

• the bank statements used (client accounts and business accounts)
• a printout or export of the client cash book for the reconciliation date
• the client ledger balances listing (or summary) at the reconciliation date
• the reconciliation statement with outstanding items schedule and explanatory notes
• evidence of postings made to correct differences (journal entries or ledger reports)
• signatures (preparer and COFA/manager reviewer) and the reconciliation date

Firms holding or receiving client money must obtain an accountant’s report for each accounting period within six months of the end of the period, and deliver it to the SRA if the report is qualified because failures placed client money at risk. No report is required if all client money held or received during the period was from the Legal Aid Agency or the total client account balances did not exceed an average of £10,000 and a maximum of £250,000 during the period.

Key Point Checklist

This article has covered the following key knowledge points:

• Law firms must keep accurate, contemporaneous, and chronological records of all client money.
• Client account reconciliations must be completed at least every five weeks using bank statements, the client cash book, and client ledgers.
• Three-way reconciliation compares the cash book, bank statement, and sum of client ledger balances and investigates any differences.
• The COFA or a manager must review and sign off each reconciliation and ensure discrepancies are resolved promptly, maintaining a breach log and overseeing corrective actions.
• Any missing client money must be replaced immediately from business money and the breach recorded and reported if material.
• Statements must be obtained for client and business accounts at least every five weeks, and reconciliations must cover all client accounts, including any SDDCAs.
• A central record of bills and notifications of costs must be kept to support lawful transfers of costs from client to business account.
• All reconciliation statements and supporting records must be retained securely for at least six years; accountant’s reports must be obtained unless an exception applies.

Key Terms and Concepts

• client account reconciliation
• three-way reconciliation
• COFA (Compliance Officer for Finance and Administration)
• discrepancy
• client ledger