Record-keeping requirements - Reconciliation of client accounts

Learning Outcomes

After studying this article, you will be able to explain the record-keeping and reconciliation requirements for client accounts under the SRA Accounts Rules. You will understand the purpose and process of client account reconciliation, the role of the COFA or manager, and the importance of identifying and resolving discrepancies. You will also be able to apply the correct procedures for maintaining accurate records and ensuring compliance for SQE1 assessment.

SQE1 Syllabus

For SQE1, you are required to understand the record-keeping and reconciliation requirements for client accounts in legal practice. Focus your revision on:

• 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.

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.

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.

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.

Steps in Reconciliation

1. Obtain bank statements for all client accounts.
2. Prepare a reconciliation statement comparing:
   • the balance on the client cash book (internal record)
   • the balance on the bank statement
   • the total of all client ledger balances
3. Identify and explain any differences, such as outstanding cheques or deposits not yet cleared.
4. Investigate and resolve discrepancies promptly.
5. Have the reconciliation reviewed and signed off by the COFA or a 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). Any unexplained difference must be investigated and resolved.

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.

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.

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

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 and record the correction.

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.

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.

Errors in Posting

Mistakes in recording transactions can cause discrepancies. Regular reconciliations help identify and correct such errors quickly.

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.

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.

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.

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.
• The COFA or a manager must review and sign off each reconciliation and ensure discrepancies are resolved promptly.
• Any missing client money must be replaced immediately and the breach recorded and reported if material.
• All reconciliation statements and supporting records must be retained for at least six years.

Key Terms and Concepts

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