Learning Outcomes
After reading this article, you will be able to explain the SRA Accounts Rules on accurate record-keeping for client money, including the requirements for client ledgers, reconciliation of accounts, and retention of accounting records. You will understand the principles behind maintaining accurate, contemporaneous, and chronological records, and be able to identify the consequences of non-compliance for SQE1.
SQE1 Syllabus
For SQE1, you are required to understand the record-keeping requirements imposed by the SRA Accounts Rules. Focus your revision on:
- the obligation to keep and maintain accurate, contemporaneous, and chronological accounting records for client money
- the requirements for client ledgers, cash books, and central records of bills
- the process and frequency of reconciling client accounts with bank statements
- the rules on retention and storage of accounting records
- the compliance and reporting obligations relating to breaches and accountants’ reports
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 information must be included on a client ledger to ensure it is identifiable under the SRA Accounts Rules?
- How often must a firm reconcile its client account records with bank statements?
- For how many years must a firm retain its accounting records?
- What action must be taken if a discrepancy is found during a client account reconciliation?
Introduction
Accurate record-keeping is a core requirement for solicitors in England and Wales. The SRA Accounts Rules 2019 set out strict obligations to ensure that client money is protected and that firms can demonstrate compliance. For SQE1, you must be able to explain the requirements for keeping and maintaining accurate records, the process of reconciliation, and the retention of accounting records.
The Requirement to Keep and Maintain Accurate Records
Solicitors must keep accounting records that are accurate, contemporaneous, and chronological. These records provide an audit trail for all dealings with client money and are essential for demonstrating compliance with the SRA Accounts Rules.
Key Term: accounting records
Accounting records are documents and electronic records that show all receipts and payments of client money, business money, and other relevant transactions. They include client ledgers, cash books, bank statements, and central records of bills.
Client Ledgers and Cash Books
Each client must have a separate client ledger for each legal matter. The ledger must clearly identify the client, the matter, and show all receipts and payments of client money and business money relating to that client.
Key Term: client ledger
A client ledger is a record showing all receipts and payments of client money and business money for a specific client and matter, including running balances.Key Term: cash book
A cash book (or cash account) records all receipts into and payments out of the firm’s client bank accounts and business bank accounts, showing running balances.
Central Records and Bills
Firms must keep a central record or file of all bills and written notifications of costs given to clients. This record must be readily accessible and kept up to date.
Reconciling Client Accounts
Firms must obtain bank statements for all client accounts at least every five weeks. These statements must be reconciled with the firm’s internal accounting records at the same frequency.
Key Term: reconciliation
Reconciliation is the process of comparing the balances on the firm’s client ledgers and cash books with the balances on bank statements to identify and resolve any discrepancies.
Worked Example 1.1
A firm’s client ledger shows a balance of £50,000 for all clients. The client cash book shows a balance of £50,000. The client bank statement shows a balance of £49,500. What should the firm do?
Answer: The firm must investigate the £500 discrepancy immediately. It may be due to an unrecorded payment, a bank error, or a timing difference. The firm must resolve the difference and correct the records before signing off the reconciliation.
Authorisation and Supervision
All withdrawals from client accounts must be appropriately authorised and supervised. Only persons with sufficient seniority and understanding of the Rules should be permitted to authorise withdrawals.
Retention and Storage of Accounting Records
Firms must securely store all accounting records for at least six years from the date of the last entry. This includes client ledgers, cash books, bank statements, reconciliations, and records of bills.
Key Term: retention of accounting records
Retention of accounting records means keeping all required documents and electronic records securely for at least six years, so they can be produced to the SRA if requested.
Compliance, Breaches, and Accountants’ Reports
Firms must have systems and controls to ensure compliance with the Rules. Any breaches must be remedied promptly upon discovery. Firms that hold client money must obtain an accountant’s report within six months of the end of each accounting period, unless exempt.
Worked Example 1.2
A firm discovers that a payment of £2,000 was made from the client account for Client A, but the client ledger for Client A shows a balance of only £1,500. What must the firm do?
Answer: The firm has used other clients’ money for Client A, which is a breach of the Rules. The firm must immediately replace the £500 shortfall from its own funds and correct the breach. The breach must be recorded and, if material, reported to the SRA.
Exam Warning
If a question refers to “promptly” recording or reconciling accounting records, remember that the SRA expects records to be kept up to date and reconciliations to be completed at least every five weeks. Failure to do so is a breach, even if no client money is lost.
Key Point Checklist
This article has covered the following key knowledge points:
- Firms must keep accurate, contemporaneous, and chronological accounting records for all client money.
- Each client and matter must have a separate client ledger showing all receipts and payments, with running balances.
- Firms must keep a cash book for all client and business bank accounts.
- Central records of all bills and written notifications of costs must be maintained.
- Client account records must be reconciled with bank statements at least every five weeks.
- All accounting records must be securely stored and retained for at least six years.
- Breaches must be remedied promptly and, if material, reported to the SRA.
- Firms holding client money must obtain an accountant’s report after each accounting period, unless exempt.
Key Terms and Concepts
- accounting records
- client ledger
- cash book
- reconciliation
- retention of accounting records
