Record-keeping requirements - Requirement to keep and mainta...

Learning Outcomes

This article explains the SRA Accounts Rules requirements for accurate record-keeping of client money, covering the structure and maintenance of client ledgers and cash books, reconciliation procedures and sign-off, retention and secure storage of accounting records, contemporaneous and chronological entry standards, audit trail expectations, systems and controls for withdrawals, central records of bills and costs notifications, and compliance obligations relating to breaches and accountants’ reports, including when reports are required and when they must be delivered to the SRA.

SQE1 Syllabus

For SQE1, you are required to understand the SRA Accounts Rules record-keeping requirements for solicitors, with a focus on the following syllabus points:

• the obligation to keep accurate, contemporaneous, and chronological accounting records for client and business money, with a clear audit trail
• the requirements for client ledgers (separate for each client and matter), cash books, transfers journals, and central records of bills and written notifications of costs
• bank statements and reconciliation of client (and business) bank accounts at least every five weeks, including reconciliation statement sign-off and prompt resolution of differences
• systems and controls for authorising withdrawals and ensuring sufficient funds exist for the particular client before any payment
• the prohibition on using the client account to provide banking facilities and the record-keeping implications
• the rules on retention and secure storage of accounting records for at least six years, and accessibility on demand
• compliance and reporting obligations relating to breaches (including immediate correction of deficits) and accountants’ reports (timing, thresholds for exemption, and delivery to the SRA)

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. What information must be included on a client ledger to ensure it is identifiable under the SRA Accounts Rules?
2. How often must a firm reconcile its client account records with bank statements?
3. For how many years must a firm retain its accounting records?
4. 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. Records must be complete, up to date, and capable of being produced promptly to the SRA. In practice, this means using a dual system of accounting (separate business and client records), maintaining identifiable client ledgers for each matter, keeping a central record of bills and costs notifications, obtaining bank statements at least every five weeks, and reconciling internal records with statements at the same frequency.

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, reconciliation statements, and central records of bills.

Key Term: ledger
A ledger is a record of financial transactions for a specific purpose. In solicitors’ accounts, ledgers include client ledgers (by client and matter) and the cash book; entries must show date, details, debit/credit, and a running balance.

Key Term: reconciliation statement
A reconciliation statement records the results of comparing bank statement balances with internal accounting records for client accounts (and business accounts). It evidences the reconciliation, notes differences, and is signed off by the COFA or a manager.

Key Term: manager
A manager is a person responsible for running a firm (for example, a sole principal, an LLP member, or a director). Managers share responsibility for systems and controls and for ensuring compliance with the Accounts Rules.

Key Term: Compliance Officer for Finance and Administration (COFA)
The COFA oversees compliance with the Accounts Rules, monitors systems and controls for client money, signs off reconciliations, records breaches, and ensures prompt remediation of errors that put client funds at risk.

Key Term: accounting period
An accounting period is the period (normally 12 months) for which a firm prepares financial statements and, if required, obtains an accountant’s report.

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. Entries should be made promptly as transactions occur, show the date and a clear description, and record the correct debit/credit in the relevant client or business columns. The current balance must be readily ascertainable for each ledger, and records must link to supporting documentation (for example, bills, invoices, instructions, bank advices).

Accurate records are not limited to the client account. Firms must also keep business account records and ensure that any movement between client and business accounts (such as transfers in payment of a bill) is supported by a proper written notification of costs and recorded in both sets of ledgers. Where firms operate separate designated deposit client accounts (for long-term client deposits), corresponding deposit records must also be kept, often by using extra columns or separate ledgers for the deposit activity and interest earned.

Key Term: central record of bills
A central record of bills is a readily accessible list or file of all bills and written notifications of costs issued by the firm. It supports transfers from client to business account and facilitates audit of costs postings and VAT reporting.

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. Identifiability typically requires the client’s full name, a meaningful matter description (for example, “Purchase of 7 Guy Lane”), and clear details for each entry (source/destination of funds, purpose of payment). Running balances should be maintained so that the current position is always visible.

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. It should reveal at any time the amount held for that client and matter.

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. It evidences movement of cash and is critical for reconciliation.

To maintain a reliable audit trail:

• use separate ledgers per client and matter (no pooling of individual activity),
• record inter-client transfers (for example, moving stakeholder deposits to a seller’s ledger on completion) with cross-references in both ledgers,
• ensure any transfer of costs from client to business account is supported by a bill or costs notification and is posted in both the client ledger (business columns) and the cash book.

Where firms hold client money in a designated deposit account for a specific client, they must record transfers into and out of the deposit, and interest earned, either in extra deposit columns or in separate deposit ledgers. In either method, the audit trail must clearly show the client funds on deposit and the interest credited to the client.

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. It underpins the requirement that money can only be transferred from client account to business account in payment of costs once a bill or other written notification has been issued, and it supports VAT accounting.

The central record should allow you to:

• trace each bill to the relevant client ledger entries,
• identify abatements or credits to bills (and their ledger postings),
• evidence VAT postings on profit costs and VAT ledgers,
• demonstrate timely and accurate transfers from client to business account.

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 (client ledgers and cash book) at the same frequency. The reconciliation process requires comparing the bank balances to internal totals, listing timing differences (such as unpresented cheques and uncleared receipts), and investigating any discrepancies that are not explained by timing variances.

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.

During reconciliation:

• prepare a reconciliation statement and ensure it is signed off by the COFA or a manager,
• note and explain timing differences (for example, outstanding cheques),
• investigate non-timing differences promptly (for example, mispostings, bank errors),
• correct entries without delay and recheck balances,
• retain the reconciliation statement and working papers for inspection.

The same discipline applies to business bank accounts: obtain statements at least every five weeks and reconcile them to the business cash book and ledgers. This helps ensure that transfers from client account to business account match costs postings and that business-side VAT/GST records align with HMRC returns.

Key Term: reconciliation statement
A reconciliation statement records the bank-to-ledger comparison, lists timing differences, confirms the reconciled balance, and is signed by the COFA or a manager. It evidences periodic checks and is retained with supporting papers.

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.

Worked Example 1.2

During a five-week reconciliation, the client bank statement shows £2,000 less than the internal client cash book. The reconciliation working papers reveal a cheque to HM Land Registry issued four days ago that has not yet been presented and a misposting of bank charges into the client cash book rather than the business cash book. What actions are required?

Answer:
Treat the unpresented cheque as a timing difference and note it on the reconciliation statement. Correct the misposting by reclassifying the bank charges into the business cash book and adjusting the client cash book accordingly. Recalculate the reconciled balance and have the COFA or manager sign off the reconciliation statement.

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. Firms must maintain systems and controls to ensure:

• sufficient funds are held for the specific client before making any withdrawal (no use of one client’s money for another’s),
• documented authority exists for each payment, with supporting evidence retained on file,
• transfers of costs are supported by a bill or costs notification and posted correctly in both client and business records,
• debit balances (negative client ledger balances) are prevented; if one arises (for example, a cheque bounces), it is identified and rectified immediately by replacing the shortfall from the firm’s own funds.

Training staff on the Rules and on the firm’s procedures is essential. Regular monitoring by managers and the COFA helps ensure systems remain effective, including controls to prevent the client account being used as a banking facility unrelated to regulated legal services.

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, reconciliation statements, transfers journals, deposit records, VAT ledgers, and central records of bills. Electronic records must be backed up and be capable of being reproduced promptly in printed form; paper records must be protected against unauthorised access or loss.

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.

Good practice includes:

• a documented retention schedule covering all accounting records,
• secure and searchable storage (digital document management systems are often used),
• procedures for migrating records when systems change, preserving integrity and accessibility,
• timely disposal of records after the retention period, in a secure manner.

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. If client money has been used improperly (for example, a shortfall arises because a cheque bounced after a disbursement was paid), the firm must immediately replace the shortfall from its own funds and correct the ledger. Breaches should be recorded and assessed for materiality; serious breaches must be reported promptly to the SRA under the Codes of Conduct.

Firms that hold client money must obtain an accountant’s report within six months of the end of each accounting period, unless exempt. Exemption generally applies where all client money in the period was received from the Legal Aid Agency, or the firm held only small amounts of client money, with the total balance not exceeding both an average threshold and a maximum threshold during the accounting period. The report is prepared by a suitably qualified accountant and focuses on the safety of client money and compliance with key Rules (including use of client accounts, withdrawals, reconciliation, systems and controls, and record retention). Only qualified reports (that identify serious breaches putting client money at risk) must be delivered to the SRA, and they must be delivered within six months of the end of the accounting period.

Worked Example 1.3

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.

Worked Example 1.4

A firm’s average client money balance during the accounting period was £8,500, with a single month’s peak of £300,000 due to a large conveyancing completion. Is the firm exempt from obtaining an accountant’s report, and must any report be delivered to the SRA?

Answer:
The firm is not exempt because the maximum client money balance in the period exceeded the permitted threshold, even though the average balance was below. It must obtain an accountant’s report within six months of period end. Delivery to the SRA is required only if the report is qualified (for example, due to a serious breach placing client money at risk).

Accountants are also under an obligation to report evidence of fraud or theft in relation to client money immediately to the SRA. Firms must provide the accountant with details of all bank accounts used during the accounting period and any information needed to complete the report. Regardless of exemption, the SRA may require delivery of a report where it is in the public interest (for example, concerns about the firm’s fitness to hold client money).

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. Similarly, never use the client account as a banking facility; entries must relate to regulated legal services with a clear connection to the matter and be fully supported by documentation.

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 and business money, with a clear audit trail.
• Each client and matter must have a separate client ledger showing all receipts and payments, with running balances and identifiable details.
• Firms must keep a cash book for all client and business bank accounts and records of transfers (including inter-client transfers and costs transfers).
• Central records of all bills and written notifications of costs must be maintained and readily accessible.
• Client account records must be reconciled with bank statements at least every five weeks; reconciliation statements must be signed off and differences resolved promptly.
• Withdrawal controls must ensure sufficient funds exist for the relevant client and that proper authority and supporting documentation are retained.
• All accounting records must be securely stored and retained for at least six years, and be capable of prompt production to the SRA.
• Breaches must be remedied immediately and, if material, reported to the SRA; debit balances and shortfalls must be replaced from firm funds without delay.
• Firms holding client money must obtain an accountant’s report within six months of period end unless exempt, and must deliver qualified reports to the SRA.

Key Terms and Concepts

• accounting records
• ledger
• client ledger
• cash book
• reconciliation
• reconciliation statement
• manager
• Compliance Officer for Finance and Administration (COFA)
• accounting period
• central record of bills
• retention of accounting records