Record-keeping requirements - Storage and retention of accounting records

Learning Outcomes

This article outlines the requirements for maintaining and storing accounting records as mandated by the SRA Accounts Rules. For the SQE1 assessments, you will need to understand the types of accounting records firms must keep, the minimum retention period, and the importance of security and accessibility. Your understanding will enable you to apply these rules in practical scenarios presented in SQE1-style multiple-choice questions, ensuring you can identify compliant practices regarding financial record management within a legal practice.

SQE1 Syllabus

For SQE1, you are required to understand the practical implications of the record-keeping requirements under the SRA Accounts Rules. This includes knowing what records must be kept, for how long, and the rationale behind these obligations, particularly concerning client money protection and regulatory oversight.

As you work through this article, remember to pay particular attention in your revision to:

• the specific types of accounting records firms must maintain (Rule 8)
• the minimum period for which accounting records must be retained (Rule 13)
• the requirement for records to be accurate, contemporaneous, and chronological (Rule 8)
• the implications of inadequate record-keeping for compliance and regulatory action.

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. For how long must a firm retain its accounting records under the SRA Accounts Rules?
   1. Three years
   2. Five years
   3. Six years
   4. Seven years
2. Which of the following must be retained for at least six years?
   1. Client ledger accounts
   2. Bank statements for client accounts
   3. Reconciliation statements
   4. All of the above

3. True or False? Accounting records may be kept solely in a digital format, provided they can be reproduced in printed form when required.

4. Which Rule primarily governs the requirements for keeping accounting records?
   1. Rule 5
   2. Rule 8
   3. Rule 11
   4. Rule 13

Introduction

Maintaining accurate and comprehensive accounting records is a fundamental aspect of running a compliant legal practice. The Solicitors Regulation Authority (SRA) Accounts Rules impose specific obligations on firms regarding the nature, storage, and retention of these records. These rules are designed to ensure the safety of client money, provide transparency, and facilitate regulatory oversight. Failure to comply can lead to disciplinary action and damage a firm's reputation. This article examines the key requirements under Rules 8 and 13 concerning the maintenance, storage, and minimum retention period for accounting records.

Accounting Records: Requirements under Rule 8

Rule 8 of the SRA Accounts Rules sets out the detailed requirements for the accounting records that firms must maintain. The overarching principle, stated in Rule 8.1, is that firms must keep accounting records that are accurate, contemporaneous, and chronological. This ensures a clear and reliable audit trail for all financial transactions involving both client and business money related to client matters.

Key Term: Accurate Records
Financial records that correctly reflect the transactions they represent, free from errors or misstatements.

Key Term: Contemporaneous Records
Financial records that are updated promptly as transactions occur, or as soon as reasonably practicable thereafter, ensuring timeliness.

Key Term: Chronological Records
Financial records that are kept in date order according to when the transactions occurred.

Rule 8 mandates several specific types of records:

• Client Ledger Accounts (Rule 8.1(a)): Separate ledgers must be maintained for each client (and often for each matter per client). These must clearly distinguish between client money and business money transactions related to the client matter. They record all receipts and payments, showing the running balance.
• Record of Balances (Rule 8.1(b)): Firms must maintain a list showing all balances on their client ledgers, enabling the total liability to clients to be easily ascertained.
• Client Cash Account (Rule 8.1(c)): Often referred to as the cash book, this record shows all transactions passing through the client bank account(s), maintaining a running total.
• Record of Bills (Rule 8.4): A central, readily accessible record of all bills or other written notifications of costs must be kept.

Firms must also keep records relating to bank reconciliations (Rule 8.3) and bank statements (Rule 8.2), which are essential for verifying the accuracy of internal records against external bank data.

Worked Example 1.1

A firm acts for Client A on a property purchase and Client B on litigation. The firm receives £10,000 from Client A for the deposit and £1,000 from Client B on account of costs. Both sums are paid into the general client account. How should these receipts be recorded internally?

Answer: The firm must maintain separate client ledger accounts for Client A (Purchase) and Client B (Litigation). The receipt of £10,000 must be credited to Client A's ledger (client section), and the receipt of £1,000 must be credited to Client B's ledger (client section). Corresponding debit entries must be made in the client cash account. This ensures accurate, separate records for each client's money.

Storage and Retention: Requirements under Rule 13

Rule 13 specifically addresses the storage and retention of accounting records.

Retention Period (Rule 13.1)

The fundamental requirement under Rule 13.1 is that firms must retain all accounting records specified under the Rules for at least six years from the date of the last entry in the record.

Key Term: Retention Period
The minimum duration for which accounting records must be kept by a firm as specified by the SRA Accounts Rules, currently six years.

This six-year period applies to a wide range of documents, including:

• Client ledgers
• Cash accounts (client and business related to client matters)
• Bank statements (client and business accounts)
• Reconciliation statements
• Copies of bills and other written notifications of costs
• Records of transfers
• Records relating to joint accounts and client's own accounts operated by the firm
• Accountants' reports (even unqualified ones should be retained by the firm)
• Records of steps taken regarding residual client balances

The purpose of this retention period is to ensure that sufficient historical data is available for:

• Regulatory Scrutiny: Allowing the SRA to investigate past transactions if required.
• Client Queries: Enabling firms to answer client questions about past matters.
• Dispute Resolution: Providing evidence in case of disputes or claims against the firm.
• Audit Trail: Maintaining a comprehensive financial history of the firm's dealings with client money.

Worked Example 1.2

A firm concluded a matter for Client X on 30 June 2020. The final entry on Client X's ledger account was made on 15 July 2020 when the remaining client balance was returned. Until what date must the firm retain Client X's ledger account records?

Answer: The firm must retain the ledger account records for Client X until at least 15 July 2026. The six-year retention period runs from the date of the last entry in the record, which was 15 July 2020.

Storage Requirements (Rule 13.1)

Rule 13.1 also mandates that accounting records must be stored securely. This applies to both physical and digital records. Firms must implement appropriate measures to protect records from loss, damage, unauthorised access, or destruction.

For digital records, this includes ensuring data integrity, regular backups, and protection against cyber threats. While the Rules permit records to be kept electronically (Rule 8 allows this, subject to specific exceptions like original paid cheques under former rules, though digital images are now common), firms must ensure they are capable of being reproduced in a hard copy format if required by the SRA or an accountant.

Exam Warning

Be mindful of the start date for the six-year retention period. It runs from the date of the last entry in the specific record, not necessarily from the date the matter concluded or the file was closed. For ongoing records like a cash account, the period runs from the date of the last transaction recorded within it.

Revision Tip

Focus on understanding why the SRA requires these records to be kept for six years. Connecting the rule to its purpose (protecting client money, enabling audits, resolving disputes) will help you apply it correctly in exam scenarios. Remember that compliance is about demonstrating proper stewardship of client funds over a significant period.

Key Point Checklist

This article has covered the following key knowledge points:

• Firms must keep accurate, contemporaneous, and chronological accounting records (Rule 8).
• Key records include client ledgers, cash accounts, records of bills, and reconciliation statements.
• All accounting records must be retained for a minimum of six years from the date of the last entry (Rule 13).
• Records must be stored securely, whether in physical or digital format.
• Digital records must be capable of being reproduced in hard copy if needed.
• The six-year retention period facilitates regulatory oversight, client protection, and dispute resolution.

Key Terms and Concepts

• Accurate Records
• Contemporaneous Records
• Chronological Records
• Retention Period