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The SRA has released a consultation document which proposes to remove the mandatory requirement for firms to have their client accounts reviewed by an independent accountant and submit an annual accountant’s report to the SRA. I applaud the principle of the proposed changes, although the timing may not be right for the profession. The extension of self-regulation and of the SRA’s current risk based approach must be key to appropriate regulation with resources applied where they are required most. I therefore agree that replacing external reporting with self- certification of compliance with the SRA Accounts Rules (“SRAAR”) by law firms is a good step to take in principle.
The consultation document notes that “the SRA receives almost 9,000 reports annually and over 50% of them are qualified”. My view is that far more than 50% of the reports should be qualified. That 50% is a shockingly low number. If reporting accountants are carrying out their jobs properly, then non-trivial breaches will be found on the vast majority of reports. Perhaps the low number of qualified reports is due to a lack of knowledge of reporting accountants appointed by law firms. That indicates to me that the current system does need to be revised. If large amounts of money are being spent by the profession on the current regime and it clearly does not work, then it does need to change. I would however question how much goes wrong in law firms that the SRA does not know about.
The SRA’s consultation document acknowledges that “the overall discipline of producing an accountant’s report may provide both a deterrent and a mechanism by which breaches are identified, thus modifying behaviour and mitigating risks”. I agree with that entirely. The vast majority of lawyers try to abide by the rules. I would hope that that is driven by the fact that it is the ‘right thing’ to do, and not just because of the reporting accountant regime. If it is due to the reporting accountant regime, then the proposed changes would cause huge issues to the profession as a whole; the vast majority of compliant solicitors having to pay the cost for the small minority that may not do the ‘right thing’.
It is true that desperate people do desperate things. I have seen client account fraud first hand perpetrated by seemingly upstanding members of the legal profession. Usually such fraud happens as a direct result of a desperate need of the perpetrator as a result of personal circumstances. As large parts of the profession are currently struggling financially, primarily as a result of legal aid reform and personal injury reform in particular, there may currently be more desperate people prepared to do desperate things.
The consultation document notes that the reporting regime “adds cost with only limited benefits”. In my experience, if carried out correctly, the reporting regime should help to improve law firms’ systems and improve their businesses. If a report is carried out by those that see how other firms are managed, then best practice can be shared. If that is passed to a COFA, they are likely to only have experience of their own firm and will lose the benefit of being pointed in the right direction. It could be argued that a more appropriate step might have been to implement a requirement that Reporting Accountants can only undertake such responsibilities if they have at least, say, ten such appointments. You might say that I ‘wouldn’t be a turkey voting for Christmas’ and that I am bound to oppose the proposed change. It is true that we do undertake a large number of SRAAR reporting assignments and that a certain amount of that income would be lost. However, many of our solicitor clients will choose to retain an element of external ‘auditing’, in order to support them in their responsibilities. I am sure that many COFAs in particular will want that comfort blanket and will continue to engage us. My main concerns are therefore for the legal profession. If the proposed changes are to be made, they must be made in the right way and at the right time.
The SRA’s consultation document notes that “COFAs are required to take all reasonable steps to… comply with…the SRAAR; keep a record of any failure to comply…; and report any material failure…to the SRA”.
I am totally immersed in the legal profession and see a great deal of what is happening at ‘the coal face’.
It is my experience that in the majority of cases, those requirements are not yet being met in practice. I commonly see empty breach registers, that is not because breaches have not occurred. It is because either the COFA is not undertaking their role correctly; and/ or reporting mechanisms haven’t been implemented for fee earners and accounts staff to report breaches to the COFA; and/or because fee earners and accounts staff are not aware when a breach has occurred because of a lack of knowledge of the SRAAR.
If the proposal to remove the requirement for an accountant’s report is to be replaced by more responsibility for the COFA, then the current COFA regime needs to be fully embraced and implemented first. There also needs to be training provided to fee earners and accounts staff. It is not the sole responsibility of the COFA and accounts staff to notice and rectify breaches. Fee earners must take more responsibility in this regard. It is often fee earners that create issues that accounts staff later notice. The SRA’s consultation document includes a proposal for “the firm’s COFA to declare that the firm’s accounts are compliant with the SRAAR”. The above statement requires clarification. In particular, the word ‘accounts’ needs to be defined; what is meant by that word? Is it the ‘accounting records’? Is it the ‘Financial Statements’? Is it the ‘client and office account records’? Is it the ‘client and office account ledgers’?
It would also be advisable to extend the above statement to include ‘other than’, so that non-compliant matters can be disclosed and to include the word ‘materially’ so that non- material items can be omitted from the ‘other than’ list. My view is that the proposals would place a huge amount of pressure and responsibility on the shoulders of the COFAs. I would not want to be in their shoes and I feel very sorry for them. In time, once the new COFA regime beds down and COFAs are happy that the systems they have implemented are working correctly, then they would be more comfortable in making such statements. I have generalised to a great extent in this section regarding the effectiveness of COFAs. Many are extremely competent and attentive to their duties. In time, they may well perform in the way envisaged by the SRA. However, for now, the vast majority of COFAs are not ready to take on the new proposals.
The SRA consultation document notes that the proposals are planned for implementation in October 2014. The proposal is for reports due after October 2014 not to be submitted. There are huge issues with that. In practice, that will mean that reports are to be submitted for accounting periods ending on or before 30 April 2014, but reports may not be required for accounting periods ending on or after 31 May 2014. We are already working on reports for periods ending on 31 May 2014 and will also commence work on reports for periods ending on 30 June 2014 before the conclusion of the consultation process. We will therefore need to charge for those services even though a report may not eventually be required. It also puts doubt in the minds of those running law firms as to whether to begin their accounts rules reviews if they have an accounting period due to end during the next few months. If they delay the commencement of the testing procedures, and the reports are then deemed to be due, they may run out of time to meet the six month deadline and the SRA would then need to deal with the issues arising on a large scale. A better solution would be for the date selected to refer to the end of the accounting period for which reports are required, that would provide more certainty. For example, if 31 October 2014 is the date selected, it should mean that reports due for filing after 30 April 2015 would not be required.
The SRA’s consultation document notes that “if certain risk circumstances are present” an accountants report in the form stipulated by the SRA will be required. Should the current proposals be implemented, there will be a ‘de-skilling’ of reporting accountants as they will no longer be regularly carrying out such reports. I would therefore suggest that a pre- determined panel of solicitor specialist accountants is appointed by the SRA to undertake such enforced reviews.
The SRA’s consultation document includes a proposal to remove the detailed provisions in the SRAAR that dictate the form an accountant’s report will take when required. That is a sensible approach as it means that resources can be applied to match the perceived risk and the reason for the accountant’s report being required.
A cautionary note however, when standardisation is removed, costs will rise significantly.
The principle of self-regulation must be applauded, although now is not the right time to make these changes. Too much pressure has been placed on compliance officers already and it would not be fair on them, or the profession as a whole, to increase that pressure right now.
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