I was interviewed recently by Law Firm Ambition about my views on the most common questions I come across in respect to mergers/accounts rules. Here are my thoughts for the first five questions, with more to follow in the coming weeks. Next week I'll be answering more questions around breaches and cyber security.
1. Who should we appoint as our COFA (compliance officer for finance and administration)?
The COFA must be an employee, but not necessarily a manager of the practice. They need to be approved by the SRA for the role and to have consented to the role. Additionally, they must be of sufficient seniority within the practice to carry out the role. The COFA does not need to be a lawyer.
The role is largely concerned with the Solicitors Accounts Rules, so a good understanding of those is vital. In addition, the COFA should have a good understanding of finance in general and the financials of the practice.
Ultimately, who is appointed to the role will depend on the size of your practice and what suits the needs of the firm. Many sole practitioners will also be their own COFA. In large practices, the COFA will be a full-time role held by a finance partner/director or someone who leads the finance team. Whoever you choose, the COFA does require the right level of gravitas to fulfil the role.
2. Other than compliance with the Solicitors Accounts Rules, what other examples of financial non-compliance may occur in law firms?
Lawyers have an obligation to run their business and carry out their roles in accordance with proper governance and sound financial and risk management principles, so financial non-compliance should not regularly occur. However, some examples are:
not filing statutory accounts with the relevant bodies on time;
not filing tax returns on time;
not paying tax liabilities on time;
owners over-drawing where the practice cannot necessarily afford to fund those drawings.
3. What are the most common breaches of the rules in law firms?
In our experience, the most common breaches are as follows:
Residual balances (Rule 14.4). At the end of a matter, small balances are often left in client account instead of being returned to the client. The rule states that the money should either be returned or, if there is good reason to retain it, the solicitor should write to the client to explain how much is being held and why, and write to confirm that annually thereafter. This is a recurring breach for many law firms. Depending on the extent of the breach, sometimes it is reportable to the SRA, and sometimes it is not.
Transferring money for fees (Rule 17.3). Often solicitors fail to transfer money from the client account to the office account within 14 days (days not working days!) following a bill having been raised. The money in client account is automatically earmarked for costs as soon as a bill has been raised. For money not to be earmarked, there needs to be a good reason which has been communicated to the client and recorded with narrative on the client ledger.
Bank account titles. Many law firms have difficulty ensuring that their client bank accounts have the correct titles. Words are often abbreviated, eg client to clt or limited to ltd, or if there is a maximum number of characters allowed within the title, the law firm name may be shortened.
4. What do fee-earners need to do about financial compliance?
Fee-earners have a lot to do in their everyday work, so can become over-reliant on the accounting team for compliance.
All fee-earners within the practice should have a good understanding of the rules. They should have regular training and updates on the rules to ensure ongoing compliance.
It is important to instil a firm-wide culture of financial compliance. The breach register, file reviews and health checks should be highlighted and discussed with the management of the practice to reinforce its importance to all.
5. What breaches should a COFA record in their breach register?
All breaches, no matter how minor, should be recorded in the breach register.
If a law firm has no breaches in its register during an accounting period, I’d question if the reporting processes are working effectively.
If you have any unanswered questions about SRA Accounts Rules, contact Huw Nicholls.
