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. Below, I'll focus on the impact of the new SRA Accounts Rules, and how the changes may affect accounting processes and the definition of client money. You can read my answers to the previous questions here:
Questions 1-5: FAQs - SRA Accounts Rules compliance for law firms
Questions 6-10: Breaches and Cyber Security
Questions 11-15: Internal Reviews
Questions 16-20: Accountant's reports
Questions 21-24: Banking Facilities and Residual Balances
The reporting accountant must provide the COFA of the practice with a signed copy of the report, whether qualified or unqualified. The COFA should ensure that all managers of the practice have access to and have seen the report. The report must be signed and delivered to the COFA within six months of the end of the accounting period.
There is no longer a checklist for completion by the reporting accountant.
I would expect the reporting accountant to provide the practice with a management letter which details any breaches (reportable or non-reportable) found through their work, together with pro-active suggestions for improvement. In addition, any best practice points where systems and processes could be improved would also be detailed.
Although it may be agreed with the reporting accountant that they will submit any reports that are required to be submitted to the SRA, the ultimate responsibility for delivery is with the practice itself.
The new rules were published in draft by the SRA in June 2017.
Although there is a lot of change, ultimately the underlying principles remain the same. Further guidance is still to be issued on the exact implementation, but the main areas of change are expected to be as follows:
A revised definition of client money.
Obligation to notify a client of bill of ‘costs’ prior to transfer, rather than ‘fees’. The definition of ‘costs’ includes disbursements, so it would seem that it will not be allowable to transfer funds from client to office to cover paid disbursements without delivering a bill to the client.
Under the new rules, monies from the Legal Aid Agency can still be paid into office account. What has changed is the need to either pay unpaid disbursements within 14 days or transfer the unpaid amounts from office to client account. The funds can now remain in the office account until required. It would still constitute a breach should a practice hold funds indefinitely by delaying payments intentionally.
Only ‘cease to hold’ reports where a practice has shut down and closed its client account will be required to be submitted to the SRA.
If the only client money that a firm holds is payment in advance for fees and disbursements, these monies can be paid into office account. This treatment is optional and is for those firms that do not wish to operate a client account. If you have a client account and wish to continue to operate it, then you can continue as you currently do.
The introduction of third party managed accounts as an alternative to holding client monies.
The definition of client money is no longer changing as originally proposed. Rather than change the entire definition of client money, the revised Rule defines the client money which must be held in client account. Included in the definition is monies paid in advance for fees and disbursements before a bill has been raised.
An exemption is provided for firms where the only client monies held are for advance fees or disbursements. Those monies can now be held outside of client account, so a client account is no longer required.
The revised Rule allows firms to continue to deal with client money in the same way as they currently do.
To help protect clients where advance payments for fees and disbursements are held in office accounts, the client must be informed upfront. The COFA is required to monitor the processes and controls within a firm operating under the exemption. The SRA has confirmed that clients will still have access to the compensation fund for those monies should the worst happen.
Exactly what the impact of the new rules will be is still to be determined. Matters will become clearer once additional guidance in the form of toolkits is released by the SRA.
From what we currently know, there are no substantial changes to the rules that should require your accounting systems and processes to be changed. If they are currently working effectively, it is likely that they will not need to be changed at all.
As part of good financial management of a practice, systems and processes should be reviewed regularly for any potential improvements – whether as part of updated regulation, or for efficiency and effectiveness.
If you have any unanswered questions about SRA Accounts Rules, contact Rosyget in touch
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