Open your accounts wide and say ‘AR’

Richard Hill By Richard Hill
from Stepien Lake and chair, ILFM

This blog post was also featured as a column in the June 2014 issue of Legal Practice Management magazine. To read the issue in full, download LPM magazine (10MB file).


In my January column I discussed the evolving role of the COFA and the three possible reasons behind the SRA’s COFA consultation – that is, the COFA becoming the SRA’s main financial contact, preparing for an eventual move to principle-based account rules, and the role of the reporting accountants.

SRA consultations keep coming, and May brought a consultation on reporting accountants. The SRA is proposing to remove the requirement to submit an annual reporting accountants report (AR) to the SRA. Instead, the onus will be on the COFA, who must sign a declaration (in the annual renewal of the firm’s authorisation) that the firm is managing client accounts in accordance with the SRA Accounts Rules 2011.

The consultation is a part of the red tape initiative for removing unnecessary regulatory burden, and a natural extension of outcomes-focused regulation. It could also further signal the real prospect of the SRA Accounts Rules becoming principles-based.

The SRA feels that AR is neither “targeted nor proportionate”, and killing it will save the SRA £200,000. With 9,000 firms in 2013 holding client money, there are possible savings for many firms that will no longer have to incur accountants fees (it may save the profession £30m annually). While this may be true in the short term, if the SRA finds itself resolving a greater number of client account problems, it could increase costs – and that cost could still be passed on to firms.

The value of ARs has long been questioned, in particular the fact how out of date they are on submission to the SRA. Over half of them are qualified, usually for trivial breaches, with only 200 referred for further investigation, with as few as 10-15 resulting in a more detailed investigation. The SRA will still be able to impose a requirement to submit an AR report, and let’s not forget a very important point: firms could still instruct accountants to carry out an independent assessment of their systems, as outlined by the firm (rather than the prescriptive SRA Accounts Rules), which will be more beneficial in targeting the high-risk areas and can still assist the COFA in implementing compliance. I am sure some negotiating will be needed on that, however, as the partners will be rubbing their hands at the thought of saving on accountants fees.

Many COFAs fell off their seats with the news that they would be expected to sign a declaration. It has been reported that the change will mean an increase in responsibility, and significant enhancement of the role. But what’s changed? In essence, nothing. The whole ethos of the role is to protect client money, so any COFA who’s not comfortable signing the declaration shouldn’t have been appointed. Besides, the role of COFA is more far-reaching (with the need for firm-wide compliance) than the sample-based AR. The precise wording for the declaration will be interesting, though, and one would assume a one-line declaration would not be suitable.

There are some other areas that raise concerns. Firstly, removing a perceived barrier against non-compliance. The presence of external accountants visiting solicitors’ offices in an official capacity grabs the partner’s attention, knowing that a direct submission of the report is made to the SRA. While an AR may not always deter the theft of client monies, some accountants have suggested that issues they have picked up are often not picked up by COFAs. That leads us onto the second concern: timing. Many firms do not take the accounts rules seriously enough, and with the COFA role still in its infancy, is now the time to be removing the AR?

I think it is understandable that the SRA is looking at the AR. It is questionable in the current format whether it is fit for purpose. Only the SRA knows if it will receive enough information from other sources of intelligence (without an AR, no minor breaches reporting, possible self-certification of residual balances under £500 and the performance of compliance officers) to identify and target its resources on the high-risk and poorly managed firms with a cavalier attitude to accounts rules, and guarantee client money is protected.

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