Legal regulator suggests scrapping annual audit

A proposal to abolish the requirement for law firms to pay for an annual accountant’s report could save law firms £30m a year, but disputes over clients' finances may offset any savings, accounting firm Menzies has said.

Under the proposals by the Solicitors Regulation Authority (SRA), a firm’s compliance officer will have to sign a declaration saying they are satisfied that client accounts are being managed according to SRA regulations.

The proposal is part of an effort to reduce unnecessary regulation of law firms.

The SRA said universal audits are...

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Comments

Purpose of Accountants Report    1 thanks

leon0001 | | Permalink

The report is to provide a check by an independent acountant to ensure that the client bank account is operated, supervised and controlled properly:

1. to ensure that the client's money is always safely held in a separate account, segregated from the solicitor's money and protected from the firm's creditors

2. to ensure that the solicitor's money is not put in the client bank account where it would be protected from the solicitor's creditors.

Independent checks, confirmations and reconciliations properly conducted twice a year provide a deterrent against the solicitor "borrowing" from the client.

When I was regularly engaged in such work, solicitors would often moan about the need for such checks, and the fees charged by us and the banks. Strangely, their attitude changed when I pointed out that the work might protect them from their partners, who might be tempted to abscond, leaving them accountable for the missing money.

(By the way, if the SRA continues to refer to SAR assurance work as "audit", they demonstrate a worrying lack of competence to make this decision - still, how many numerate solicitors do you know?)

As far as a "burden on smaller law firms" is concerned, this is the price of looking after other people's money.

jon_griffey's picture

Going too far..

jon_griffey | | Permalink

So basically the solicitor is supposed to certify themselves as being compliant.  Would they really sign a declaration to say  " I am not satisfied that client accounts are being managed according to SRA regulations."?

All it needs is for a few scandals to be reported nationally and the SRA will be accused of abdicating its responsibility.  There have always been instances of solicitors running off with the client money, but next time the story will be that the SRA abolished the requirement, now look whats happened.  It's a great headline.

Having said that the accountants reporting checklists are overprescriptive.  I have sat there on assignments wondering why I am conducting pointless tests when I know what the outcome will be.

Instead they should massively simplify the work that the accountant is required to perform so as to require just a few key checks, such as does the client account actually balance.

johnjenkins's picture

The problem is

johnjenkins | | Permalink

that if you are putting your name to something you have to be 100% sure that what you are signing is correct.

I don't think that a few "key" checks would be sufficient for a proper judgement to be made.

It's not just whether the account balances it's the content that needs to be looked at. As my old boss used to say 1p (that's old pence) difference could be a number of differences which give the accounts a whole new look.

jon_griffey's picture

Not necessarily

jon_griffey | | Permalink

johnjenkins wrote:

that if you are putting your name to something you have to be 100% sure that what you are signing is correct.

I don't think that a few "key" checks would be sufficient for a proper judgement to be made.

It's not just whether the account balances it's the content that needs to be looked at. As my old boss used to say 1p (that's old pence) difference could be a number of differences which give the accounts a whole new look.

That is only correct up to a point.  If you think about audit generally, you never have 100% certainty as you use sampling techniques and for immaterial areas you may do very little work anyway.  The SRA report doesn't ask for 100% assurance in all areas - only for that which is prescribed.  What I am saying is that they prescribed much less then that might be a better solution than no assurance at all. Again is any COFA really going to hold their hands up to non-compliance?

johnjenkins's picture

I know what you mean jon

johnjenkins | | Permalink

and that is the reason I won't do audits, although as audit trained I do a mental audit on every job I do.

An audit is two way. One to make sure the client is compliant and two to make sure you have checked enough to make sure the client is compliant. Since "is it material?" has crept in standards have slipped.

What I am saying is if you're going to have audits let's have them done properly or not at all. A few checks won't give you the picture that an audit is supposed to do.

When you are taking on the responsibility of dealing with clients' money shouldn't you be 100% sure that all is in order? 

Yes, necessarily....    1 thanks

leon0001 | | Permalink

The required tests are specific and necessary to ensure that the rules are being complied with. There are no superfluous requirements. You either have the reports or dispense with them altogether.

In my view, the Accountants' Reports are essential. In my experience, however, there was little feedback when breaches were reported, particularly in cases where these were the bank's fault.

Please remember that using the word "audit" is misleading.

Pointless? I don't think so.

leon0001 | | Permalink

@jon _griffey

Which of the prescribed tests do you think are pointless? 

May the Master of the universe help us!

David Gordon FCCA | | Permalink

 

 First, as said this is not an "Audit"- perhaps it is time for the ICAEW/ ACCA to take full page adverts in the relevant papers explaining what an audit is.

 Solicitors' clients accounts have to be independently and rigorously checked.

 Professional indemnity insurance for solicitors is, as far as I may judge, anything up to twenty times the cost of PI for an equivalent sized accountancy practice. Presumably Insurance companies have good reason for this.

 Since 1995 I/my clients have been affected by six firms of lawyers which had got into difficulties

 over their clients' accounts. Only one of those matters involved actual villainy on the part of a solicitor. The other matters  were all accounting SNAFU in various degrees of seriousness.

 My practice is about as small as you may get, but it is provides a valid statistical sample.

 Apart from which I will make an educated guess that most of us have at times been victims of bank errors on clients' accounts.

 Additionally unlike accountants solicitors regularly hold six or seven figure sums in their accounts. This has brought to my mind with horrible clarity, memory of a solicitor's managing clerk who had developed a gambling habit.  that was in 1967 but what he did remains a live example of risk even in today's digital age.

 

addendum

David Gordon FCCA | | Permalink

 

 Leon, I do not follow your comment. Any error in a clients' account has to be reported. My experience is that the Law Society do not take this lightly.

 also, the ICAEW / ACCA will discipline the accountant in these cases.

Steve Collings's picture

Solicitor clients

Steve Collings | | Permalink

Hi,

The proposals were not surprising in all honesty given that law firms are having a pretty hard time.  I would imagine there are accountants who will welcome this news but, of course, there are also those who will be concerned about the proposals.  Certainly some of the people I have spoken to are concerned about the increased risk where client money is concerned.

However, the SRA have mentioned to me that the repealing of the accountant's report is not imminent.  The consultation will end on 18 June 2014 and then the responses have to be considered.  The changes to the rules will then have to be approved and incorporated into a new Handbook for solicitors which will undoubtedly take quite a while.  Solicitor clients who have been advised about these proposals should be informed that the existing regime should still be followed and not to disproportionately delay the work by the reporting accountants in the hope that such reports will be immediately withdrawn as soon as the consultation period ends.  The SRA have said that there will be a transitional process.

Kind regards

Steve

Annual audit of client accounts

PMilton | | Permalink

Maybe the depth of annual audits for solicitors and financial advisers is excessive but to do away with an annual audit is a poor idea.  It's not as if all solicitors are honest and efficient with their accounting after all!

sorry to go on about this but    1 thanks

David Gordon FCCA | | Permalink

 

My colleagues keep on referring to "villains". This is unfair. The problem is not villains.

 The pleasing truth is that 99.995% of professionals are not villains, but they often are (including accountants dealing with their own affairs) distracted inattentive book-keepers.

 It is to protect this 99.995% from themselves that the clients' account inspection is needed.

 My experience over four decades is that sadly it is very rarely that an accountant or auditor will catch out a crook determined not to be caught. Mostly it is an "Outside" event which brings the wrongdoing to light.

johnjenkins's picture

Perhaps if

johnjenkins | | Permalink

lawyers stopped taking hundreds, sometimes thousands in advance of any work being done (yes I know some Accountants who do the same, especially for investigations) the clients account would be easier to follow.

jon_griffey's picture

Imminent

jon_griffey | | Permalink

Steve Collings wrote:

Hi,

However, the SRA have mentioned to me that the repealing of the accountant's report is not imminent.  The consultation will end on 18 June 2014 and then the responses have to be considered.  The changes to the rules will then have to be approved and incorporated into a new Handbook for solicitors which will undoubtedly take quite a while. 

Kind regards

Steve

The consulation paper says at paragraph15 "Both proposals are planned for implementation in October 2014, subject to the consultation’s outcome. This means that we do not expect that firms whose reports are due after October will need to submit them".

That looks pretty imminent to me.

The fact is the answer lies with PI insurers

David Gordon FCCA | | Permalink

 The final word lies with the Insurance companies.

 if they are happy to PI insure solicitors who have not undergone an MOT on their clients' acs,

 it is their risk. Nevertheless, if they do this for solicitors, why not for small firms of Financial advisers, and or Travel Agents?

 

Steve Collings's picture

Target date

Steve Collings | | Permalink

Hi Jon,

You are indeed correct - however the SRA said to me this morning that it is unlikely to be imminent given the process that they have to adopt which does contradict the consultation paper but I think they are expecting quite a few responses to this as it's quite a major change.  I was led to believe that the target date was pretty non-commital.

Time will undoubtedly tell though.

stepurhan's picture

Sampling

stepurhan | | Permalink

David Gordon FCCA wrote:
My practice is about as small as you may get, but it is provides a valid statistical sample.
This sentence shows a fundamental misunderstanding of sampling.

You are talking about a small sample size from one source. A small sample means that any anomalies (good or bad) will skew the results more severely. Taking all of your sample from one source means that any anomaly related to the source will be magnified. I could go on. This is not, in any way, a valid statistical sample and conclusions drawn from it therefore lack credibility.

Any statistics from a genuinely valid statistical source to back up your assertions?

Simple solution

North East Acco... | | Permalink

Scrap the audit requirement and send any solicitor who steals clients money to jail for a minimum served sentence of 10 years. It's not their money and therefore theft. The SRA should check it as part of their compliance review.

Due due for scrapping reports

kris.brains | | Permalink

Well I was on a course today where the SRA representative said the new rule is expected to be in by 30 October, but was unable to say if this was reports due after 30 October or for accounting period ending after 30 October........

Not all breaches are errors

leon0001 | | Permalink

David Gordon FCCA wrote:

 

 Leon, I do not follow your comment. Any error in a clients' account has to be reported. My experience is that the Law Society do not take this lightly.

 also, the ICAEW / ACCA will discipline the accountant in these cases.

 

A breach does not have to be an error. For example:

1. if the bank omits the word "client" from the account name, it's a breach. Even if the solicitor keeps reminding the bank, it remains a breach until corrected. It does not fall within the circumstances allowing it to be treated as a trivial breach.

2. similarly,  a client account paid cheque signed by a person not entitled to handle client money might not constitute an error or cause any loss to the client - it is still a breach.

Why is this a problem?

Example 1.The account loses its protection from the solicitor's creditors and becomes just another office account. Just imagine what could happen if such an account was frozen in accordance with the proposed new HMRC powers.

Example 2. There is inadequate control over client money.

If the accountant finds a breach this MUST be reported - there is no discretion.

(By the way, its a while since reports were sent to the Law Society).

So far as the expenses of paying for accountants and admistration of the reporting system are concerned, don't forget that any solicitor has an unlimited licence to look after unlimited sums of other people's money.

Bad decision

Sheepy306 | | Permalink

Sounds like its one of those 'consultations' where the decision has already been made but they're looking for a little bit of support to justify the answer.
As an auditor, scrapping the requirement will lose me £k's but that's not the issue. I find that by undertaking the reviews it' keeps the accounting system all in good shape, without an annual visit it would become a mess and laziness would set in with all kinds of breaches not being reported correctly, even with a half decent CoFA.
I'm probably a little bit above average fees compared to small firms, but not a single law firm client has resented my fees and when you compare the fees against their PI premiums, wage bill, office costs, software etc it dwindles in comparison.
I think the SRA are wrong to remove the requirement but I'm not surprised that they've taken that decision.
My role will become more advisory, assisting with SRA visits (which will presumably become more often) and undertaking mini-audits every 12 months instead, for reduced fees.

SRA is not an audit. It is more important than that

David Gordon FCCA | | Permalink

 

Unlike the farce that statutory company audits have often become, the SRA check of a solicitor's clients' accounts in not an "Audit".

 It is far more important than that. It is safeguarding real money belonging to real people, and it guards the client against self-harm.

 My experience is the smaller the firm of solicitors, the more relevant the examination of clients' account becomes.