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Advice on dealing with solicitor accounts

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20th Aug 2013
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Professional regulators are placing more emphasis on the quality of work performed by reporting accountants in respect of 2011 SRA Accounts Rules. 

In this article, Steve Collings takes a look at some of the most commonly asked questions where this work is concerned, in a Q & A style format.

Q: During a recent practice assurance visit, the inspector complained that I had not obtained bank certificates for two selected dates. My understanding was that the bank statement was sufficient. Is this correct?

A: You must obtain a bank certificate in order to comply with rule 39.1(f)(ii). This particular rule is clear that the balance held in the client must be ‘...as confirmed direct to the accountant by the relevant banks, building societies and other financial institutions.’  Guidance note (iii) says that:

'The main purpose of confirming balances direct with banks, etc., under rule 39.1(f)(ii) is to ensure that your records accurately reflect the sums held at the bank.  The accountant is not expected to conduct an active search for undisclosed accounts.’

Q: A solicitor client has paid a batch of agreed fees into the client account in error.  Would this warrant a qualification of the report?

A: Yes, this would give rise to a qualification. Rule 17.5 says that a payment for an agreed fee must be paid into an office account. This rule goes on to say that an ‘agreed fee’ is one that is fixed - not a fee that can be varied upwards, nor a fee that is dependent on the transaction being completed. An agreed fee must be evidenced in writing.

Q: One of my solicitor clients received a cheque that had been returned by the bank as unpresented into the general client account. The solicitor had made payments out of the general client account before the cheque had cleared - does this give rise to a qualification?

A: Yes, a qualification will be necessary. Solicitors should use discretion in making payments against cheques that have not yet cleared the banking system. In this case, other clients’ money will have been used to make the payment which is a breach of the rules. 

Solicitor clients are encouraged (as per guidance note (iii) (a) in rule 20 Withdrawals from a client account) to instruct their bank or building society to charge all unpaid credits to their office or personal account in order to avoid a rule breach.

Q: A solicitor has recently refused to provide various information to me for the purposes of my examination of his records on the grounds of ‘privileged information’. Is the solicitor client being unreasonable?

A: Rule 42, Privileged documents, does make provision for privileged documents. Normally a solicitor will have the right on the grounds of privilege between the solicitor and their client not to provide certain information. 

But where the solicitor does exercise this right, you must qualify the report and set out the circumstances. Solicitors should bear in mind that legal professional privilege may not be attached to work done by one or more managers who are not legally qualified and whose work is not supervised by a legally qualified individual (as per Legal Services Act 2007, s190(3) to (7) and Schedule 22 paragraph 17).

Q: What are the implications for filing a report late?

A: It's important that all SRA Accountants’ Reports are filed by the due date (the filing deadline is six months following the end of the accounting period). The SRA now levy financial penalties for failing to meet this deadline and so the advice is to have the report completed as soon as possible after the year-end has passed.

Q: I have a client that is located approximately 200 miles away from my office.  Would it be possible for the client to send me their files and records so I can perform the work at my office?

A: The place of examination of your client’s records must be at their premises as stated in rule 37.1. 

This rule is specific in that the place of examination must be at the client's offices and not the accountant's. But the rule does say that ‘unless there are exceptional circumstances...’ although the distance between your office and the client’s       office would not be classed as an exceptional circumstance.  The rule also allows the accountant to request an initial electronic transmission of data for examination at the accountant’s office as a time-saving mechanism.

Q: I have inherited a new solicitor client from a firm whose partner is retiring.  Is there anything that the client needs to do after agreeing the terms of the engagement?

A: Yes. Solicitor clients need to comply with rule 36 Change of accountant when they engage the services of a new accountant. This rule requires the solicitor to inform SRA of the change in accountant and provide the name and business address of the new accountancy practice. 5The SRA will then write to the solicitor acknowledging receipt and advising the solicitor to ensure that the incoming accountant is qualified in accordance with rule 34, Qualifications for making a report.

Q; I am concerned that my solicitor client’s interest policy is inadequate and wondered if this would be grounds for qualification?

A:As a reporting accountant, you are not required to determine the adequacy of a firm’s interest policy (rule 41.1(d)). You are also not required to check the firm’s compliance with rule 22, When interest must be paid

But you do have a duty under rule 40, Departures from guidelines for accounting procedures and systems to report any substantial departures from the guidelines which you discover during the course of your work. 

Q: I have spotted some breaches that I feel are trivial breaches and have been made as a result of bookkeeping errors. Am I required to qualify my report on these?

A: When doing your work on the SRA Accountants’ Report, you normally ask yourself ‘has the objective of the test been achieved?’ If the answer is ‘yes’, there has not been a breach of the rules. 

If it's ‘no’, there has been a breach and therefore this will give rise to a qualified report.  However, guidance note (v) in rule 44 Form of accountant’s report acknowledges that a reporting accountant is not required to report on trivial breaches due to clerical errors or mistakes in book-keeping, provided that they have been rectified on discovery and you, as reporting accountant, are satisfied that no client suffered any loss as a result.

Q:I am aware that I have to select two dates for testing, but became aware that on one  client I had not selected the year-end date. Have I made a mistake?

A: You are required under rule 39, Test procedures, to select two dates for testing one of which may be the year-end date. In a large number of cases the year-end is selected, but as long as you select two dates you will be fine.

Q: Are there any specific terms that need to be included in my letter of engagement between my firm and the solicitor?

A: Letters of engagement are dealt with in rule 35, Reporting accountant’s right and duties - letter of engagement.  To comply with this rule, you need to ensure that your rights and duties are stated. 

Your rights and duties are outlined in rule 35.1(a). Rule 35 does acknowledge that the engagement letter may be included in a letter from you to the solicitor which sets out the terms of the engagement, but the text must be adapted appropriately and must be signed in duplicate by yourself and the solicitor with the solicitor retaining the original copy of the letter. 

Q; My solicitor client has been holding on to some client money after completion of a  matter for about 18 months. I cannot find any documentation relating to why this money is being held and the legal cashier is also unsure why these funds are being  held.  What are the implications for my report?

A: Rule 14, Use of a client account, requires a solicitor to report to their client ‘promptly’ and in writing the reasons why they are holding on to client money at the end of a matter (or substantial conclusion of a matter) and outline the reasons why they are holding on to that money. 

In addition, the solicitor must also write to the client at least once every 12 months thereafter if they continue to hold on to client money following the end of a matter.  If the solicitor has not done so, they are in breach of rule 14.4 and this will give rise to a qualification of your report.

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates and the author of ‘Interpretation and Application of International Standards on Auditing’. He is also the author of ‘The AccountingWEB Guide to IFRS’ and ‘IFRS For Dummies’ and was named Accounting Technician of the Year at the 2011 British Accountancy Awards.

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