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Client money breach racks up big disciplinary bill

4th Jan 2019
Editor AccountingWEB
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West Yorkshire firm Auker Rhodes has been reprimanded and fined £5000 after breaching client money regulations in a complex case that garnered a £14,930 disciplinary bill of costs. 

Client money regulation complaints are a recurring issue in disciplinary tribunals and although this byzantine case involved several layers, the crux of the complaint echoed a similar complaint from earlier this year where the message from an ICAEW tribunal was that client money is sacrosanct.

As reported in December's ICAEW disciplinary orders, the ICAEW tribunal heard three accusations against Auker Rhodes, which included its failure to return money belonging to a client, not holding client’s money in excess of £10,000 in separate accounts 30 days from receipt, and withdrawing money to pay invoices without written authority.

The issue in the first complaint, which had a knock-on effect on the subsequent complaints, rested on whether the money was being held on behalf of the limited company client or belonged to the three directors.

The tribunal concluded that irrespective of HMRC paying the personal tax refund from an amended 2010 tax return to Auker Rhodes’ client account, it didn’t change ownership of the money – the money was the property of the individuals, not the company, despite the fact that the tax payments had been drawn on the client’s – limited company’s – bank account.

Accordingly, the firm should have returned part of the funds to one of the directors when asked.

With that matter established, the tribunal was then able to find that Auker Rhodes should have set up separate designated client accounts for each director. According to the client money regulations, money held in excess of £10,000 that is held by the firm for more than 30 days should be paid into a designated client bank account.

And finally, the tribunal ruled that Auker Rhodes should have sought written consent before withdrawing money from the client account.

As background to this complaint, Auker Rhodes had emailed the directors and partners of the two companies advising that the firm was owed £115,744.86 for the work carried out (£31,744.86 (inc VAT) for the LLP and £84,000 (inc VAT) for the limited company), including the LLP’s capital allowances claim which resulted in a personal income refund to the directors totalling £148,030.

However, both companies were in financial difficulties. Auker Rhodes sought to offset tax refund monies of £88,030 against one company’s invoice. Auker Rhodes explained that this should serve to reduce the individual directors’ loan accounts on the basis that they had personally settled a liability of the company.

The disciplinary tribunal heard how Auker Rhodes had transferred the money from their client account to office account without written authority from the company’s directors.

The tribunal viewed all complaints together when it reprimanded the firm with a £5,000 fine. With such an involved case, the costs spiralled to over £30,000. However, taking account of all circumstances, these were reduced by 60% to £14,930.

Chris Cope, director of Accountants National Complaint Services Limited, comments:

I need to declare an interest in that I was instructed. Counsel was engaged. Very substantial work had been carried out by Auker Rhodes. The client company had previously paid a large tax bill on behalf of the three directors. As a result of work carried out by Auker Rhodes, a substantial tax rebate was secured. Did this belong to the limited company (who had paid the original tax) or to the individual taxpayers? If it belonged to the limited company, there was no reason why it should not be paid into Auker Rhodes’ client account and used to offset outstanding accountancy fees, particularly in circumstances where the client was in financial difficulty. If belonging to the taxpayers and paid into client account, it could only be offset against the limited company’s fees with the specific written consent of the three directors. Disappointing that we lost the argument that the money belonged to the limited company.

You can find out more about Chris Cope and the Accountants National Complaint Service by visiting their website here.

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