Fewer solicitor firms will be required to have an annual audit under a proposal from the Solicitors Regulation Authority (SRA).
The proposal is to exempt firms from the requirement of getting an annual accountant’s report if there is a low risk of a solicitor taking customers’ money.
This is part of a wider plan to cut unnecessary regulation in the law profession.
The SRA consultation, published on 18 November, also suggests another reform of accounting rules; changing the criteria for when an accountant has to qualify the report.
The intention is to reduce the amount of fairly “trivial” qualified accounts it gets.
Proposed changes could cut income for accounting firms, although the new rules may have some benefits. The SRA suggests that accountants be given more freedom to use their professional judgement when checking solicitors’ accounts.
“The primary purpose of the current Accounts Rules is simple - to keep client money safe,” the SRA says in its consultation.
“We need to balance a proper degree of oversight and control to ensure client funds are safeguarded, while ensuring that the regulatory burdens we impose are necessary and proportionate.”
The SRA has already relaxed some accounting rules for solicitors. Firms now only have to send an accounting report to the SRA if the report qualified. Firms that get all their fees from legal-aid work do not need a report.
But critics of the accounting rules - including AccountingWEB members - say it may increase the risk of fraud.
Current accounting rules for solicitors are fairly rigorous. Requirements include: completion of detailed test procedures; recording of the results of the checks or tests, using a prescribed checklist and “completion of a report which sets out the results of the examination of the accounting records by comparing on two separate dates, the money owed to clients, the money held and any difference between the two.”
Accountants have to qualify a report on a client if these rules are not complied with.
Although the rules do not require accountants to report on trivial breaches of the accounting rules, the SRA said many of the qualified reports it receives often do not reveal any significant risk to client money.
“Redefining the criteria in which the accountant's reports need to be qualified, to focus more on issues that may adversely affect client money, will allow us to retain a crucial element of independent oversight over firms that hold client money - but in a more proportionate and targeted way,” the SRA says in its consultation
This is the SRA’s second consultation on changes to accounting rules. The changes have been controversial and complex.
“ … Respondents expressed broad support for the SRA's desire to move towards more proportionate and targeted regulation of the risks in this area but also highlighted the importance of retaining a degree of independent scrutiny of the way that firms safeguard client money,” the SRA said about the response to its first consultation. “We have also heard from accountants that we should rely more on their professional judgement.”
About Nick Huber
I’m a specialist business journalist and have a particular interest in tax and technology.