As I am sure you are aware the Solicitors Regulation Authority (SRA) has recently been proposing new changes to the Account Rules in the hope of reducing costs for smaller solicitor firms. These proposals are being phased in three waves; we have now entered phase two of the process. Phase one of proposals saw the SRA relax some rules on the filing of accountants’ reports. Firms now only have to send an accountants’ report to the SRA if the report is qualified and firms that get all their fees from legal aid work do not need to obtain a report at all. For more information on SRA’s phase one proposal, view our blog ‘Changes to SRA Account Rules’..
Following the phase one consultation, the SRA has now announced its phase two proposal. This proposal is currently under consultation until 28 January 2015.
The proposals for phase two involve reviewing the circumstances in which accountants’ reports are qualified and consequential amendments to the Account Rules and the format of the report. Phase two will also consider whether low risk firms (those where there is little danger of the solicitor taking money from a client) can be excluded altogether from the burden of an annual accountants’ report. The criteria to determine which firms are low risk, as set out in the SRA’s proposal, are those with an average balance of client funds less than £10,000.
Within phase two, in order to amend the Account Rules and remove the amount of prescribed testing that is required in the reports, the SRA has suggested giving accountants more freedom in their testing. Therefore, there will be a greater reliance on the professional judgement of the accountant in identifying risks to client money and when a report should be qualified. The SRA is trying to reduce the unnecessary regulations in the law profession. It is hoped that with these latest changes the number of qualified reports with minor breaches that currently get submitted will decrease, saving solicitors, accountants and the SRA time and money.
However, these latest proposals have resulted in many arguing that the risk of fraud could dramatically increase. Currently, under the Account Rules solicitors are required to complete a report that compares the accounting records on two separate dates. This provides visibility on the money owed to clients, the money held and any difference between the two. We are then, as an accountant, required to qualify the report if these rules are not complied with. The SRA claim that, under these current rules, many of the qualified reports do not reveal any significant risk to client money. Therefore, these new proposals will not mean that client money is any less safe. They simply 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.” (SRA)
There are two further issues included in the consultation. The first is that an annual declaration should be submitted to confirm that an accountant’s report was obtained by the solicitor. The SRA will argue that this is unnecessary. The second issue is whether the obligation to submit the reports should be transferred from the solicitor to the reporting accountants. Again, the SRA does not support this on the grounds that compliance with the rules rests with the solicitor. Within the industry there has been broad support for more proportionate and targeted regulation and these latest proposals put SRA one step closer towards achieving their goal. If you have any concerns over these proposed changes to the rules, or would like further information please do not hesitate to contact me.