The Solicitors Regulation Authority (SRA) has launched a consultation proposing to remove the mandatory requirement that firms must submit an annual accountant’s report.
The SRA proposal is part of its programme of regulatory reform that aims to remove unnecessary regulatory barriers and restrictions in the legal services market and reduce unnecessary regulatory burdens and cost on its regulated firms.
The consultation is one of four launched by the SRA covering other areas like the increase in multi-disciplinary practices, changes to minimum compulsory PII cover and changes to clients’ compensation arrangements.
Currently all SRA regulated firms holding client money are required to submit an annual accountant’s report under the SRA Accounts Rules. The report involves the performance of specific procedures and the delivery of a statement that is prescribed in terms of style and content. The accountant’s report needs to be delivered by a registered auditor.
The current requirement in the Accounts Rules to deliver an accountant’s report is aimed at providing protection for client money; in particular as an external assessment reduces risk by acting as a deterrent to dishonesty by firms’ members and to lack of appropriate systems of control and governance in respect of client money.
The SRA receives almost 9,000 reports annually and over 50% of them are qualified. Qualification occurs for minor breaches, for instance short delays in posting money to the client account or an amount being wrongly allocated between office and client account, or for more significant problems. Out of all the reports received, about 200 are referred for further examination and usually about 10 result in a referral to supervision for further investigation by the SRA.
On such premises the view expressed by the SRA in the consultation is that the cost to firms of engaging a reporting accountant and that to the SRA for processing, assessing, storing and destroying all annual accountant’s reports can no longer be justified by the risks identified by the exercise. Such costs are quantified by the SRA as about £800 for small firms, rising to several thousand pounds for larger firms, and £200,000 for the SRA.
Additionally, according to the SRA, the accountant’s assessments and reports are retrospective, ie historic, in nature as they are completed at the end of the accounting year and submitted within six months of the year-end, so they add cost with limited benefits by way of consumer protection and overall management of the risk to client money.
While the SRA acknowledge that reporting accountants are required ‘immediately’ to report evidence of fraud or theft or other issues of material significance as to whether a regulated person is fit to hold client money, they identify some duplication of duties with the Compliance Officer for Finance and Administration’s (COFA) function of recording and reporting that would include notification of material breaches or serious misconduct as soon as practicable.
Consultation proposals
The SRA has therefore exposed two proposals for consultation:
- the removal of the mandatory requirement that firms must submit an annual accountant’s report to the SRA
- the requirement for the COFAs, at the annual PC renewal stage, to sign a declaration that they are satisfied that the firm is managing its client account in accordance with the SRA Accounts Rules.
The second proposal is seen by the SRA as a corollary of the responsibility placed on the COFA to ensure that the account is managed and protected in accordance with the Accounts Rules and of the removal of the requirement to submit annual accountant’s reports.
Subject to the results of the consultation, both proposals are planned for implementation in October 2014, meaning that the SRA does not expect that firms whose reports are due after October will need to submit them. At the same time the PC renewal process will include a declaration from the COFA.
To mitigate the risks in terms of client protection arising from the elimination of the accountant’s report, the SRA is also proposing to require an accountant’s report for specific periods if certain risk circumstances are present or following problems with client money. The form and content of such ad hoc reports will be stipulated by the SRA on a case-by-case basis, ie it will not be standardised as it is now.
Article contributed by ACCA