Useful resources for solicitors
- Here’s the 2020 Solicitors accounts rules handbook, if you have any questions or worries prior to your read, do get in touch.
- Here’s some guidance on law firm management from the law society – to keep your firm running smoothly.
Common breaches we find of the solicitor’s account rules
Here are some common breaches of the solicitor’s accounts rules that occur time and time again. While they may not be your fault, a report may still need to be filed.
An amount is paid into the client account which isn’t permitted
This is a breach of Rule 17.5 which requires all agreed fees (a fee which is fixed and evidenced in writing) to be paid into the office account. Another common breach of the rules is where the bank credits interest directly into the general client account. Solicitors should ensure that their bank is instructed to pay such interest directly into the office account to avoid a breach of the rules.
Unauthorised withdrawals from the client account
This can occur when the solicitor draws money against an uncleared cheque. If the cheque is returned because of insufficient funds, client money from elsewhere will have been used to pay, which is a breach of the rules. The guidance notes under Rule 20 suggest the firm instructs their bank or building society to charge all unpaid credits to either the solicitor’s personal or the firm’s office account.
Overdrawn client accounts
Rule 20 prohibits client accounts becoming overdrawn, except for the two circumstances outlined in Rule 20.9(a) and 20.9(b). If the firm withdraws money from the general client account on the expectation that an electronic payment is on its way from the client, but the electronic payment does not arrive, this means that other client money has been used in breach of the rules.
Use of suspense accounts
Rule 29.25 permits the use of suspense client ledger accounts, but only if the solicitor/firm can justify their use. They should not be used regularly. Rule 29.25 gives an example of when an unidentified receipt is received and time is needed to establish the nature of the payment or identity of the client.
Failure to reconcile bank accounts on a timely basis
Rule 29.12 requires all client accounts to be reconciled at least every five weeks. In everyday practice, it is common to reconcile such accounts at the end of the month under the normal month-end routine. However, a breach of Rule 29 will occur when the solicitor does not reconcile the client accounts at least every five weeks. If this is the case, the reporting accountant must also consider whether such a breach is also a substantial departure of the guidelines for accounting procedures and systems in Rule 26.
Transfers from client to an office account within the specified time
Many firms received “mixed receipts”. These are receipts which include client money and office money/out-of-scope money (out-of-scope money is money that falls outside SRA regulation). Rule 18.3 permits such receipts to be placed into a client account in its entirety, but all office and/or out-of-scope money must be transferred out of the client account into the office account within 14 days of receipt. A breach of the rule occurs when this 14-day time span is exceeded.
Solicitors accounts rules FAQs
Q. We have received client money which we gave invested in stocks and shares. Is this money still client money?
A. When a firm invests client money in stocks and shares, it ceases to be client money because it is no longer money held by the firm. Where the stocks and shares are sold at a later date, the proceeds from disposal will become client money.
Q. A solicitor’s client paid a cheque to the practice which was subsequently paid into client account. This cheque then bounced and was debited to the client account. Is this a breach of the rules?
A. Yes, a breach of SAR 2011 rule 20 has occurred because other client monies will have been used to make the payment in respect of the dishonoured cheque. Your solicitor client should be advised to instruct their bank to charge any dishonoured cheques to the office account to avoid further breaches of the rules.
Q. We lost our bookkeeper at the start of the financial year and the bookkeeping is now significantly behind. How does this effect the accountant’s report?
A. While reporting accountants are not required to carry out a detailed check for compliance with the guidelines in appendix 3 of the 2011 rules, the reporting accountant does have a duty to report to the SRA on any substantial departure from the guidelines (as per rule 26) that they may discover during the course of their work. The fact that the law firm has not completed their bookkeeping on a regular basis (at least weekly for smaller firms and daily for larger firms in accordance with the guidance notes in rule 29) would more than likely be classed as a substantial departure from the guidelines.
Q. My accountant obtained copies of cheques from me and not from the bank. Am I correct in saying that such photocopied cheques are not permissible?
A. Yes, you are correct – the cheques in accountant’s sample must be paid cheques i.e. they must have gone through the banking system. Photocopied cheques from a law firm’s internal records are not appropriate. The bank should supply you with a copy of both the front, and the back, of the cheque and digital images of such are permissible under the rules.
Q. My bookkeeper also acts as my reporting accountant. I am worried that there may be a breach in the rules?
A. Guidance note (i) in rule 34 confirms that it is not a breach of the rules for a reporting accountant to also act in the capacity of a bookkeeper. However, you will have to disclose these circumstances in the accountants’ report. However independence could be compromised in this situation.
Q. Is it permissible for me to drop off files, books and records to my accountant’s office rather than them attending my premises to undertake the work required for the accountants report?
A. Only in exceptional circumstances can the place of examination of your solicitor’s accounting records be done at accountant’s offices. Rule 37.1 requires the work to be completed at the law firm itself but does recognise that electronic transmission of information can be sent to the accountant’s office to try and reduce the time spent at the client’s premises.
Q. The bank did not include the word ‘client’ in the name of the bank account for a short period of time after the account was opened for a newly form firm of solicitors. Can this lead to a qualified report?
A. Yes, This is a breach of 1998 rule 13.3 and a breach of 2011 rule 14.3 and such a breach cannot be treated as a trivial breach because the word ‘client’ must be present in order that the protection to clients under section 85 of the Solicitors Act 1974 can apply.
Q. If a sole practitioner solicitor client dies and the client account subsequently freezes resulting in some overdrawn client accounts. Would this result in a qualified report?
A. In the unfortunate event that a sole practitioner dies, it is permissible under 2011 rule 20.9(b) for client accounts to become overdrawn but only to the extent of the money held in frozen accounts. Any overdrawn balances in excess of the money held in frozen accounts would result in a breach of the rule.
Q. My client is untraceable and I need to raise a bill of cost. Can I simply raise a cost of bill and transfer monies from client to office account to pay the bill?
A. This will not be permissible in the circumstances as the solicitor is not able to make the transfer in accordance with rules 17.2-17.3. Where the client has vanished without trace, the solicitor must apply to the SRA, regardless of the amount involved.
Q. Is it correct that a small residual balance can be paid to a charity without application to theSolicitors Regulation Authority (SRA)?
(a) make reasonable attempts to establish the identity of the owner of the money
(b) make adequate attempts to ascertain the proper destination of the money, and to return it to the rightful owner, unless the reasonable costs of doing so are likely to be excessive in relation to the amount held;
(c) pay the funds to a charity;
(d) record the above steps taken and retain those records, together with all relevant documentation (including receipts from the charity)
(e) keep a central register
Q. How long should books and statements relating to client accounts be kept?
A. Six years.
- Solicitors Accounts Rules – Helpful Information
The Solicitors Accounts Rules state that the law firm must comply with all the principles laid out in the handbook.
Interest Previously there were very detailed and prescriptive Rules in Rules 24 to 27 which govern the payment of interest. These detailed and prescriptive rules are replaced by a requirement for the payment of a “fair and reasonable” amount of interest when it is fair and reasonable to do so.
Clearly for smaller firms this requirement may become more burdensome and firms must have a written policy on interest which must be drawn to the client’s attention at the outset of the transaction.
It is worth mentioning that the proposals state that there are no de-minims amounts and the table of material amounts have been removed from the rules as a result. To help firms, there are details in the guidance notes on matters which firms must consider when considering their policy on interest payments.
Electronic Signatures Rules 22 and 23 are being updated due to the increasing use of electronic means of storing and sending information; the rules have been updated to enable firms to retain electronic copies of bank statements and electronic signatures for withdrawals from client accounts. However, firms must ensure that there are suitable safeguards in place in this respect. This amendment is not a replacement of the existing requirements and firms can still obtain and retain paper statements and continue using manual signatures should they wish.
A key point to note is that the rule prohibits the use of direct debits because each withdrawal from the client account must have specific authority.
Authorised Signatures The prescribed list of authorised signatories for withdrawals from the client account which were set out in Rule 23 have been replaced by the requirement for the law firm to have appropriate systems and controls in place governing withdrawals from client accounts. It is also the decision of the firm to decide who will be an appropriate person (s) to sign such an authority.
However, a pivotal point in the guidance is that the person (s) who has authority to approve withdrawals from the client account must have regular involvement in the firm to such an extent that they are familiar with current client matters and must have a clear understanding of the rules.
Compliance Officer for Finance Administration (COFA)Rule 6 requires that principals assume responsibility for ensuring compliance with the rules. This requirement is being extended to include a COFA who must be appointed and who will be responsible for reporting breaches of the rules to the Solicitors Regulation Authority (SRA) and who must be a lawyer.
It is unclear as to whether reportable breaches mean ‘serious’ breaches or ‘serious AND trivial breaches’, though a common-sense approach would suggest the SRA would prefer not have a deluge of trivial breaches being reported; however the SRA would do well to clarify what they define ‘serious’ to be.
It should also be prudent for the COFA to maintain a central register of breaches in order that they can demonstrate to the SRA that they are complying with their obligations in this area.
Damages under conditional fee arrangementsThere are new Rules (15 (e) and 19 (e)) relating to the receipt of monies for damages and costs under the Law Society’s Conditional Fee Arrangement which are paid into the client account and it is a requirement that the ‘cost’ element must be transferred to the office account within 14 days of receipt.
Passbook-operated designated client accountsRule 32 currently requires the solicitor to perform 14-weekly reconciliations on all passbook-operated designated client accounts. However, the re-write of the rules will require the solicitor to perform reconciliations on these accounts at least every five weeks as is currently the case for all other accounts.
Guidance notesRule 2 was changed in the last update (March 2009) which made it clear that the guidance notes were mandatory. It has been changed again to essentially reverse this requirement and now states that the guidance notes no longer form part of the rules. This change was proposed because a number of the guidance notes have now been elevated into the rules themselves.
The new rules contain a considerable number of changes to the previous rules and some of the more notable changes are as follows:
Rule 1: Keep client money safely
The key principles place much more emphasis on the importance of proper governance and keeping clients’ money safe, which the SRA acknowledges is the overarching aim of the SARs.
Rule 2(1): Separate guidance
Prior to the SARs 2011, all the guidance notes to the rules formed a mandatory part of the rules. In the October rewrite, Rule 2.1 states that the guidance notes do not form part of the rules.
Rule 14: Banking facilities prohibited
Rule 14.5 strictly prohibits solicitors from providing banking facilities for their clients through the client account. This is not a new introduction from the old rules, but it is an important prohibition to note. This is because using the client account as a banking facility may result in the loss of the exemption status under the Financial Services and Markets Act 2000 where there is no underlying transaction supporting the deposit. It could also have implications under Anti-Money Laundering Regulations under the Proceeds of Crime Act 2002.
Rule 21: Electronic withdrawals
Rule 21.1 now allows withdrawals from the client account to be signed electronically. However, this particular rule also places a responsibility on the practice to make sure that appropriate safeguards and controls are in place where authority for withdrawals from the client account are signed electronically.
Prior to the rewrite Rule 23 outlined who could authorise a withdrawal from the client account. The outcomes-focused approach within the new Rule 21 requires firms to have appropriate systems and controls in place relating to withdrawals from a client account. Rule 21.2 also states that a non-manager owner or a non-employee owner of a licensed body is not an appropriate person to be a signatory on the client account and must not be permitted by the firm to act in this way.
Rule 22: Interest payments and calculations
Rule 22 requires a firm to account to its client for interest when it is “fair and reasonable to do so”. Prior to the rewrite there were materiality tables which assisted in the calculation of interest payments to the client, which are no longer in the new rules. The firm must have a written policy on the payment of interest and the terms of this policy must be drawn to the attention of the client at the outset of a retainer, unless it is inappropriate to do so in the circumstances (Rule 22.3).
Rules 29 and 30: Electronic statements
Rules 29 and 30 allow firms to obtain, and retain, electronic copies of bank statements as opposed to relying on paper statements. Rule 29.12 requires all client accounts (including separate designated client accounts) to be reconciled at least once every five weeks. Please note that previously separate designated client accounts only had to be reconciled at least once every 14 weeks – this no longer applies and such accounts must be reconciled every five weeks. In practice it is extremely common to reconcile such accounts monthly as part of a firm’s normal month-end routine.
Matters affecting reporting accountants
There is no denying that the SARs are complex and create the potential for unintentional breaches. The following paragraphs details some of the traps that reporting accountants should be aware of.
Reporting accountant versus auditor
Reporting accountants do not act in the capacity of auditors. Many solicitor clients will refer to the work done in compiling the accountants report and checklist as an “audit”. But it is not an audit in the context of a statutory audit. As a result, the reporting accountant is not expressing an opinion on whether the client’s accounts give a true and fair view and they are not expected to detect material weaknesses in the solicitor client’s internal control environment.
While the reporting accountant is not acting in the capacity of auditor, and thus does not carry out tests of control on a client’s internal control system, the reporting accountant does have a duty to report to the SRA any substantial departures from the guidelines for accounting procedures and systems contained in Rule 26. This should take place even though Rule 41.1(e) does not require the reporting accountant to make a detailed check on compliance with the guidelines for accounting procedures and systems.
The concept of materiality is a fundamental aspect of auditing. However there is no concept of materiality for an accountant acting as reporting accountant for a solicitor client concept of materiality. The question that is at the forefront of the reporting accountant’s work is, ‘Has there been a breach of the rules or not?’ to which the answer is either ‘yes’ or ‘no’.
Duty of care
There is a duty of care owed by the reporting accountant to the SRA and the SRA has the power under Rule 34.3 to disqualify a reporting accountant from dealing with any accountants report. The SRA will do this in the following situations:
- The accountant has been found guilty by his or her professional body of professional misconduct or discreditable conduct; [Rule 34.3(a)] or
- The SRA is satisfied that the solicitor/firm has not complied with the rules in respect of matters which the accountant has negligently failed to specify in a report. [Rule 34.3(b)]
In situations where you are faced with disqualification by the SRA, the SRA will take into account any representations made to them by the accountant and the accountant’s professional body.
However, if you are disqualified by the SRA from making an accountants’ report you will receive written notice of disqualification from the SRA (in accordance with Rule 34.4) and the SRA may notify any law firms which are likely to be affected and may publish the name of the disqualified accountant in the Law Society’s Gazette or other publications.
It is also worth mentioning that the guidance notes (guidance note (i)) in Rule 34 do acknowledge that it is not a breach of the rules if a solicitor client instructs an accountant to do the bookkeeping and act in the capacity of reporting accountant for the purposes of completing the accountants’ report and checklist. However, where you do act for the solicitor client in both capacities you must disclose these circumstances in the accountants’ report.
(Collings, Steve – Retrieved from Accounting Web)
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