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Accountants’ Reports: Unnecessary Burden or Effective Deterrent?

June 2014

The Solicitors Regulation Authority (SRA) recently launched a consultation seeking the views of interested parties on their proposals to scrap the mandatory requirement that all solicitors and others subject to the SRA Accounts Rules 2011 be required to have an annual audit carried out by an independent accountant, who is also a registered auditor, and to file an Accountant's Report with the SRA.

In brief, the SRA intends to abolish the current requirement for all those that have held or received clients‘ money or operated a client’s own bank account to submit an Accountant‘s Report to the SRA for each twelve month accounting, period within six months of the end of the relevant period. The SRA has indicated that it is their intention to bring this change into effect by the end of October 2014. Instead, it is proposed that the Compliance Officer for Finance and Administration (COFA) will be required, 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 2011. However, the proposed amendments to Rule 32.1 of the SRA Accounts Rules 2011 will give the SRA the power to require any regulated person to submit an Accountant’s Report when instructed to do so.

The SRA‘s consultation document cites cost savings as being the main driver behind their proposals. Each year the SRA receives approximately 9,000 Accountants’ Reports and the cost of processing these is said to be in the region of £200,000 to the SRA. The cost to each practice varies from a few hundred pounds to tens of thousands for the larger national and international firms. But, is it too simplistic to consider the Accountants' Report regime as being a costly, unnecessary administrative burden?

There has always been concern as to the effectiveness of the role of the reporting accountant when carrying out audits under the SRA Accounts Rules 2011. The SRA consultation document states that 50% of the Accountants‘ Reports they receive are qualified and that about 200 are referred for further examination. After internal processing and risk assessment, on average, only about 10 qualified Accountants’ Reports result in a referral to supervision for further investigation. Another concern raised by the SRA is the fact that Accountants‘ Reports are historic in nature, transactions being reported upon can be as much as eighteen months old even if the report is submitted on time. Taking these factors together, the SRA considers that the cost of the Accountants’ Report regime outweighs the benefits it brings particularly given that the SRA expects COFAs to report material breaches of the SRA Accounts Rules 2011 directly to them as soon as reasonably practicable.
Whilst there is undoubtedly some merit in the SRA‘s argument there is one aspect of the debate which it is impossible to quantify. How significant is the deterrent effect of knowing that an independent qualified accountant will, at least once a year, undertake an audit and report on a firm’s compliance with the SRA Accounts Rules 2011? Last year the SRA published a consultation document which detailed their plans to cover the costs of interventions from the Compensation Fund. In that paper the SRA forecast that for 2013 the direct cost of carrying out an intervention was likely to be, on average, £89,833 per intervention. That cost rises sharply for the larger firms. The SRA‘s own figures indicate that the cost of intervening into a medium size/impact entity is £1m per intervention rising to £4.3m for an intervention into a large size/impact firm. Ultimately, with the cost of interventions falling on the members of the profession, it is easy to see that abandoning the mandatory requirement to file an Accountants’ Report may also have a negative financial impact if, as seems likely, it causes an increase in the number of firms subject to interventions as a result of dishonesty or other misuse of clients' money.

Of course, this decision isn‘t just about the financial consequences of either retaining or scrapping the need to file an Accountants’ Report. The feedback we have received from clients and delegates attending our training courses is that solicitor's value the assurance that the annual audit brings. Even more apparent have been the misgivings that many COFAs have about the prospect of taking on the additional responsibility of certifying to the SRA that their firm is compliant with the SRA Accounts Rules 2011.

Whatever your opinion might be, we would encourage all interested parties to make your views known to the SRA by taking the time to complete the SRA Consultation Questionnaire (see link below) and to return it to the SRA by the deadline of 18 June 2014.

SRA Consultation Questionnaire

Other Consultation Documentation:

The SRA’s Consultation Paper
Proposed Changes to the SRA Accounts Rules 2011
About You Form

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