Solicitors’ Accounts Rules – A Matter of Judgement

Given that a lot of solicitors' practices typically have March or April year ends many accountants are only now starting to deal with assignments under the new regime which came into effect in November 2015.

This requires a fundamental shift in approach away from following a very prescriptive 'rules-based' approach to one in which the accountant is expected to exercise a much greater degree of professional judgement.

For most this is a welcome freedom from having to perform a mandatory list of procedures, some of which may have been perceived as outdated, unnecessary or unhelpful and often resulted in reports which were qualified for relatively innocuous reasons. However for others the change presents uncertainty and apprehension. The comfort of following a specified list of tests, coupled with the narrow definition of trivial breaches meant that there was little scope for judgement and opinion. Now it's all about that.

The accountant needs to consider two basic questions:

1 What work should I do?

2 What should I report?

In my view the answer to both of these questions lies in the fundamental purpose of the report being 'Is client money at risk?'

In order to decide what work to do, the accountant needs to take into consideration the level of funds held and the type(s) of work carried out by the solicitor. They need to understand and assess the systems and procedures in place to deal with client money. They should also take into account their previous experience of the solicitor and knowledge of any problems encountered or improvements made.

These factors should then be used to establish the level and areas of risk which in turn determines the level and focus of the testing carried out.

The detailed accounts rules which regulate how solicitors deal with client money have, in the main, remain unchanged so it is likely that the same breaches will occur. What has changed is what the accountant is required to report.

Under the previous regime the accountant had to report non-trivial breaches which typically resulted in 50% - 60% of reports being qualified. The new regime requires the accountant to report on material breaches and/or significant weaknesses in systems and controls over client money. This is therefore the second area of judgement for the accountant. What is material? What is significant?

Whilst neither are defined, again, in my view it comes back to the key question 'Is client money at risk?' An occasional breach of the 14 day rule for example is unlikely to result in a 'yes' answer to that question whereas failure to carry out any reconciliations on the client account at all during the year is likely to result in a definite qualification.

Coming back to the two basic questions, whatever decision the accountant makes about what work to do and what to report it is vital that the reasons and rationale behind those decisions are plainly evidenced on their file making it more important than ever to ensure that their work is fully and clearly documented. The updated Mercia Solicitors' Accounts Rules Manual helps aid compliance in this area by providing all of the work programmes needed to undertake this type of assignment.

Sally is chairing Mercia's one day Solicitors Conference on 19 May 2016, held at the Hilton East Midlands. For more information please click here.