It is surprisingly easy for residual client balances to appear on a practice’s matter listing if the right controls are not put in place by the accounts department. 

Residual client balances can appear on the accounts for several reasons:

• Returned funds cheques not being cashed by clients.
• Funds due back to the client not being sent.
• Office monies being left in client account and not transferred over.
• Miscalculations on statements of accounts such as completion statements and estate accounts causing small balances to remain.
• Mis-postings on the accounts not being remedied.

The above causes of residual balances show a lack of strict controls, heightening the risk to client monies. It is for this reason that the SRA will deem systematic residual client balances a qualifying breach of the SRA Accounts Rules.

It is therefore crucial to review the reports provided to the COFA each month to spot any aging credit balances in client account and look to remedy them. If the above is followed, it will keep the residuals to a minimum as they are being actioned on an ongoing basis. 

It is also important to have strict controls placed in practice to ensure that the causes of residuals are avoided. Simple solutions are quite often the best.  For example:

• Taking bank details upon ID check and file opening will mean that any funds needing returning to the client can be done so without the need for the client to cash a cheque in at a local branch.
• Adding key dates/review dates to the case management to ensure that staff are prompted to review and send funds.
• Ensuring that the cashier runs regular costs transfer reports which are distributed to the fee-earners so that they can move office monies over regularly.
• Using Excel/spreadsheet formulae or the case management system to calculate statements of account and avoid discrepancies.
• Reviewing client ledgers which have erroneous balances from the monthly matter balance listing and rectifying issues upon discovery.

If a firm already has residual credit balances on client account, the key is to deal with those first, then put the process in place to handle new ones on a monthly basis.

The process for handling the balances is all about communication and transparency. 

• Identification: Review any balance which has not moved for an abnormal matter of time. Review the ledger and identify the root cause for the monies remaining. 
• Action: Attempt to send the money to its intended beneficiary, whether it is the client, office account (if applicable) or a third party who is owed.
• Schedule: Keep a log of attempts to send the monies out and a record of the correspondence between the firm and the beneficiary.
• Charity: This should be used if all else fails. If adequate attempts have been made to return/pay funds and they have been scheduled in a log, then they can be sent to a charity. If the individual balance is under £500.00 it can be sent with a note kept in the log. If it is over £500.00 the firm must contact the SRA for approval to send. It is also best practice to have the charity indemnify the funds so that they return to the firm any monies that a client may return for.

Keeping a clean matter listing is very important. The new SRA Accounts Rules state that client monies should only be used for their original intended purpose meaning that a firm should know exactly what the monies held across client account are for. Keeping a close eye on the processes and controls within the firm will help ensure that causes of residual balances are avoided. It is always worth reviewing the controls and processes regularly because they need to be relevant and fit for purpose.

Alex Simons
The Law Factory LLP

www.thelawfactory.net