COFA’s, are you reviewing your bank reconciliations properly?
This blog explores the relationship between the COFA and the accounts department and the importance of giving the monthly bank reconciliation more than just a cursory glance.
The SRA Accounts Rule 8 states the following:
8.3
You complete at least every five weeks, for all client accounts held or operated by you, a reconciliation of the bank or building society statement balance with the cash book balance and the client ledger total, a record of which must be signed off by the COFA or a manager of the firm. You should promptly investigate and resolve any differences shown by the reconciliation.
The SRA has also released guidance for the responsibilities of the COFA:
As a COFA, you must take all reasonable steps to:
ensure that your firm and its managers and employees comply with any obligations imposed upon them under the Accounts Rules;
ensure that a prompt report is made to us of any serious breach of the Accounts Rules which apply to them.
The two sections go hand-in-hand and my question is “COFA’s, are you reviewing your monthly reconciliations properly?”
Every five weeks, the accounts department/cashier should provide a three-way reconciliation which the COFA must understand, and sign so satisfy the SRA requirements in rule 8.3.
The three-way reconciliation must match the bank statement, to the cashbook balance to the matter listing. Any differences on the balancing reconciliation figures must be understood by the COFA and rectified promptly. Generally, a difference between the reconciling figures is often down to a problem with the accounting system, however it is the firm’s responsibility to demonstrate that their accounts show a true reflection of the position of client monies they hold.
There are other elements that the COFA must understand too which directly affect the overall figures shown on the reconciliations.
Adjustments/Additions/Missing Items
- In some instances, the accounts department may not have all information required about certain transactions which have cleared the bank account by the time the month-end needs to be run. These items are often scheduled on the reconciliation itself or on an external adjustment sheet which matches back to the statement balance.
- It is vitally important that the COFA understands that these items have not been posted or reconciled and that urgent investigation needs to be undertaken to find out what they are and which files they belong to.
- The COFA also needs to understand that adjustments should not remain on an external list indefinitely and therefore must be rectified quickly. At no stage should an adjustment show on two or more consecutive COFA reports.
Unreconciled Items
- In most cases, there will be a small level of un-reconciled items showing on a reconciliation at the end of each month, especially if the firm uses cheques.
- It is important to understand which items on the un-reconciled list are acceptable and which ones aren’t.
- CHEQUES: If the firm uses cheques to make payments from client account, there will inevitably be some which do not clear by the close of the month. The key however is to keep an eye on them to ensure that they clear promptly and do not sit as uncleared on the accounts for months. If a cheque appears to be ageing, it is important to contact the beneficiary to ensure that A: they have received it and B: that they are going to cash it. It is my recommendation to use electronic payments wherever possible to avoid this issue.
- BACS Payments: BACS payments should always clear three days after the initial set-up. They may appear on the unreconciled listing if they have been posted on or near the end of the month but the date that they debit the bank is in the following month. This is acceptable. It is not acceptable for them to show as unreconciled after three days. If they do, it is likely a posting error, or something has gone wrong during the payment set-up process at the bank.
- CHAPS Payments/Same Day/Faster: These payments should all clear on the day they are entered. There should never be a situation where they show as un-reconciled at the month-end as they should have been entered on the accounts on the day they cleared at the bank.
- Monies Received: All monies received should show as reconciled at the month end, unless cash and cheques have been recorded on the last day of the month but have not been paid in physically at the bank until the following day. A COFA must see proof of that at month-end.
- Transfers between accounts: Transfers should all show as cleared at the month-end with no exceptions. They are completely controlled by the firm and are always done as same-day transfers.
Matter Balance Listing
- Client debit balances: This should be the first thing that a COFA looks for on the matter listing. If any overdrawn client ledgers are identified, the COFA should speak to the accounts department directly to understand why they appear. They should also determine the strategy for rectification.
- Office credit balances: The next most important element is to determine whether the firm is holding any client monies in office account. Determine whether there are posting errors, bills missing or disbursements that have not been paid out promptly and work with the accounts department to rectify.
- The next key aspect to this is to notice any patterns. Are matter balance errors becoming frequent? Is there a systematic problem causing ledgers to breach? If so, the COFA needs to work with the accounts department and alter the processes across the firm to ensure that ledgers remain compliant on an ongoing basis.
There needs to be a symbiotic relationship between the COFA and the accounts department to ensure continued compliance with the SRA Accounts Rules. Signing off the reconciliations each month is not enough. It is the COFA’s responsibility to read and fully understand the position of the reconciliations every five weeks making sure that they pick up and discuss any potential issues.
Alex Simons – New Business Manager
The Law Factory LLP
