Under Rule 12.1 of the SRA Accounts Rules, firms that handle or receive client money are required to obtain an annual SRA accountants report (AR1) within six months of the end of their accounting period. This report is based on a comprehensive audit of the firm’s accounts to ensure compliance with the current SRA Accounts Rules. The accountants only need to submit the report to the SRA if it is “qualified,” meaning it highlights a material departure from the rules. Such qualifications require the accountants to inform the SRA, often leading to an audit or investigation to identify the cause of the departure.

The other reasons to deliver a report are as follows:

• you are required to under conditions on your practising certificate/firm authorisation, or
• your firm has ceased to operate as an authorised body and to hold or operate a client account and has been asked to obtain and deliver a final report under rule 12.4.

Firms that hold or receive client money solely from the Legal Aid Agency during an accounting period are not required to obtain an SRA accountants report. Additionally, under Rule 12.2(b) of the SRA Accounts Rules, this exemption applies if the average balance on the client account does not exceed £10,000 and the maximum balance remains below £250,000 throughout the period.

SRA Accounts Rules audits are comprehensive, examining various aspects of a firm’s financial practices. Some of the main areas that the reporting accountant will review include:

• Bank reconciliations:
  – Have they been done in a timely manner?
  – Have they been reviewed and signed by the COFA at least every five weeks?
  – Do the reconciliations balance?
  – Is there anything missing from the reconciliations?
  – Are there un-reconciled items or mis-postings?
• Matter balances:
  – Do the client balances match the cashbook for the client bank?
  – Are there any overdrawn client ledgers?
  – Are there any credit balances on office account showing client money in office?
  – Are there any residual balances which have not moved for a significant length of time?
  – Are there any files where costs should have been transferred from client to office?
• Client ledgers:
  – Are the transactions being recorded accurately?
  – Do the client ledgers match the activity on the client file itself?
  – Are there any entries that raise suspicion or look strange?
  – Are there transactions not relating to the matter, i.e. using client account as a bank?
• Systems and Controls:
  – What controls are in place to safeguard client monies?
  – What banking authorisation procedures are in place?
  – Who signs off the transactions on client account?
  – Are the systems and controls adequate to safeguard client money?
• Bank Mandates and Insurances
  – Need to see copies of bank mandates.
  – Need to see copies of Professional Indemnity Insurance certificates.
  – Need confirmation of COLP and COFA.

Several people will need to be involved with the audit and subsequent SRA Accountants Report preparation:

• Accountants: Usually this will be a team where a junior will collate all information required for the audit and then will report to a senior accountant or partner within the practice to check, finalise and sign off.
• Legal Cashier: Most of the information that the auditor will require should be provided with context to the reporting accountant. The legal cashier should also be available to respond to any questions or queries that the accountant may have during the process.
• COFA: The COFA needs to be aware of all correspondence and be prepared to answer questions that the legal cashier cannot.
• Partner/Director: There are certain documents, like the PI certificate and bank mandates that the legal cashier is unlikely to have access to. Partner level needs to provide these to the auditor.
• Fee earners/secretaries: There may be queries on the files that can only be answered by the solicitor running the case or their secretary, so it is important that they are on hand to assist as required.

SRA Accountants Reports are typically provided to the COFA, directors, partners, or legal cashiers once they are completed. A draft version is shared with these parties for review and feedback. The report often includes a list of accountants’ recommendations supported by an appendix. The firm can respond to each recommendation, outlining how they plan to implement any necessary changes in the following year. If the report is qualified, the AR1 will detail the reasons for the qualification and be submitted to the SRA. The final reports should be stored securely for future reference and distributed as needed, particularly if any actions are required.

Reports can vary depending on each firm, primarily influenced by the firm’s areas of legal practice and how effectively it is managed. Larger firms or those handling a higher volume and value of client transactions typically require the auditor to take larger sample sizes. Additional scrutiny is applied in cases of apparent mismanagement, weak controls, or if the firm has recently received a qualified report or undergone SRA intervention.

At The Law Factory, we specialise in preparing firms for an SRA Accounts Rules Audit. We offer comprehensive health checks of your accounts, systems, and processes to identify necessary improvements and ensure ongoing compliance.

Our experts can advise on process enhancements aligned with best practices and provide detailed lists of files that may be non-compliant. We review matter balance listings, bank reconciliations, COFA reports, breaches registers, residual balances, and profitability, delivering a thorough report highlighting areas needing attention.

Firms can choose to engage us to help resolve these issues and liaise directly with auditors, or simply use our report as a guide for internal follow-up.

Additionally, The Law Factory can act as your legal cashiers, starting with a review and then maintaining compliance as an ongoing priority. With extensive experience dating back to 1990, we have assisted numerous firms in maintaining compliance, regularly liaising with auditors and investigators during SRA audits.

If you require support with your accounts compliance or want to review your systems and processes, please don’t hesitate to contact us.