On 1 November 2015 v15 of the SRA Accounts Rules 2011 was published bringing about a change in our work as reporting accountants and what we report to the SRA as part of the annual accountants report.
The new rules are effective for all periods ending on of after 1 November 2015.
Which practices are required to obtain and submit a report?
Nearly all regulated firms still have to obtain an accountants report within six months of the end of the accounting period but only qualified reports have to be submitted to the SRA. There is also now an obligation on the reporting accountant to report to the SRA if it is discovered a qualified report has not been submitted.
There are a few limited circumstances where you are not required to obtain or deliver an accountants report which are set out in detail in Rule 32.1A. These exemptions are if
- All the client money held or received during the period was received from the Legal Aid Agency
- during the accounting period the balance of client money held or received does not exceed an average of £10,000 and a maximum of £250,000
It is your responsibility to determine whether a report is required based on these exemptions. All practices will be required to submit a report when they cease to hold client money regardless of the above criteria.
What effect will the changes have on the work carried out?
Rule 39 has been removed from the rules which previously set out the detailed testing required. This has been replaced with Rule 38 which requires the reporting accountant to use professional judgement in determining the work required in order to report on whether the practice is compliant with the rules. However the underlying rules are currently unchanged so the work performed by the reporting accountant is unlikely to be significantly different.
A more outcome focused approach with more judgment being exercised by the reporting accountant brings an expectation on reporting accountants to consider not only the specific rules and transactions occurring but also the wider systems and control environment in place allowing errors to be identified, corrected and prevented from reoccurring – part of this work is likely to require the reporting accountant to review the internal breach register maintained by the Compliance Officer for Finance and Administration (COFA).
What is likely to lead to a qualified report?
The SRA have indicated that they only expect reports to be qualified where the breaches are material and likely to put client money at risk. The latest guidance issued to reporting accountants states
“Material breaches are likely to arise as a result of an intention to break the rules and/or as a result of a significant weakness in the firm’s systems and controls such that there has been a systematic break down of controls designed to prevent breaches. Breaches arising from administrative error are less likely to be material, but still could be if they are persistent, derive from a lack of controls or break down of controls, and have put client money at risk. We recognise that trivial, non-material breaches of the Rules do occur in many firms and we are not expecting all identified breaches to be notified to us in the form of a qualified report.”
While some breaches may be immaterial alone, if they are recurring or part of a larger weakness in systems or controls then they are likely to be considered material and still reportable.
As there is now more emphasis being placed on the systems and controls in place it is advisable that the COFA should read and understand the new guidance issued, in particular the SRA Guidelines – Accounting Procedures and Systems. Failure to understand what is required and to ensure there are appropriate safeguards to client money is in itself likely to be considered a material breach
Details of the SRA guidance can be found here.
For further information on the issues above please contact Samantha Collins.