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Accountants' reports

Part 6: Accountants' reports

Rule 32: Delivery of accountants' reports

32.1

If you have, at any time during an accounting period, held or received client money, or operated a client's own account as signatory, you must deliver to the SRA an accountant's report for that accounting period within six months of the end of the accounting period. This duty extends to the directors of a company, or the members of an LLP, which is subject to this rule.

32.2

In addition the SRA may require the delivery of an accountant's report in circumstances other than those set out in rule 32.1 above if the SRA has reason to believe that it is in the public interest to do so.

Guidance notes

(i)

Examples of situations under rule 32.2 include:

(a)

when no report has been delivered but the SRA has reason to believe that a report should have been delivered;

(b)

when a report has been delivered but the SRA has reason to believe that it may be inaccurate;

(c)

when your conduct gives the SRA reason to believe that it would be appropriate to require earlier delivery of a report (for instance three months after the end of the accounting period);

(d)

when your conduct gives the SRA reason to believe that it would be appropriate to require more frequent delivery of reports (for instance every six months);

(e)

when the SRA has reason to believe that the regulatory risk justifies the imposition on a category of firm of a requirement to deliver reports earlier or at more frequent intervals;

(f)

when a condition on a solicitor's practising certificate requires earlier delivery of reports or the delivery of reports at more frequent intervals.

(ii)

For accountant's reports of limited scope see rule 8 (liquidators, trustees in bankruptcy, Court of Protection deputies and trustees of occupational pension schemes), rule 9 (joint accounts) and rule 10 (operation of a client's own account). For exemption from the obligation to deliver a report, see rule 5 (persons exempt from the rules).

(iii)

The requirement in rule 32 for a registered foreign lawyer to deliver an accountant's report applies only to a registered foreign lawyer practising in one of the ways set out in paragraph (vi)(C) of the definition of "you" in the Glossary.

(iv)

The form of report is dealt with in rule 44.

(v)

When client money is held or received by an unincorporated practice, the principals in the practice will have held or received client money. A salaried partner whose name appears in the list of partners on a firm's letterhead, even if the name appears under a separate heading of "salaried partners" or "associate partners", is a principal.

(vi)

In the case of an incorporated practice, it is the company or LLP (i.e. the recognised body or licensed body) which will have held or received client money. The recognised body/licensed body and its directors (in the case of a company) or members (in the case of an LLP) will have the duty to deliver an accountant's report, although the directors or members will not usually have held client money.

(vii)

Assistant solicitors, consultants and other employees do not normally hold client money. An assistant solicitor or consultant might be a signatory for a firm's client account, but this does not constitute holding or receiving client money. If a client or third party hands cash to an assistant solicitor, consultant or other employee, it is the sole principal or the partners (rather than the assistant solicitor, consultant or other employee) who are regarded as having received and held the money. In the case of an incorporated practice, whether a company or an LLP, it would be the recognised body or licensed body itself which would be regarded as having held or received the money.

(viii)

If, exceptionally, an assistant solicitor, consultant or other employee has a client account (as a trustee), or operates a client's own account as signatory, the assistant solicitor, consultant or other employee will have to deliver an accountant's report. The assistant solicitor, consultant or other employee can be included in the report of the practice, but will need to ensure that his or her name is added, and an explanation given.

(ix)

If a cheque or draft is made out to you, and in the course of practice you endorse it over to a client or employer, you have received (and paid) client money. You will have to deliver an accountant's report, even if no other client money has been held or received.

(x)

Rule 32 does not apply to a solicitor or registered European lawyer, employed as an in-house lawyer by a non-solicitor employer, who operates the account of the employer or a related body of the employer.

(xi)

When only a small number of transactions is undertaken or a small volume of client money is handled in an accounting period, a waiver of the obligation to deliver a report may sometimes be granted. Applications should be made to the Information Directorate.

(xii)

If a firm owns all the shares in a recognised body or licensed body which is an executor, trustee or nominee company, the firm and the recognised body/licensed body may deliver a single accountant's report (see rule 28.1(b)).

Rule 33: Accounting periods

The norm

33.1

An "accounting period" means the period for which your accounts are ordinarily made up, except that it must:

(a)

begin at the end of the previous accounting period; and

(b)

cover twelve months.

Rules 33.2 to 33.5 below set out exceptions.

First and resumed reports

33.2

If you are under a duty to deliver your first report, the accounting period must begin on the date when you first held or received client money (or operated a client's own account as signatory), and may cover less than twelve months.

33.3

If you are under a duty to deliver your first report after a break, the accounting period must begin on the date when you for the first time after the break held or received client money (or operated a client's own account as signatory), and may cover less than twelve months.

Change of accounting period

33.4

If you change the period for which your accounts are made up (for example, on a merger, or simply for convenience), the accounting period immediately preceding the change may be shorter than twelve months, or longer than twelve months up to a maximum of 18 months, provided that the accounting period shall not be changed to a period longer than twelve months unless the SRA receives written notice of the change before expiry of the deadline for delivery of the accountant's report which would have been expected on the basis of your old accounting period.

Final reports

33.5

If you for any reason stop holding or receiving client money (and operating any client's own account as signatory), you must deliver a final report. The accounting period must end on the date upon which you stopped holding or receiving client money (and operating any client's own account as signatory), and may cover less than twelve months.

Guidance notes

(i)

In the case of persons joining or leaving a continuing partnership, any accountant's report for the firm as a whole will show the names and dates of the principals joining or leaving. For a person who did not previously hold or receive client money, etc., and has become a principal in the firm, the report for the firm will represent, from the date of joining, that person's first report for the purpose of rule 33.2. For a person who was a principal in the firm and, on leaving, stops holding or receiving client money, etc., the report for the firm will represent, up to the date of leaving, that person's final report for the purpose of rule 33.5 above.

(ii)

When a partnership splits up, it is usually appropriate for the books to be made up as at the date of dissolution, and for an accountant's report to be delivered within six months of that date. If, however, the old partnership continues to hold or receive client money, etc., in connection with outstanding matters, accountant's reports will continue to be required for those matters; the books should then be made up on completion of the last of those matters and a report delivered within six months of that date. The same would be true for a sole practitioner winding up matters on retirement.

(iii)

When a practice is being wound up, you may be left with money which is unattributable, or belongs to a client who cannot be traced. It may be appropriate to apply to the SRA for authority to withdraw this money from the client account - see rule 20.1(k) and guidance note (vi)(a) to rule 20.

Rule 34: Qualifications for making a report

34.1

A report must be prepared and signed by an accountant

(a)

who is a member of:

(i)

the Institute of Chartered Accountants in England and Wales;

(ii)

the Institute of Chartered Accountants of Scotland;

(iii)

the Association of Chartered Certified Accountants;

(iv)

the Institute of Chartered Accountants in Ireland; or

(v)

the Association of Authorised Public Accountants; and

(b)

who is also:

(i)

an individual who is a registered auditor within the terms of section 1239 of the Companies Act 2006; or

(ii)

an employee of such an individual; or

(iii)

a partner in or employee of a partnership which is a registered auditor within the terms of section 1239 of the Companies Act 2006; or

(iv)

a director or employee of a company which is a registered auditor within the terms of section 1239 of the Companies Act 2006; or

(v)

a member or employee of an LLP which is a registered auditor within the terms of section 1239 of the Companies Act 2006.

34.2

An accountant is not qualified to make a report if:

(a)

at any time between the beginning of the accounting period to which the report relates, and the completion of the report:

(i)

he or she was a partner or employee, or an officer or employee (in the case of a company), or a member or employee (in the case of an LLP) in the firm to which the report relates; or

(ii)

he or she was employed by the same non-solicitor employer as the solicitor or REL for whom the report is being made; or

(iii)

he or she was a partner or employee, or an officer or employee (in the case of a company), or a member or employee (in the case of an LLP) in an accountancy practice which had an ownership interest in, or was part of the group structure of, the licensed body to which the report relates; or

(b)

he or she has been disqualified under rule 34.3 below and notice of disqualification has been given under rule 34.4 (and has not subsequently been withdrawn).

34.3

The SRA may disqualify an accountant from making any accountant's report if:

(a)

the accountant has been found guilty by his or her professional body of professional misconduct or discreditable conduct; or

(b)

the SRA is satisfied that you have not complied with the rules in respect of matters which the accountant has negligently failed to specify in a report.

In coming to a decision, the SRA will take into account any representations made by the accountant or his or her professional body.

34.4

Written notice of disqualification must be left at or sent by recorded delivery to the address of the accountant shown on an accountant's report or in the records of the accountant's professional body. If sent through the post, receipt will be deemed 48 hours (excluding Saturdays, Sundays and Bank Holidays) after posting.

34.5

An accountant's disqualification may be notified to any firm likely to be affected and may be printed in the Society's Gazette or other publication.

Guidance note

(i)

It is not a breach of the rules for you to retain an outside accountant to write up the books of account and to instruct the same accountant to prepare the accountant's report. However, the accountant will have to disclose these circumstances in the report - see the form of report in Appendix 5.

Rule 35: Reporting accountant's rights and duties - letter of engagement

35.1

You must ensure that the reporting accountant's rights and duties are stated in a letter of engagement incorporating the following terms:

"In accordance with rule 35 of the SRA Accounts Rules 2011, you are instructed as follows:

(a)

I/this firm/this company/this limited liability partnership recognises that, if during the course of preparing an accountant's report:

(i)

you discover evidence of fraud or theft in relation to money

(A)

held by a solicitor (or registered European lawyer, or registered foreign lawyer, or recognised body, or licensed body, or employee of a solicitor or registered European lawyer, or manager or employee of a recognised body or licensed body) for a client or any other person (including money held on trust), or

(B)

held in an account of a client, or an account of another person, which is operated by a solicitor (or registered European lawyer, registered foreign lawyer, recognised body, licensed body, employee of a solicitor or registered European lawyer, or manager or employee of a recognised body or licensed body); or

(ii)

you obtain information which you have reasonable cause to believe is likely to be of material significance in determining whether a solicitor (or registered European lawyer, or registered foreign lawyer, or recognised body, or licensed body, or employee of a solicitor or registered European lawyer, or manager or employee of a recognised body or licensed body) is a fit and proper person

(A)

to hold money for clients or other persons (including money held on trust), or

(B)

to operate an account of a client or an account of another person,

you must immediately give a report of the matter to the Solicitors Regulation Authority in accordance with section 34(9) of the Solicitors Act 1974 or article 3(1) of the Legal Services Act 2007 (Designation as a Licensing Authority) (No. 2) Order 2011 as appropriate;

(b)

you may, and are encouraged to, make that report without prior reference to me/this firm/this company/this limited liability partnership;

(c)

you are to report directly to the Solicitors Regulation Authority should your appointment be terminated following the issue of, or indication of intention to issue, a qualified accountant's report, or following the raising of concerns prior to the preparation of an accountant's report;

(d)

you are to deliver to me/this firm/this company/this limited liability partnership with your report the completed checklist required by rule 43 of the SRA Accounts Rules 2011; to retain for at least three years from the date of signature a copy of the completed checklist; and to produce the copy to the Solicitors Regulation Authority on request;

(e)

you are to retain these terms of engagement for at least three years after the termination of the retainer and to produce them to the Solicitors Regulation Authority on request; and

(f)

following any direct report made to the Solicitors Regulation Authority under (a) or (c) above, you are to provide to the Solicitors Regulation Authority on request any further relevant information in your possession or in the possession of your firm.

To the extent necessary to enable you to comply with (a) to (f) above, I/we waive my/the firm's/the company's/the limited liability partnership's right of confidentiality. This waiver extends to any report made, document produced or information disclosed to the Solicitors Regulation Authority in good faith pursuant to these instructions, even though it may subsequently transpire that you were mistaken in your belief that there was cause for concern."

35.2

The letter of engagement and a copy must be signed by you and by the accountant. You must keep the copy of the signed letter of engagement for at least three years after the termination of the retainer and produce it to the SRA on request.

35.3

The specified terms may be included in a letter from the accountant to you setting out the terms of the engagement but the text must be adapted appropriately. The letter must be signed in duplicate by both parties, with you keeping the original and the accountant the copy.

Guidance note

(i)

Any direct report by the accountant to the SRA under rule 35.1(a) or (c) should be made to the Fraud and Confidential Intelligence Bureau.

Rule 36: Change of accountant

36.1

On instructing an accountancy practice to replace that previously instructed to produce accountant's reports, you must immediately notify the SRA of the change and provide the name and business address of the new accountancy practice.

Rule 37: Place of examination

37.1

Unless there are exceptional circumstances, the place of examination of your accounting records, files and other relevant documents must be your office and not the office of the accountant. This does not prevent an initial electronic transmission of data to the accountant for examination at the accountant's office with a view to reducing the time which needs to be spent at your office.

Rule 38: Provision of details of bank accounts, etc.

38.1

The accountant must request, and you must provide, details of all accounts kept or operated by you in connection with your practice at any bank, building society or other financial institution at any time during the accounting period to which the report relates. This includes client accounts, office accounts, accounts which are not client accounts but which contain client money, and clients' own accounts operated by you as signatory.

Rule 39: Test procedures

39.1

The accountant must examine your accounting records (including statements and passbooks), client and trust matter files selected by the accountant as and when appropriate, and other relevant documents, and make the following checks and tests:

(a)

confirm that the accounting system in every office complies with:

(i)

rule 29 - accounting records for client accounts, etc;

(ii)

rule 30 - accounting records for clients' own accounts;

and is so designed that:

(A)

an appropriate client ledger account is kept for each client (or other person for whom client money is received, held or paid) or trust;

(B)

the client ledger accounts show separately from other information details of all client money received, held or paid on account of each client (or other person for whom client money is received, held or paid) or trust; and

(C)

transactions relating to client money and any other money dealt with through a client account are recorded in the accounting records in a way which distinguishes them from transactions relating to any other money received, held or paid by you;

(b)

make test checks of postings to the client ledger accounts from records of receipts and payments of client money, and make test checks of the casts of these accounts and records;

(c)

compare a sample of payments into and from the client accounts as shown in bank and building society or other financial institutions' statements or passbooks with your records of receipts and payments of client money, including paid cheques;

(d)

test check the system of recording costs and of making transfers in respect of costs from the client accounts;

(e)

make a test examination of a selection of documents requested from you in order to confirm:

(i)

that the financial transactions (including those giving rise to transfers from one client ledger account to another) evidenced by such documents comply with Parts 1 and 2 of the rules, rule 27 (restrictions on transfers between clients) and rule 28 (executor, trustee or nominee companies); and

(ii)

that the entries in the accounting records reflect those transactions in a manner complying with rule 29;

(f)

subject to rule 39.2 below, extract (or check extractions of) balances on the client ledger accounts during the accounting period under review at not fewer than two dates selected by the accountant (one of which may be the last day of the accounting period), and at each date:

(i)

compare the total shown by the client ledger accounts of the liabilities to the clients (and other persons for whom client money is held) and trusts with the cash account balance; and

(ii)

reconcile that cash account balance with the balances held in the client accounts, and accounts which are not client accounts but in which client money is held, as confirmed direct to the accountant by the relevant banks, building societies and other financial institutions;

(g)

confirm that reconciliation statements have been made and kept in accordance with rule 29.12 and 29.17(a);

(h)

make a test examination of the client ledger accounts to see whether payments from the client account have been made on any individual account in excess of money held on behalf of that client (or other person for whom client money is held) or trust;

(i)

check the office ledgers, office cash accounts and the statements provided by the bank, building society or other financial institution for any office account maintained by you in connection with the practice, to see whether any client money has been improperly paid into an office account or, if properly paid into an office account under rule 17.1(b) or rule 19.1, has been kept there in breach of the rules;

(j)

check the accounting records kept under rule 29.17(d) and 29.19 for client money held outside a client account to ascertain what transactions have been effected in respect of this money and to confirm that the client has given appropriate instructions under rule 15.1(a);

(k)

make a test examination of the client ledger accounts to see whether rule 29.10 (accounting records when acting for both lender and borrower) has been complied with;

(l)

for liquidators, trustees in bankruptcy, Court of Protection deputies and trustees of occupational pension schemes, check that records are being kept in accordance with rule 29.15, 29.17(c) and 29.20, and cross-check transactions with client or trust matter files when appropriate;

(m)

check that statements and passbooks and/or duplicate statements and copies of passbook entries are being kept in accordance with rule 29.17(b)(ii) and 29.21 (record-keeping requirements for joint accounts), and cross-check transactions with client matter files when appropriate;

(n)

check that statements and passbooks and/or duplicate statements, copies of passbook entries and cheque details are being kept in accordance with rule 30 (record-keeping requirements for clients' own accounts), and cross-check transactions with client matter files when appropriate;

(o)

for money withdrawn from client account under rule 20.1(j), check that records are being kept in accordance with rule 29.16, 29.17(a) and 29.22, and cross-check with client or trust matter files when appropriate;

(p)

in the case of private practice only, check that for the period which will be covered by the accountant's report the firm was covered for the purposes of the SRA's indemnity insurance rules in respect of its offices in England and Wales by:

(i)

certificates of qualifying insurance outside the assigned risks pool; or

(ii)

a policy issued by the assigned risks pool manager; or

(iii)

certificates of indemnity cover under the professional requirements of an REL's home jurisdiction in accordance with paragraph 1 of Appendix 3 to those rules, together with the SRA's written grant of full exemption; or

(iv)

certificates of indemnity cover under the professional requirements of an REL's home jurisdiction plus certificates of a difference in conditions policy with a qualifying insurer under paragraph 2 of Appendix 3 to those rules, together with the SRA's written grant of partial exemption; and

(q)

ask for any information and explanations required as a result of making the above checks and tests.

Extracting balances

39.2

For the purposes of rule 39.1(f) above, if you use a computerised or mechanised system of accounting which automatically produces an extraction of all client ledger balances, the accountant need not check all client ledger balances extracted on the list produced by the computer or machine against the individual records of client ledger accounts, provided the accountant:

(a)

confirms that a satisfactory system of control is in operation and the accounting records are in balance;

(b)

carries out a test check of the extraction against the individual records; and

(c)

states in the report that he or she has relied on this exception.

Guidance notes

(i)

The rules do not require a complete audit of your accounts nor do they require the preparation of a profit and loss account or balance sheet.

(ii)

In making the comparisons under rule 39.1(f), some accountants improperly use credits of one client against debits of another when checking total client liabilities, thus failing to disclose a shortage. A debit balance on a client account when no funds are held for that client results in a shortage which must be disclosed as a result of the comparison.

(iii)

The main purpose of confirming balances direct with banks, etc., under rule 39.1(f)(ii) is to ensure that your records accurately reflect the sums held at the bank. The accountant is not expected to conduct an active search for undisclosed accounts.

(iv)

In checking compliance with rule 20.1(j), the accountant should check on a sample basis that you have complied with rule 20.2 and are keeping appropriate records in accordance with rule 29.16, 29.17(a) and 29.22. The accountant is not expected to judge the adequacy of the steps taken to establish the identity of, and to trace, the rightful owner of the money.

Rule 40: Departures from guidelines for accounting procedures and systems

40.1

The accountant should be aware of the SRA's guidelines for accounting procedures and systems (see rule 26), and must note in the accountant's report any substantial departures from the guidelines discovered whilst carrying out work in preparation of the report. (See also rule 41.1(e).)

Rule 41: Matters outside the accountant's remit

41.1

The accountant is not required:

(a)

to extend his or her enquiries beyond the information contained in the documents produced, supplemented by any information and explanations given by you;

(b)

to enquire into the stocks, shares, other securities or documents of title held by you on behalf of your clients;

(c)

to consider whether your accounting records have been properly written up at any time other than the time at which his or her examination of the accounting records takes place;

(d)

to check compliance with the provisions in rule 22 on interest, nor to determine the adequacy of your interest policy;

(e)

to make a detailed check on compliance with the guidelines for accounting procedures and systems (see rules 26 and 40); or

(f)

to determine the adequacy of the steps taken under paragraphs (a) and (b) of rule 20.2.

Rule 42: Privileged documents

42.1

When acting on a client's instructions, you will normally have the right on the grounds of privilege as between solicitor and client to decline to produce any document requested by the accountant for the purposes of his or her examination. In these circumstances, the accountant must qualify the report and set out the circumstances.

Guidance note

(i)

In a recognised body or licensed body with one or more managers who are not legally qualified, legal professional privilege may not attach to work which is neither done nor supervised by a legally qualified individual - see Legal Services Act 2007, section 190(3) to (7), and Schedule 22, paragraph 17.

Rule 43: Completion of checklist

43.1

The accountant should exercise his or her professional judgment in adopting a suitable "audit" programme, but must also complete and sign a checklist in the form published from time to time by the SRA. You must obtain the completed checklist, retain it for at least three years from the date of signature and produce it to the SRA on request.

Guidance notes

(i)

The current checklist appears at Appendix 4. It is issued by the SRA to firms at the appropriate time for completion by their reporting accountants.

(ii)

The letter of engagement required by rule 35 imposes a duty on the accountant to hand the completed checklist to the firm, to keep a copy for three years and to produce the copy to the SRA on request.

Rule 44: Form of accountant's report

44.1

The accountant must complete and sign his or her report in the form published from time to time by the SRA. An explanation of any significant difference between liabilities to clients and client money held, as identified at section 4 of the report, must be given by either the accountant or you.

Guidance notes

(i)

The current form of accountant's report appears at Appendix 5.

(ii)

The form of report is prepared and issued by the SRA to firms at the appropriate time for completion by their reporting accountants. Separate reports can be delivered for each principal in a partnership but most firms deliver one report in the name of all the principals. For assistant solicitors, consultants and other employees, see rule 32, guidance notes (vii) and (viii).

(iii)

An incorporated practice will deliver only one report, on behalf of the company and its directors, or on behalf of the LLP and its members - see rule 32.1.

(iv)

Although it may be agreed that the accountant send the report direct to the SRA, the responsibility for delivery is that of the firm. The form of report requires the accountant to confirm that either a copy of the report has been sent to each of the persons (including bodies corporate) to whom the report relates, or a copy of the report has been sent to a named partner on behalf of all the partners in the firm. A similar confirmation is required in respect of the directors of a recognised body/licensed body which is a company, or the members of a recognised body/licensed body which is an LLP.

(v)

A reporting accountant is not required to report on trivial breaches due to clerical errors or mistakes in book-keeping, provided that they have been rectified on discovery and the accountant is satisfied that no client suffered any loss as a result.

(vi)

In many practices, clerical and book-keeping errors will arise. In the majority of cases these may be classified by the reporting accountant as trivial breaches. However, a "trivial breach" cannot be precisely defined. The amount involved, the nature of the breach, whether the breach is deliberate or accidental, how often the same breach has occurred, and the time outstanding before correction (especially the replacement of any shortage) are all factors which should be considered by the accountant before deciding whether a breach is trivial.

(vii)

Accountants' reports should be sent to the Information Directorate.

(viii)

For direct reporting by the accountant to the SRA in cases of concern, see rule 35 and guidance note (i) to that rule.

Rule 45: Firms with two or more places of business

45.1

If a firm has two or more offices:

(a)

separate reports may be delivered in respect of the different offices; and

(b)

separate accounting periods may be adopted for different offices, provided that:

(i)

separate reports are delivered;

(ii)

every office is covered by a report delivered within six months of the end of its accounting period; and

(iii)

there are no gaps between the accounting periods covered by successive reports for any particular office or offices.

Rule 46: Waivers

46.1

The SRA may waive in writing in any particular case or cases any of the provisions of Part 6 of the rules, and may revoke any waiver.

Guidance note

(i)

Applications for waivers should be made to the Information Directorate. In appropriate cases, firms may be granted a waiver of the obligation to deliver an accountant's report (see rule 32, and guidance note (xi) to that rule). The circumstances in which a waiver of any other provision of Part 6 would be given must be extremely rare.