SRA Handbook

Accountants' reports

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Version 17 of the Handbook was published on 12/08/2016. For more information, please click 'History' Above

Part 6: Accountants' reports

Rule 32: Delivery of accountants' reports [Deleted]

Rule 32A: Obtaining and delivery of accountants' reports

32A.1

Subject to rule 32A.1A, 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:-

(a)

obtain an accountant's report for that accounting period within six months of the end of the accounting period; and

(b)

if the report has been qualified, deliver it to the SRA 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.

32A.1A

Subject to rule 32A.2, you are not required to obtain or deliver an accountant's report if:

(a)

all of the client money held or received during an accounting period is money held or received from the Legal Aid Agency or in the circumstances set out in rule 19.3; or

(b)

in the accounting period, the statement or passbook balance of client money you have held or received does not exceed:

(i)

an average of £10,000; and

(ii)

a maximum of £250,000,

or the equivalent in foreign currency.

32A.1B

In rule 32A.1A above:

(a)

a "statement or passbook balance" is the total balance obtained at least once every five weeks, from a bank, building society or other institution of all general client accounts and separate designated client accounts, and accounts that are not client accounts but are holding client money, when carrying out reconciliations in accordance with rules 29.11 to 29.14; and

(b)

an average "statement or passbook balance" is the total of all statement or passbook balances obtained in any accounting period divided by the number of such balances in that period.

32A.2

Notwithstanding the provisions of rules 32A.1 and 32A.1A, the SRA may require you to obtain or deliver an accountant's report at any time in circumstances other than those set out in rules 32A.1 and in the circumstances set out in rule 32A.1A if the SRA has reason to believe that it is in the public interest to do so.

Guidance notes

(i)

A qualified accountant's report is a report prepared in accordance with rule 32A.1(a) where the reporting accountant forms the judgement that these rules have not been complied with such that the safety of client money is at risk. The form of the report is dealt with in rule 44. See also the SRA's "Guidance to Reporting Accountants and firms on planning and completion of the annual Accountants' Reports, under Rule 32A of the SRA Accounts Rules 2011".

(ii)

To qualify for the exemption in rule 32A.1A(b), you are required to assess at the end of the accounting period if the average (at least five weekly) balance of client money you have held or received is or less than, or equal to £10,000 and that the maximum aggregated total of client money held or received is less than, or equal to £250,000 (or the equivalent in foreign currency). Both thresholds need to be satisfied for the exemption to apply. If you do satisfy the criteria you will be exempted from the requirement of obtaining an annual accountant's report for that accounting period. We expect that firms will inevitably move in and out of the thresholds from year to year and it is your obligation to satisfy yourself, and if required the SRA, that you have properly applied the exemptions. You should ensure you keep full records of your decisions in this regard. For the avoidance of any doubt if you or your firm is exempted from the obligation to obtain an accountant's report under rule 32A.1A, all of the other sections of these rules will continue to apply to you in full.

(iii)

Examples of situations under rule 32A.2 include:

(a)

when no report has been obtained or delivered but the SRA has reason to believe that a report should have been obtained or delivered, for example, because you have failed to deliver a qualified report to the SRA or where you have failed to obtain a report because you have improperly applied one of the exemptions in rule 32A.1A;

(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 you to obtain or deliver a report earlier than would otherwise have been the case (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 the obtaining and delivery of a report, whether or not qualified that an exemption would otherwise apply, or the more frequent obtaining and 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 obtain and 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 obtaining and delivery of reports at more frequent intervals.

(iv)

The requirement in rule 32A 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.

(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 obtain the accountant's report and to deliver any such report to the SRA if it is qualified, 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 obtain and deliver an accountant's report unless the exemptions in rule 32A.1A apply. 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)

Rule 32A 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.

(x)

In exceptional circumstances, a waiver of the obligation to obtain a report may sometimes be granted. Applications should be made to the SRA.

(xi)

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 obtain 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 obtain your first report, the accounting period must begin:

(a)

on the date when you first held or received client money (or operated a client's own account as signatory); or

(b)

at the end of the last accounting period in which an exemption under rule 32A.1A applied.

33.3

If you are under a duty to obtain your first report after a break, the accounting period must begin:

(a)

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); or

(b)

at the end of the last accounting period in which an exemption under rule 32A.1A applied

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 obtain and deliver a final report to the SRA. 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)

You must obtain and deliver a final report to the SRA when you cease to hold client money. This applies regardless of whether you would otherwise have been exempted from the requirement to obtain an annual accountant's report on the basis you meet the criteria set out in Rule 32A.1A above and irrespective of whether the report is qualified or unqualified.

(ii)

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.

(iii)

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.

(iv)

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, both you and the accountant will have to be satisfied that these circumstances do not affect his or her independence in preparing the report.

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,

(iii)

you discover a failure by the firm to submit a qualified accountant's report to the Solicitors Regulation Authority, as required by these rules,

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 your report which you should also retain for at least six years from the date of its signature and to produce the copy to the Solicitors Regulation Authority on request;

(e)

you are to retain these terms of engagement for at least six 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 six years after the termination of the retainer and produce it to the SRA on request. Both you and the reporting accountant must also retain a copy of the accountant's report, whether qualified or not, for at least six years from the date of its signature and produce the copy 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 [Deleted]

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 [Deleted]

Rule 40: Departures from guidelines for accounting procedures and systems [Deleted]

Rule 41: Matters outside the accountant's remit [Deleted]

Rule 42: Privileged documents [Deleted]

Rule 43: Completion of checklist [Deleted]

Rule 43A: Work to be undertaken

43A.1

The accountant should exercise his or her professional judgement in determining the work required for the firm they are instructed to obtain the report on in order to assess risks to client money arising from compliance with these rules. This should cover the work that the accountant considers is appropriate to enable completion of the report required by the SRA at the date the report is commissioned (referred to in Rule 44 below).

Guidance notes

(i)

The purpose of the accountant's report is to enable a proportionate degree of oversight by the SRA over risks to clients' funds. It may also help the firm identify any improvements in its control systems that are required. The form of the report that the accountant is required to complete is intended to provide assurance that client funds are properly safeguarded. If the accountant forms the judgement that these Rules have not been complied with such that the safety of client money is at risk, then the accountant is required to "qualify" the report and set out in the report details of the areas where risks have been identified. Rule 32A.1 sets out which firms are required to obtain a report but only qualified reports have to be delivered to the SRA within the time frame set out.

(ii)

The types of work that the accountant is required to undertake will depend on a number of factors including the size and complexity of the firm, the nature of the work undertaken, the number of transactions and amount of client funds held. The accountant may also want to consider the firm's existing systems and for example, the numbers and types of breaches of these Rules that the firm's COFA has recorded under his/her reporting obligations. Separate guidance as to the work that might be considered as part of a work programme has been issued by the SRA and will be updated from time to time; see the SRA's "Guidance to Reporting Accountants and firms on planning and completion of the annual Accountants' Reports, under Rule 32A of the SRA Accounts Rules 2011"

Rule 43B: Failure to provide documentation

43B.1

You must provide documentation to the accountant as required to enable completion of the accountant's report. 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. A significant failure to provide documentation may result in the accountant deciding that they should qualify the report if they consider that as a result, they cannot properly prepare the report in accordance with these rules.

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 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.

Guidance notes

(i)

The current form of the accountant's report under rule 44 requires the accountant to confirm of he/she has found it necessary to qualify the report. If so, the report must be delivered to the SRA - see rule 32A.1(b) and guidance notes to that rule.

(ii)

Separate reports can be obtained for each principal in a partnership but most firms choose to obtain one report in the name of all the principals. In either case, the report must be delivered to the SRA if it is qualified - see rule 32A.1(b) and the guidance notes to that rule. For assistant solicitors, consultants and other employees, see rule 32A, guidance notes (vii) and (viii).

(iii)

An incorporated practice will obtain only one report, on behalf of the company and its directors, or on behalf of the LLP and its members - see rule 32A.1. The report must be delivered to the SRA if it is qualified - see rule 32A.1(b) and the guidance notes to that rule.

(iv)

Although it may be agreed that the accountant will send a qualified report direct to the SRA, the responsibility for delivery is that of the firm. The form of report requires the accountant to confirm that a copy of the report (whether qualified or unqualified) has been sent to the COFA on behalf of the firm to which it relates. The COFA should ensure that the report is seen by each of the managers of the firm.

(v)

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 obtained in respect of the different offices; and

(b)

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

(i)

separate reports are obtained;

(ii)

every office is covered by a report obtained 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 SRA. In appropriate cases, firms may be granted a waiver of the obligation to obtain an accountant's and in accordance with the SRA's current Waivers Policy.