Playing by the rules

Knowledge of the Solicitors Regulation Authority (SRA) Accounts Rules is of paramount importance to any solicitor holding client money, and
in complying with these rules
it is equally as important to have systems and controls in place that work efficiently both
in terms of administration
and compliance.

While the reporting accountant will scrutinise those systems as part of the client money examination, and provide a management letter evaluating those systems and the adherence to the rules, they are not permitted to make specific recommendations as to systems and controls due to the risk of self-review threat. So, what tools does the solicitor have to advise on systems and controls?

Accounting procedures

Often overlooked is appendix 3 to the SRA Accounts Rules, entitled ‘SRA Guidelines – Accounting Procedures and Systems’. While the rules themselves dictate
what should happen, with the guidance notes providing assistance as regards interpretation, appendix 3
gives indications as to how.

The guidelines in appendix 3 actually form part of the rules themselves via rule 26, which states: ‘The SRA may from time
to time publish guidelines for accounting procedures and systems to assist you to comply with parts 1 to 4 of the rules, and you may be required to justify any departure from the guidelines.’ So, although appendix 3 is provided as assistance, it is very much the view of the SRA that it represents best practice.

The fact the recommendations of appendix 3 are embedded within the rules should not
take away from the level of additional assistance they provide.

For example, rule 29.9 states: ‘The current balance on each client ledger account must always be shown, or be readily ascertainable.’ The accounting procedures and guidelines
go much further on how this
is achieved, and paragraphs
2.3 and 2.4 provide details on the bookkeeping principals which, if adhered to, will not only help to achieve compliance with rule 29.9, but with rule 29 as a whole.

Client to client transfers

Another area the guidelines highlight is rule 27.2 covering client to client transfers – a rule which is often overlooked.
This rule states that where one client of the firm is making a private loan to another client
of the firm, whether via a direct payment or a paper transfer, there must be prior written authority from both clients, and this should be retained on file.

Quite often instructions to make such a loan can come from the lender only via a telephone call or in a meeting. However, it is imperative that at the point of instruction the client is told they will have to provide written authority,
and also that the receiving client is contacted and asked to acknowledge the loan they are about to receive. If either the lending or receiving client is
in a joint matter, then both individuals on that matter
must acknowledge the loan
in writing.

It is the norm with a payment from a client account on behalf
of a client for rule 21 to apply,
and for an appropriate person within the firm to give authority for the payment to be made.
If a client to client transfer is
to occur under rule 27, then
the authority given by both clients negates the need for
an appropriate individual to
give authority under rule 21.
This stresses the importance
of complying with rule 27 and ensuring both client files hold
the required documentation
to support the transfer.

The guidelines also assist practices in other areas
outside the rules. For example, paragraphs 4.4 and 5.5 detail
how the firm should have policies, systems, and procedures with regards to controlling the access to both funds and computerised
records. It suggests differing
user rights, so that those with responsibilities regarding the input have ‘write to’ abilities,
but those who only need to
view the information have
‘read only’ access. Such controls will not only help compliance with the rules, but also act
as a control against the risk
of fraud, and could therefore
have a positive effect on insurance policies.

Appendix 3 is a very useful,
but often forgotten, tool,
not only when looking at a prospective system in times
of change, but also for regular review of existing systems. SJ

Dan Edwards is accounts and outsourcing senior manager at accountancy firm Kreston Reeves