Why the SRA is scrapping the accountant's report

Making use of the value-added audit may be a lot more useful to law firms than wholesale scrapping of the mandatory requirement for the accountant's report as proposed by the Solicitors Regulation Authority, suggests Mark Sharpley, partner at Smailes Goldie

The Solicitors Regulation Authority (SRA) is consulting on how best to have proportionate regulation in respect of accounting requirements within the sector, which includes proposals to do without the mandatory requirement for law firms to submit an annual accountant's report.

It also proposes requiring compliance officers for finance and administration (COFAs) to sign a declaration they are satisfied that the firm is managing the client account in accordance with the SRA Account Rules.

The preparation of the SRA report should be a catalyst for healthy and informative dialogue with the legal firm. If testing of the rules and compliance issues is carried out on an interim basis – with directional testing where necessary, looking to give the practice assurance that the fee-earners and the practice management are compliant – then it is serving its purpose.

Accountants involved in this type of work must therefore feel somewhat threatened by the SRA proposals if they perceive the appointment as high value and, in carrying it out, they provide guidance and some surety as to the quality of the underlying accounting records. 

At the same time, any law firm that welcomes the SRA move because they perceive the audit report as an unnecessary expense with no real value, should, perhaps, have been questioning the role of the accountant in adding value rather than the absolute cost incurred. 

Any accountant signing SAR reports should have the experience to deal with this work correctly and should be looking to assist the legal practice with any improvements and give general advice on areas of weakness. 

Value-added trend

This follows the increasing trend for added value audits. Many commercial clients still ask for a voluntary audit to give directors confidence in the underlying accuracy of figures produced. It would also, significantly, provide the whole organisation with an understanding that a third party is reviewing controls. The very presence of auditors should reduce the risk of fraud and error.

Placing the burden of compliance squarely on the shoulders of the COFA means this individual will have to ensure they carry out similar testing on a regular and random basis throughout the practice and have a system in place that monitors and records transactions throughout the reporting period. 

This is an important role within any legal practice. Not only does it carry with it severe repercussions should the individual not be suitably qualified or trained but it also will take up a significant amount of their individual time. 

If this person is also a fee-earner (usually the case) then this time cost has to be built into the workload and this can be significant. It may even lead to employing an independent party to assist with the process, even though the COFA will take ultimate responsibility.

It appears that the SRA is primarily concerned in reducing its own administrative costs and I do not see any real savings for legal firms in dropping the SRA reporting requirement as ongoing costs will, in all probability, outweigh the independent reporting cost. 

That is not to say that this is a reason for retaining the current system. Many may consider that the SRA reports prepared by some accountants are ‘low value and I would not necessarily disagree.

I would much rather see legal firms discussing issues with their existing reporting accountants (or other independent advisers) with a view to assisting the COFA, being more proactive in streamlining systems and looking for cost savings, as well as compliance efficiency, as part of the annual working involvement. 

The problem I see as having existed for many years is that the SRA does not vigorously review accountants involved in SRA reporting, which has reduced the value of the reports. A lowest-cost denominator will produce a poor audit report and it is only by luck, rather than the quality of the work, that more high profile non-compliance and fraudulent cases have been avoided.

Client money is the major area of risk. Any firms that continue to hold client monies should be subject to a more rigorous approach than those who do not, ideally regular reviews by independent third parties.

When the change of rules requiring each firm to appoint a COFA was first introduced, I foresaw that this would have a detrimental effect on the annual audit compliance work that each registered law firm must undertake through an independent qualified accountant. Bringing self-regulation into every firm of legal practice is fraught with difficulty and, in particular, those where client money is at risk. 

If nothing else, I would support an annual review of the workings of the COFA to give the practice and that individual the knowledge and support when they need it. This type of review would naturally reduce external costs but, as I mentioned, the overall cost of compliance has been shifted away from the cost of the SRA to the legal firms and I see little, if any, saving to the legal profession as a whole. 

We will await the outcome of the review with interest. Quality firms, whatever the outcome, will continue to work closely with their accountancy advisers and will be foolish to disregard the independent input that can be gained to support the internal COFA.

The SRA consultation, which closes on closes on 18 June, can be accessed here http://www.sra.org.uk/sra/consultations/reporting-accountant.page

Mark Sharpley is a partner at Smailes Goldie Chartered Accountants and chair of the legal special interest group of the UK200Group

Mark Sharpley |Partner, Smailes Goldie Chartered Accountants

Sharpley is a partner at Smailes Goldie Chartered Accountants and chair of the legal special interest group of the ...

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