Qualified Accountants Reports and SRA Investigations
Kate Arnott · May 9th 2023 · read
Many solicitors and law firms do not appreciate the impact and consequences that an SRA investigation can have. From a compliance, commercial, cost, and reputational point of view, an enquiry can be traumatic and time-consuming. An investigation can start from a number of sources including a complaint from a client or ex-employee as well as a qualified Accountants Report.
Although as Reporting Accountants (RA’s), we must understand the rules, besides Rule 12, it is the solicitors who have to adhere and understand them. Ignorance of the rules is no excuse, and Rule 1.2 states that “The authorised body’s managers are jointly and severally responsible for compliance by the authorised bodies, its managers and employees with these rules” A manager is defined as a sole practitioner, a partner in a partnership, a member of an LLP or a director of a company. For example, a partner of a partnership who does not have direct duties in respect of the finance function still needs to understand their obligations under the Accounts Rules.
The guidance “Planning for and completing an accountants report” which accompanies the 2019 Accounts Rules is a key tool for RA’s to consider whether a report may be qualified or not. Of course, often this may be subjective, and opinions may differ. Dependent on the reasoning and documentation two differing opinions may both be acceptable.
The guidance however does assist in planning what work might need to be undertaken by RA’s and how to ensure that client money is properly safeguarded. It also helps in assessing when the RA may decide to qualify the report which will then need to be submitted to the SRA. Such a qualified report may lead to further questions from the SRA and in some instances may result in an investigation.
RA’s need to consider serious and moderate factors when looking at possible qualifications. For example, as far as the serious factors are concerned, the presence of one of more of these is likely to lead to a qualification. These include a significant and/or unreplaced shortfall as well as a failure to provide documentation requested by the RA.
One thing RA’s have to be mindful of is that they are under a statutory duty as set out in Section 34 of the Solicitors Act 1974 and section 5, schedule 2 of the Administration of Justice Act 1985, to immediately report to the SRA:
- any evidence of theft or fraud in relation to money held by a solicitor or a law firm for a client or any other person or in a client account or an account operated by the solicitor.
- if they have concerns about whether a solicitor or a law firm is fit and proper to hold money for clients or third parties or operate any such accounts.
Law firms need to appreciate the professional obligations of RA’s in addition to appointing them to prepare an Accountants Report or financial statements.
It is not possible to legislate for dishonest solicitors or those who are reckless, negligent, or chaotic as to the rules, but RA’s can assist in providing good management advice, honest assessments on viability and advising on good systems and internal policies.
SRA investigations can have wide reaching implications on law firms and solicitors, which can include consequences for professional indemnity insurance, fines and in worst cases intervention or individuals being struck off. It may be the case that a firm may not even be able to get insurance when it comes up for renewal.
Good systems and controls, proper management and an understanding of the Accounts Rules are a good starting point for avoiding a qualified Accountants Report and the possibility of an SRA investigation.