Learning Outcomes
After reading this article, you will be able to explain the purpose of accountants' reports, identify the SRA's requirements for their storage and retention, and understand which firms are exempt from obtaining or delivering reports. You will also be able to apply these principles to practical scenarios and recognise the compliance risks associated with improper record-keeping.
SQE1 Syllabus
For SQE1, you are required to understand the regulatory requirements for accountants' reports in solicitors' accounts. In your revision, focus on:
- the purpose and function of accountants' reports in legal practice
- the SRA's rules on the storage and retention of accountants' reports and supporting records
- the six-year retention period and what it covers
- which firms are exempt from obtaining or delivering accountants' reports
- the compliance officer's (COFA) responsibilities for record-keeping and reporting
- the consequences of failing to retain or produce reports when required
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- How long must a firm retain accountants' reports and supporting documentation under the SRA Accounts Rules?
- Which of the following firms is exempt from obtaining an accountant's report? a) A firm that only holds Legal Aid Agency money b) A firm that never holds client money c) A firm whose average client account balance is £8,000 and maximum is £200,000 during the accounting period d) All of the above
- What is the main compliance risk if a firm cannot produce an accountant's report from four years ago during an SRA investigation?
- True or false? If a firm qualifies for an exemption from obtaining an accountant's report, it no longer needs to keep any financial records for that period.
Introduction
Accountants' reports are a key part of the regulatory framework for solicitors in England and Wales. These reports provide independent assurance that firms are complying with the SRA Accounts Rules, especially in relation to the handling of client money. The SRA imposes strict requirements on the storage and retention of these reports and related documents. Understanding these rules—and the exemptions that may apply—is essential for SQE1.
The Purpose of Accountants' Reports
Accountants' reports are independent assessments of a firm's compliance with the SRA Accounts Rules. They are usually prepared annually by a qualified accountant and must be obtained by most firms that hold or receive client money, or operate joint accounts or clients' own accounts as signatory.
Key Term: accountants' report
An independent report prepared by a qualified accountant confirming a firm's compliance with the SRA Accounts Rules, especially regarding client money.
Storage and Retention of Accountants' Reports
The SRA requires firms to keep accountants' reports and all supporting documentation for a minimum of six years. This retention period ensures that records are available for regulatory inspections, audits, or investigations, and aligns with the statutory limitation period for most civil claims.
Key Term: retention period
The minimum length of time (six years) that a firm must securely store accountants' reports and supporting records, as required by the SRA.
Firms may store these records in paper or electronic form, provided they are secure, accessible, and protected from unauthorised access or loss. The records must be capable of being produced promptly if requested by the SRA.
Worked Example 1.1
A firm receives an SRA request to produce its accountant's report for the accounting period ending four years ago. The firm has switched to a new IT system and cannot retrieve the report or supporting records.
Answer: The firm is in breach of the SRA Accounts Rules. It must retain accountants' reports and supporting documentation for at least six years and be able to produce them promptly on request. Failure to do so may result in regulatory action.
Exemptions from Accountants' Reports
Not all firms are required to obtain or deliver an accountant's report. The main exemptions are:
- Firms that only hold or receive money from the Legal Aid Agency during the accounting period.
- Firms whose average client account balance does not exceed £10,000 and whose maximum balance does not exceed £250,000 during the accounting period.
- Firms that do not hold or receive any client money, or do not operate joint accounts or clients' own accounts as signatory.
Key Term: exemption (accountants' report)
A situation where a firm is not required to obtain or deliver an accountant's report due to meeting specific SRA criteria.
Even if a firm is exempt, it must still comply with all other SRA Accounts Rules, including maintaining accurate records and monitoring whether it continues to meet the exemption criteria.
Key Term: compliance officer for finance and administration (COFA)
The individual responsible for ensuring a firm's compliance with the SRA Accounts Rules, including record-keeping and reporting breaches.
Worked Example 1.2
A small firm holds an average client account balance of £8,000 and a maximum of £200,000 during the accounting period. It only holds client money for a few weeks each year.
Answer: The firm is exempt from obtaining an accountant's report for that period, as it meets both the average and maximum balance thresholds. However, it must still keep all records for six years and monitor its balances in future periods.
Compliance Duties and Risks
The COFA is responsible for ensuring that accountants' reports and supporting records are stored securely and retained for the required period. If the SRA requests a report or supporting documentation, the firm must be able to produce it promptly. Failure to do so may result in regulatory action, disciplinary proceedings, or reputational harm.
Exam Warning
If a firm qualifies for an exemption in one accounting period but later exceeds the exemption thresholds, it must obtain an accountant's report for the period in which the thresholds are breached. Failing to do so is a breach of the SRA Accounts Rules.
Revision Tip
Always check the firm's client account balances at each reconciliation to ensure ongoing eligibility for exemption. If in doubt, obtain an accountant's report.
Key Point Checklist
This article has covered the following key knowledge points:
- Accountants' reports are required for most firms holding or receiving client money.
- Firms must store accountants' reports and supporting records securely for at least six years.
- The retention period applies regardless of whether records are kept in paper or electronic form.
- Exemptions apply for firms holding only Legal Aid Agency money, or with low client account balances, or not holding client money at all.
- The COFA is responsible for compliance, including record-keeping and reporting.
- Failure to retain or produce reports may result in regulatory action.
Key Terms and Concepts
- accountants' report
- retention period
- exemption (accountants' report)
- compliance officer for finance and administration (COFA)
