As law firms continue to navigate the complexities of client money compliance, Hazlewoods — a leading firm of business advisers and accountants — has released its annual SRA Accounts Rules audit round-up for the 2024 calendar year. With over 150 Accountant’s Reports signed off annually, Hazlewoods offers a valuable lens into the most common breaches, emerging trends, and practical tips for improving compliance.
Encouraging Trends in Compliance
Hazlewoods reports that over 90% of the audits were unqualified, and 23% had no breaches at all, a promising sign that many firms are maintaining strong financial controls. However, residual balances remain the most frequent cause of qualified reports, appearing in two-thirds of audits and leading to qualification in 7% of cases.
Residual Balances: A Persistent Challenge
Residual balances — funds left in client accounts after a matter has concluded — continue to be a thorn in the side of compliance. Hazlewoods notes that firms that delegate responsibility for clearing these balances away from fee earners tend to perform better. The challenge lies in motivating fee earners to prioritize resolution, especially for older balances.
Common Breaches and Their Implications
Hazlewoods categorizes breaches into reportable and non-reportable, with the latter still posing risks if left unaddressed. Key issues include:
- Suspense and Charity Ledgers: Suspense ledgers should only contain current balances. If ownership cannot be identified within six months, funds should be returned. Charity ledger balances must be donated at least annually.
- Missed Deadlines: Delays in completing audits — often due to staff or system changes — can result in qualified reports.
- Control Weaknesses: These include using miscellaneous ledgers for multiple clients, providing banking facilities, and office ledger credit balance issues.
Noteworthy Non-Reportable Breaches
Hazlewoods highlights several breaches that, while not immediately reportable, could become systemic:
- Incorrect Withdrawals (19%): Overpayments or duplicate payments from client accounts.
- Office Ledger Credit Balances (20%): Often due to excess payments or disbursement refunds.
- Bank Reconciliation Breaches (17%): Lack of timely review or discrepancies in reconciled balances.
- Acting as a Bank (11%): Holding or transferring funds without an active legal matter.
- Overdrawn Client Ledgers (7%): Payments exceeding client balances.
- Incorrect Postings (9%): Errors in dates, amounts, or matter references.
A Call to Action
Hazlewoods emphasizes the importance of proactive compliance and robust internal controls. Firms are encouraged to review their procedures, ensure timely reconciliations, and maintain clear records. The firm also warns against complacency, citing the Axiom Ince case as a cautionary tale where limited audit oversight led to significant issues.
Source: This blog post is based on Hazlewoods’ original article, SRA Accounts Rules Audit Round-Up, published on Hazlewoods.co.uk.