Are your client bank account reconciliations fully compliant?

Within these was an update from the SRA which included a discussion surrounding qualified Accounting Reports. Surprisingly it was confirmed that the majority of those qualified reports received over the last 12 months, reported issues arising from within the client funds reconciliation process. The pandemic will no doubt have played its part in some of these reported scenarios but there have been no concessions in this important process, and it remains a vital control to safeguard client funds.

The total client funds bank reconciliation process is required to be undertaken at least every 5 weeks per SRA Accounts Rules 8.3 and is one of most important key controls in assisting practices in maintaining accurate client accounting records and safeguarding clients’ funds. Whilst there have been numerus SRA Accounts Rules changes over the years and a new rule book introduced on the 25 November 2019, little has changed on the client fund reconciliation requirements since its introduction.

In this article we provide a guide into the client funds reconciliation process to assist practices and their finance teams. The following is not exhaustive but may be a useful “work programme” and checklist to ensure those involved in this process are comfortable with the relevant steps being adopted.

1. Is the client reconciliation a complete 3 way reconciliation?

Is there part of the reconciliation which compares the total of client ledger balances from a report generated by the practice management system (1) which is compared with the bank reconciliation balance i.e. the bank statement adjusted for outstanding payments and receipts (2) which is finally compared with the trial balance figure for the client account (3).

Many reconciliations only compare items (1) and (2) but ignore item (3) meaning the process is not fully compliant.

2. Review of outstanding payments for cheques older than 3 months

Outstanding cheques over 3 months can be an indication of a number of problem areas including fraud, teeming and lading of client funds and also instances where client money in incorrectly being held on the office account.

Reviewing old outstanding payments to investigate the reason why the amount has not cleared is an important task for someone reviewing a reconciliation. Often the outcome will identify a breach of the SAR which can be corrected or prompt action with a fee earner to follow up the issue to prevent a breach arising in the future.

3. Review outstanding receipts which have not cleared promptly

Receipts that are genuinely banked clear quickly. Instances where this is not happening suggest some underlying issue that may require investigating.

For example it may be that delays are happening between monies being received and actually banked; it could in some instances represent misappropriation of other client funds on other matters which are being covered temporarily by amounts anticipated from other clients. It could also be evidence of fee earners taking risks with other client’s money by covering transactions before amounts from the client concerned have actually been received.

4. Review outstanding bank transfers (in and out) which have not cleared promptly

Bank transfers genuinely completed rarely take more than a day to complete (save around weekends). Bank transfers that take notably longer than this can be indicative of transactions which have not actually taken place or ones where the transaction date differs to the date recorded in the client ledgers.

Again; investigating such instances is important because it can indicate a range of problems from poor matter management, underlying breaches of the SAR or more significantly fraud and misappropriation of client funds.

5. Agreement of bank statement balance to the bank reconciliation

Simple checks of integrity to ensure the bank statement balance(s) being used in the reconciliation process is the actual balance per the bank statement and that they have been extracted at the same dates.

6. Cast of bank reconciliation

A physical check to ensure the reconciliation has not been manipulated in any way in transition as output from the Practice Management system to the final form reconciliation

So; a check to ensure that the bank statement balance less outstanding payments listed plus outstanding lodgements agrees with the reconciled bank balance shown on the bank reconciliation statement.

7. Agreement of the reconciled bank balance to matter listing report

Physical checks that the amounts recorded on the reconciliation for the adjusted bank balance does actually agree to the “hard copy” or “electronic copy” that is retained of the client matter listing.

It may also be appropriate from time to time to undertake a casting check of such matter listing reports to ensure there is not intermediate adjustments being made from the electronic output of the practice.

8. Agreement of matter listing report to trial balance

Physical checks that the amounts recorded on the reconciliation summary do actually agree to the “hard copy” or “electronic copy” that is retained of the client matter listing and that this agrees to the trial balance.

Ensure that the matter balance and the trial balance reports have been extracted from the Practice Management System at the same date as the reconciliation statement is being prepared.

9. Review the client matter listing

A specific review of the matter listing for unusual items such as:-

• Overdrawn client ledgers (Debt balances on client ledgers)

• Client money on office ledgers (Credit balances on office ledgers)

• Suspense matters / general ledgers listed

• Matters in the name of the firm

• Matters in the name of partners

The above are some items in the matter listing which should alert the reviewer to potential areas of risk from a SAR breach viewpoint and potential misappropriation of client funds.

10. Review the reconciliation statement for unusual items

By definition it is difficult to be precise here but examples of what might be defined as unusual could include the following:-

• Adjusting items needed to make the reconciliation report balance

• Very large outstanding payments that do not clear very shortly after the balance sheet dates

These types of instances require further enquiries and can point to more significant problems in the reconciliation.

11. Review the office account reconciliation

Strictly the office reconciliation warrants a review in its own right. In the context of client funds however it is important to look at the office account reconciliation for a number of reasons.

A good example to illustrate this point is outstanding payments on office account; these can indicate for example instances where money has been transferred from client to office to cover expenses that the firm has not actually incurred on a clients’ behalf.

The firm’s COFA should insist on having the office reconciliation to review at the same time as reviewing the client funds reconciliation as part of their requirements.

12. Clients’ own accounts

Where clients’ own bank accounts are operated within the practice have these been included with the three-way client funds reconciliation subject to all of the above processes? In the event this is not possible has the SRA concession in this area been suitably adopted and has any reference been made to the concessionary application referred to with the reconciliation documentation?

It has been a challenging environment over the last 18 months and has arguably been too easy for the processes and review of the client funds reconciliation to be undertaken on a light touch basis. It is however a fundamental control in protecting client funds and allowing the COFA, finance teams and the Managers to meet their obligations to safeguard client funds.

^{*The views expressed are the author’s and not ICAEW}

^{This publication is produced by Francis Clark LLP for information only and is not intended to constitute professional advice. Specific professional advice should be obtained before acting on any of the information contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of its production), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.}