It seems highly unlikely now that everyone working in this space isn’t very aware of the Legal Services Board’s report into the events leading up to the SRA’s intervention into Axiom Ince Ltd, published on 21 October 2024.

Having said that, perhaps wading through all 70 plus pages may have felt like a task too far for some?

There have of course been numerous commentaries in the legal press, highlighted in this article are the key points for both the law firm and the reporting accountant specifically in relation to the current SRA Accounts Rules.

While anything Accounts Rules related affects both the law firm and their Reporting Accountant (RA), some issues sit more with one than the other.

The report concludes that the reactive nature of the SRA’s inspections of law firms is inadequate.

• It recommends a move a more proactive inspection regime
• Inspections could based upon factors such as: a firm’s risk profile; qualified accountant’s reports; changes in an approved role holder or type of work; recent mergers or acquisitions
• The SRA said recently at the ICAEW Solicitors Conference that proactive visits now form part of their regulatory processes
• Firms need to be aware that they may be subject to such a review at any point

The report comments directly on the risk attached to changes made in 2015, requiring only qualified Accountant’s Reports to be filed. Many RAs will be unable to refrain from a cry of ‘we told you so’ to the SRA on this one. The concern that some firms may avoid filing a qualified report or obtaining one altogether, since this failure would not be apparent, has been to an extent borne out.

• The LSB recommends a reversal of the changes made in 2015 and that either:
• all reports should be filed with the SRA or
• qualified reports should be filed in full and otherwise the law firm should confirm to the SRA they have obtained and Accountant’s Report in accordance with the rules
• Many RAs would in all likelihood ‘vote’ for further ‘checks and balances’ here. For example:
• a requirement (box) for the AR1 form to actually be signed by the RA;
• if the SRA opted just for confirmation of an unqualified report having been done, this should be signed by both the law firm and the RA
• Additionally, the report proposes that the regulator considers if there ought to be a requirement for periodic changes to a firm’s RA – every three years is given as an example. This is linked to the need for the RA to be properly independent, although the report comments that this might only be considered necessary for higher risk law firms.

In this regard, the report looks more at what the LSB considers the SRA should be/have been doing, rather than recommending particular changes for the RA to implement. However, these will inevitably impact both what would be considered best practice for RAs in the work they carry out as well as expectations of their reporting of breaches.

• Obtaining direct bank confirmation of client account balances was not part of the SRA’s own standard review procedures. This was recommended and has been implemented by them.
• What about RAs? Many had dispensed with obtaining these confirmations in all but higher risk assignments once there was no longer a specific requirement to do so (from 2015). In the main this was due to widespread experience of poor quality, incomplete and late confirmations from banks. However RAs will need to consider:
• If this is a key recommendation that the SRA have, can RAs routinely justify not obtaining these?
• Should RAs revert back to the position pre 2015 changes and, even if not mandatory, make it best practice to obtain in all cases again?
• Is there a way of addressing the issues of poor quality/lateness that have dogged these confirmations in the past and (some will say) continue to do so?
• Finally, the report recommends a review/update of the SRA’s Guidance to Reporting Accountants (now over four years old), in respect both the of nature and type of work they may be undertaking and the nature of what constitutes a reportable breach via a qualified report

All of the above is, of course, only pertinent for as long as the legal profession continues to receive and hold client money in order to facilitate regulated activities on behalf of their clients.

To make a determination on that particular point the SRA have launched the next round of their consumer protection review, specifically in relation to the holding of client money by law firms. The consultation is open for you to give the SRA your views until 21 February 2025 and we will take a further look at this in the next edition of the newsletter.