SRA Consultation: Reporting Accountant

Transcription

1 SRA Consultation: Reporting Accountant The Law Society response 18 June The Law Society. All rights reserved.

2 1. This is the Law Society s response to the SRA s consultation on whether the requirement for firms to have and submit an accountant s report should be abolished. The Society believes that the SRA should continue to require some form of independent reporting on solicitors accounts. In summary, the Law Society s views are: The vast majority of compliance officers for finance and administration (COFAs) will need to assure themselves of the firm s compliance through an external review before making the required declaration, meaning any savings for the majority of the profession are limited; There is significant scope for a review of the Accounts Rules and this might lead to the reduction of the burden on businesses and in the number of qualified reports; The current requirement is the only independent evidence available to the SRA about a firm s honesty and the state of its accounts; The requirement may well provide a significant deterrent to dishonesty and an incentive to organise a firm properly; Rather than simply removing this obligation, it would be preferable if the SRA could consider developing a more efficient solution, for example online, to reduce the cost of providing the information; The existence of the report provides assurance to clients and other stakeholders the impression given will be that the regulatory regime governing solicitors will be significantly weaker with its removal. This undermines the regulatory objective of encouraging an independent, strong, diverse and effective legal profession. 2. For these reasons we believe that: A form of independent review should be kept; The Accounts Rules should be simplified to limit the number of qualified reports (by, for example, requiring accountants to report systemic breaches only); and The SRA should explore options for making the report more relevant and userfriendly. 3. We are particularly concerned that the SRA may retain the power to require some firms to submit accountants reports by way of a condition on the practising certificate. Conditions can have serious adverse consequences for firms both in terms of adverse publicity and their ability to secure instructions from lenders, professional indemnity insurance and accreditations. Furthermore, it may suggest that the SRA regards such firms as particularly risky or as giving rise to concern. Since, as we understand it, some reports may be required simply because a firm is new or for some other entirely innocent reason, the SRA should find another way of imposing such requirements. 1. Do you agree with the removal of the mandatory requirement that all firms holding client money must submit an annual accountant s report? 4. We recognise that the requirement to submit an accountant s report places a financial burden on firms. However, the accountant s review of a firm s client accounts provides an important external review. The SRA notes that very few accountants reports submitted lead to a formal investigation into a firm. However, what cannot be quantified is the importance of them as a regulatory tool, both in terms of deterring dishonesty and in preventing poor accounting practices. The requirement to have an annual review of 1

3 accounts acts as incentive to ensure that records are kept up to date and in order. This effect cannot be underestimated. While firms may have good intentions to maintain systems, the absence of a requirement for an annual review, together with pressures of work may lead to solicitors falling behind on accounts records. This can have disastrous consequences for clients, the firm and ultimately for the reputation of the profession. We would also note that the SRA frequently identifies firms facing difficulties by the absence or late submission of an accountant s report in itself. The loss of this useful indicator does not appear to be reflected in the SRA s analysis. 5. Currently, a high proportion of accountants reports are qualified. This is in part due to the complexity of the Solicitors Accounts Rules (SARs) which have remained unchanged despite the significant changes made to other areas of solicitors regulation. We would welcome a review of these rules to make them simpler and easier for solicitors to comply with. This would have the effect of reducing the burden on solicitors, making minor breaches of the rules less likely and lowering the percentage of reports that are qualified. 6. That the SRA is consulting on this indicates that they do not find accountants reports, in many cases, a vital source of regulatory information. However, the consultation paper does not indicate what other sources of information are more useful and how they will identify the firms with accounting irregularities. While only a small number of firms might be identified via the accountant s report, their identification may well save money in the longer term and limit consumer harm. Although the number of firms identified by this means are small, these are serious cases of failure and it would have been useful for the SRA to explain how it will identify such firms in future. Part 3 of the Regulators Code requires that regulators should base their regulatory activities on risk. There is limited evidence that the SRA have considered the risks in relation to retaining or removing the requirement to submit an accountant s report. 7. The SRA may still make it a condition of practice that an accountant s report be submitted. It is not clear from the consultation whether conditions will be applied to certain types of firm e.g. those undertaking a certain type of work or of a particular size or to firms on an individual basis. Any condition on an authorisation of a firm (regardless of the reason for its application) can create difficulties for a firm in retaining its accreditations, obtaining PII and remaining on panels. 2. Do you agree with the proposed amendment to the role of the Compliance Officer for Finance and Administration? 8. The COFA s declaration is far more wide-ranging than that of a reporting accountant and requires them to declare that the accounts are being managed in accordance with the SARs. COFAs are already required to ensure a firm takes all reasonable steps to comply with the SARs. However, this declaration goes a step further and requires them to confirm that the SARs are being complied with across the firm. For firms that undertake more than a small number of transactions involving client money, there is likely to be a continuing need for an audit to enable the COFA to make such a declaration with any confidence. This may make the anticipated savings from the proposal more limited than expected. 9. Given the obligations under the Authorisation Rules for the COFA to report material breaches it is not clear what additional protection any declaration will achieve. 2

4 10. The SRA makes no mention of the options available for those who feel unable to make such a declaration. Given the high level of qualified accountants reports, it seems likely that a significant number of COFAs will be unable to confirm that they have fully complied with the SARs over the year. It is unclear how the SRA will deal with reports of minor breaches or the cost implications of doing so. 11. The role of COFA has changed substantially from what was first envisaged by the SRA, with COFAs being required to consider issues such as financial stability and now being required to make a wide-ranging declaration about compliance. Many COFAs were appointed when the nature of the role was much more limited and are employees of firms rather than managers. This could create an environment in which some may be put under pressure into making a declaration without being able to fully verify compliance. 12. The SRA proposes to introduce this change in October. However, this may cause issues for firms where the COFA would want an external review before making a declaration. Normally accountants reports are undertaken in the months after PC renewal (because of the six months firms are given to submit their report). There may not be capacity in the accountancy market to provide a substantial number of reviews of client accounts in the run up to renewal and costs may be higher. 3. Do you agree with the proposed changes to the SRA Account Rules (attached in Annex 1)? 13. See comments above. 4. Do you have (or are you aware of) any evidence, analysis, or views that will assist us in completing an impact assessment on these proposals? 14. It is disappointing that this consultation has been published without any attempt at an impact assessment. This leaves many unanswered questions regarding the benefits of accountants reports and the costs. As noted above, we recognise that the numbers of firms identified by this means are small. However, it is not clear what the outcomes are for these firms and whether further shortfalls on client funds are prevented. Nor are any figures provided for the number of reports the SRA receives from accountants regarding material breaches or shortfalls on client accounts. 15. We are particularly concerned about the impact on those firms who are required to continue to submit an accountant s report. As noted above, this will be viewed as a sanction by both clients and other stakeholders and may affect the firm s ability to join panels, obtain indemnity insurance and gain accreditation. 16. There has also been no consideration as to whether others may continue to require an accountant s report e.g. PII providers, lenders and accreditation schemes. If this were the case, any benefit would be significantly smaller than the proposals suggest. 17. It is important that the SRA considers the full impact of its proposals on different types of firm and, in particular, on how the proposals will affect those with protected characteristics. 3

5 18. The consultation also fails to explore other options such as: Using the accountant's report to collect data that might be more relevant to the SRA; Creating an online report that would enable the SRA to extract information more readily and at less cost; A more flexible approach to the report which would allow firms to tailor the audit to more fully suit their needs. 4