Solicitors' Accounts rules. Effecting independent investigation
20 May 1997
Although relatively few solicitors actually default on their responsibilities with regard to clients' money, the few that do create a disproportionately large number of problems for the Law Society and for the Compensation and Indemnity Funds.
The Law Society views the Reporting Accountant as the legal profession's front-line defence against those who, deliberately or otherwise, breach the Solicitors' Accounts Rules (SAR).
Changes to the Accountants Report Rules, which will affect reports issued on or after 1 September 1998, aim to give further guidance and increased responsibilities to Reporting Accountants. The six-month deadline for filing the report means that the revised rules can affect financial years which commence on or after 1 March 1997.
So how will the changes to the new rules affect those in practice?
The Letter of Engagement, which sets out the terms and conditions of the firm's relationship with its Reporting Accountant, will change under the new rules.
It must include an acknowledgement to the Reporting Accountant from the solicitor that: "you may, and are encouraged to report directly to the Law Society without prior reference to this firm should you, during the course of carrying out work in preparation of the Accountants Report, discover evidence of theft or fraud affecting clients money or information which is likely to be of material significance in determining whether any solicitor is a fit and proper person to hold clients money".
This effectively places Reporting Accountants under an obligation to report directly to the Law Society if they believe in all good faith that there is cause for concern, even if it later transpires that they were mistaken.
Unfortunately, fraud and theft are not always blatantly obvious and the first warning signs are often ambiguous.
The new provisions require Reporting Accountants to exercise a high degree of judgement as to the point at which a case should be reported direct without alerting the solicitor first.
Provisions will be made to ensure that Reporting Accountants give a neutral and independent report. They will be required to supply information which will help the Law Society identify circumstances where it might be difficult to give an independent report.
The information submitted will include details of whether any partner, principal, director or employee of the accountancy practice:
is related to the solicitor;
maintains client account books;
places substantial reliance on referrals of work;
is a client or former client; or
is aware of any other relevant information.
Many of the above can quite plainly be seen to jeopardise independence, and there are situations in which they will be difficult to implement in practice.
For example, a large firm of accountants which acts for a number of solicitors may have many staff who will undoubtedly have had personal work, such as conveyancing or wills work, carried out by family solicitors who are also clients of the firm.
Law Society Guidelines for Procedures and Systems for Accounting for Clients' Money have also been introduced to act as a checklist to help firms comply with the SAR.
Although it is assumed that most firms will meet the majority of the specifications, the new rules for the first time include the requirement for the accountant to note "any substantial departures from the guidelines discovered during the course of carrying out work in preparation of the report".
While detailed checks to ensure compliance with the guidelines are not required, the phrase "substantial departures" may lead to considerable debate over which matters should be reported.
For example, areas such as the transfer to a new accounting system or a firm's policies and procedures in respect of computerised systems, may trigger differences of opinion between accountant and solicitor.
In addition, the guidelines include the requirement for the firm to operate "a system which will promptly identify situations which may lead to the payment of deposit interest to clients".
The deposit interest rules have previously fallen outside the Accountant's Report so this may be the first time that the accountant has had to address this particular issue with a solicitor client.
If non-compliance is discovered during the course of work on the report, and the report is delivered after 1 September 1998, accountants will be obliged to inform the Law Society.
An early review of solicitor's current systems, and one which is tailored to meet their particular needs, may ensure that they have no embarrassing problems with the guidelines when the new form of report comes to be filed.
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