Regulatory and Compliance Training & Consultancy

SRA Guidance for COFAs

June 2016

For many individuals who currently fulfill the role of Compliance Officer for Finance and Administration (COFA), whether within a traditional solicitors‘ firm or an Alternative Business Structure (ABS), one of the greatest frustrations involved with the role has been the lack of any meaningful guidance explaining the Solicitors Regulation Authority’s (SRA) expectations of them.

Perhaps inadvertently, the SRA has given what is possibly the clearest indication yet of what they are looking for from those acting as a COFA. We describe this as ‘inadvertent’, because the guidance comes from a document entitled, ‘SRA’s Guidance to Reporting Accountants and firms on planning and completion of the annual Accountant‘s Reports, under Rule 32 of the SRA Accounts Rules 2011’. This document accompanied the introduction of version 15 of the SRA Accounts Rules 2011 and is designed to assist Reporting Accountants to decide when they should be qualifying their Accountant's Report.

This guidance document covers general SRA Accounts Rules 2011 compliance issues as well as guidance which is specific to the role of the COFA.

What are the SRA's Expectations of a COFA?

Bank reconciliations and control of client bank accounts

Let us start with the basics. So far as general compliance with the SAR Accounts Rules 2011 is concerned, the SRA have specified that in a firm that is being well run, either the COFA or another appropriate person within the firm will, more than once a month, perform a review of SRA Accounts Rules compliance which will include a review of:

• client bank account reconciliations;
• office bank account reconciliations;
• strong>three-way reconciliation of the cash book, client ledger *listing and bank accounts; and
• breaches register.

The SRA state that they would expect to see that evidence exists of challenge by the COFA and details of the actions taken to improve the control environment.

Appendix Three of the SRA Accounts Rules 2011 provides a further insight into the SRA‘s expectations in relation to the review of client bank account reconciliations. This document, entitled, ’SRA Guidelines - Accounting Procedures and Systems', advises that, in relation to the control of client accounts:

The firm should operate a system to ensure that accurate reconciliations of the client accounts are carried out at least every five weeks. In particular, it should ensure that:

• a full list of client ledger balances is produced. Any debit balances should be listed, fully investigated and rectified immediately. The total of any debit balances cannot be “netted off” against the total of credit balances;
• a full list of unpresented cheques is produced;
• a list of outstanding lodgements is produced;
• formal statements are produced reconciling the client account cash book balances, aggregate client ledger balances and the client bank accounts. All unresolved differences must be investigated and, where appropriate, corrective action taken;
• a manager or the Compliance Officer for Finance and Administration checks the reconciliation statement and any corrective action, and ensures that enquiries are made into any unusual or apparently unsatisfactory items or still unresolved matters.

We think every COFA should be fully conversant with the content of Appendix Three to SRA Accounts Rules 2011 and meeting what are, in effect, the SRA's minimum expectations. However, our experience from running our COFA Masterclass training course suggests this is far from the case!

Accounting system and internal controls

The SRA‘s expectation is that, in a well-run firm, all client and office transactions are posted to the firm’s accounting system by the end of the next working day. The firm would, at all times, be able to account to clients for client money held.

The SRA has always been against the use of suspense accounts but they do recognise that in certain situations the use of a suspense account is necessary. However, in their guidance, the SRA state that, in a well-run firm, where suspense accounts are used, suspense account transactions are usually no more than 5 working days old. For an average firm, transactions posted to a suspense ledger would normally be no more than 30 working days' old.

The COFA, or another appropriate individual within the firm, performs a review annually, or as appropriate, of the client money control environment and, where necessary, takes action to improve processes. Additionally, the COFA should undertake a detailed annual review of the training requirements of the staff (both finance staff and legal professionals) and should make arrangements for appropriate training to be provided as required. We offer a range of highly relvant public courses on the SRA Accounts Rules 2011 and the role of COFA across the country as well as bespoke in-house training courses for firms.

If it is not the COFA who performs these tasks, there should be evidence of reporting to and review by the COFA.

Client debit and office credit balances

In a well-run firm, the internal controls in operation are such that debit balances on the client ledger simply are not allowed to exist. A listing of credit balances on the office ledgers is reviewed at least weekly and each credit balance is investigated, fully understood and action taken where necessary to remove client funds which are being held incorrectly in office account.

In a firm with adequate procedures, debit balances on client ledgers are reviewed at least weekly and necessary action taken to remove the debit balance. A listing of credit balances on the office ledger is reviewed at least monthly and each credit balance is investigated, fully understood and action taken where necessary to remove client funds which are being held incorrectly in office account.

Residual client ledger balances

The SRA suggest that in a well-run firm, any monies held on a client ledger at the completion of the matter will be returned to the client, thus, the presence of residual client balances at any one time will be rare.

In a firm with adequate procedures, residual client balances are returned to clients, although, this can take up to 90 days. Residual client balances do exist at any one time; however, the finance team are aware of all of these and are in the process of returning the funds or are dealing with them in accordance with Rules 20.1 (k) and/or Rule 20.2 of the SRA Accounts Rules 2011.

Have you read our very popular guidance document on dealing with residual client ledger balances? Would you like to know how you can solve your residual balance problems with minimal effort and, potentially, at no cost? If the answer is ‘yes’, read about our residual balance clearance service.

Method of withdrawals from client bank account

The guidance issued by the SRA underlines the requirement under Rule 21 of the SRA Accounts Rules 2011 that a formal client account withdrawals process exists. In a well-run firm, this will be fully documented and adhered to. In an average firm, the process exists and is adhered to, but is not formally documented. In both cases, withdrawals can only be processed once the proper authorisation has been obtained and, whilst electronic authorities are permitted, these are only acceptable when using a secure IT approval process - email approval is not considered by the SRA to be secure.

Conclusion

The ‘SRA’s Guidance to Reporting Accountants and firms on planning and completion of the annual Accountant‘s Reports, under Rule 32 of the SRA Accounts Rules 2011’, has provided a useful insight in to what it is the SRA are expecting from COFA's in terms of compliance with the SRA Accounts Rules 2011.

For further information about our COLP/COFA Support Service or for information about the training we can provide to support your firm please contact Richard Lane on 0330 223 5346 or contact us by e-mail.

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