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Changes to approach on law firm accountants’ reports, deliver a greater focus on issues of genuine concern

The number of accountants’ reports being submitted for review to us has fallen by two-thirds since changes to the rules were introduced.

These changes allow accountants to apply greater professional judgement in reviewing risks to client money. This reduction has coincided with a trebling of the number of reports we investigate more fully because the reasons for qualifying the reports focus more specifically on genuine risks to client money.

Under the Account Rules, firms must submit ‘qualified’ accounts to us. Qualified accounts are where a potential issue or rule breach has been identified.

Between June and November 2017, 923 qualified reports were submitted, down from 2,797 over the same period in 2015. Of these submissions, 121 reports were further investigated, compared to just 38 two years earlier. The highly technical and specific nature of the current Accounts Rules contributes to the vast majority of breaches occurring.

In November 2015 we made changes following responses to a consultation to allow accountants to apply greater professional judgement. They no longer necessarily had to qualify reports due to minor breaches. Instead they could consider whether a breach constituted a genuine risk to client money.

Although in most cases the investigation of qualified reports does not result in formal action being required, six cases did lead to regulatory action in 2016. Under tour Handbook reforms – due to be implemented from 2019 onwards – new Accounts Rules are set to be introduced. These focus on keeping client money safe and removing much of the prescriptive detail from the rules, which in turn should further reduce the number of accounts needing to be qualified.

Paul Philip, Chief Executive of the SRA, said: “These findings are encouraging and show that this approach is meeting our expectations. We are ensuring a sharp focus on public protection, while reducing unnecessary bureaucracy for firms.”

As well as being easier to understand and providing a greater focus on genuine issues of risk, these changes should also reduce the regulatory burden for most firms associated with compiling their annual reports and maintaining public protections.

We have published a report on what has happened since the change in the rules. This useful hints and tips on preparing accountants’ reports, including illustrative examples. Contents include:

  • Examples of common technical rule breaches, which in isolation do not necessarily require accounts to be qualified
  • Examples of reports featuring the type of information we require
  • Common issues drawn from reports currently received, including some firms sending them to the SRA’s historic address in Redditch.

Read the report