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No single individual should have all that responsibility

Will handing over the regulation of annual accounts to COFAs make firms more vulnerable to indemnity claims, asks Susanna Heley

COFAs may not be terribly happy with the Solicitors Regulation Authority’s latest proposals to do away with the annual accountants’ report in favour of a declaration of compliance from COFAs. The consultation, which opened on 7 May and closes on 18 June is one of a number released by the SRA that propose significant changes to practice.

The SRA has been vocal about its plans to reduce red tape and cut the regulatory burden on firms. The rationale for the proposed abolition of the annual accountants’ report falls squarely within these parameters.

Those solicitors who have butted heads with the SRA over obtaining extensions for report filing may be surprised to learn that it believes said reports have limited value.

Dubious value

In fairness, the reports themselves are cumbersome and of dubious value given that they can be prepared by any accountant permitted to conduct audits; there is no specialist knowledge of solicitors’ accounts rules needed.

The timing of the reports also tends to indicate that the information they contain is significantly out of date. The issue of minor non-compliances has also been a rather vexed question over the years.

It is high time that the reports were looked at from a clean slate perspective. They are not user-friendly. That does not mean the SRA needs to take the drastic step of making independent oversight of compliance with accounts rules wholly optional.

Obviously, it is more cost-effective if firms do not need to instruct external accountants and rely on the view of the COFA, who should report material breaches to the SRA and ensure that the firm maintains proper records to enable adequate oversight of client accounts.

Diligent firms that have proper risk management procedures in place will want the comfort of an independent audit in any event. It’s good practice. At the very least, COFAs will be demanding expert advice before agreeing to put their head on the block.

Abuse target

The problem with an argument based on cost to firms is that the SRA’s proposal is a huge responsibility for the COFA and that such a system, with only optional external oversight, is a clear target for abuse.

Given the potential sanctions if a COFA signs a certificate of compliance and is later found to have made a mistake, the self-preservation instincts of diligent COFAs are likely to negate the argument.

On the other hand, who is likely to catch a dishonest COFA? Putting responsibility for compliance in the hands of one individual is inherently dangerous, particularly if non-COFA principals in firms are content to rely on the word of the COFA. The whole profession will be relying entirely on the capability and integrity of an individual in each firm and we are all fallible.

There are many instances in which solicitors have fallen into error inadvertently either through ignorance, overwork or other pressures. This is without those who are inherently dishonest or succumb to temptation as a result of stress or poor judgment.

Given that the SRA minimum terms deems a shortage on client accounts a trigger to an automatic indemnity insurance claim, it is also likely that insurers will reward those firms that continue to seek external oversight.

It comes as no surprise that about half the annual accountants’ reports submitted to the SRA are qualified. The accounts rules are difficult for firms to comply with all of the time and accountants are understandably concerned about the possibility of any comeback on them if something is missed.

Happily, the SRA states in its consultation that it will be looking again at the accounts rules to see if they are fit for purpose and is inviting views.

The SRA estimates that it spends around £200,000 per year in assessing, storing and generally dealing with accountants’ reports. That is a lot of our money. There are other ways to reduce that cost, which may involve less risk for the profession and less pressure for COFAs.

The SRA is awaiting your suggestions. You have until 18 June.

Susanna Heley

This article was first published by Solicitors Journal and is reproduced by kind permission. You can read the original article by clicking here.


This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.