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Living the Eye Life February 2020

I still can’t believe how dark it is in the mornings! I would have thought that I’d have got used to this by now given how many years I’ve been doing this, but oddly it still comes as a shock every year. In the gloom, we are about to make our travel arrangements for the week ahead. Something seems to be going very wrong with the trains in this country. It is still our preferred method of transport when travelling around the UK visiting law firm clients (being good citizens we watch our carbon-footprint). For the last few months however, my favourite new toy is the “delay, repay, claim” app. For those of us that take an interest in finance, there is nothing more satisfying than seeing some of your hard-earned cash arriving into your bank account because you were left sitting outside Rugby station for an hour waiting for the line to re-open!

It’s Monday morning and we have another busy week ahead. The new Accounts Rules are throwing up a new set of issues to address that might not have been obvious to everyone when they came into force last year. All the advice given at the time was that nothing much has changed. Except that things have changed. This year the regulators expect all firms to return any balance on client account as soon as the matter completes. Previously, common practice was just to write to clients once every twelve months informing them of balances held, whether there was a legitimate ongoing legal matter or just a balance.  Not anymore. The SRA say if it’s not your money and there is no underlying ongoing legal transaction you must return it. This is exactly the thing that firms should be addressing when preparing their Accounting Policy document so that all employees are aware of the firm’s responsibility to treat client money as if it was, well, the client’s money!

I am still struck by how many of these types of issues I encounter in any given week. There have always been, and still are residual balances. This is not the first time I have addressed them in this column.  My own personal experience tells me that they frequently occur because of a whole catalogue of events that might stretch back for years and in some cases decades. Many times, they come about because of a merger or series or mergers and nobody has found the time to address the problem. It can be very hard for a legal cashier to bring this to the attention of the firm’s management so that it is acted upon because in many instances, the fee earners responsible for the residual balance no longer work in the business. And partners and fee earners just do not have the time, or the appetite, to get the problem resolved.

“If it’s not your money, give it back” I patiently tell them, again. “Well it’s not that easy” I hear them scream. “Well it’s very easy to fall foul of the new Accounts Rules and the Code” I tell them, “and what’s more, you should not be operating your client account as a bank account and it’s really not a great defence when you are talking to your regulator to say it’s not that easy”. If there was ever a time for putting new processes in place to ensure residual balances never ever occur again it is now. The only way to demonstrate that you are taking this seriously is to write your process down.

For a variety of reasons, many of the firms we work with are in the process of moving over to a new Accounts package. This is not an area I am happy to give advice in as I work with pretty much all of the well-known systems when conducting compliance reviews. They all have good points and it really depends on the type of work the firm is engaged in and the size of the firm. One thing I do see is an opportunity for the firm to clean up all the old residual balances and suspense accounts and all those old unreconciled differences once and for all. I also see an opportunity to say goodbye to all those zero balances that have yet to be removed from the system and the files sent to archive. If there was ever a good time for the finance department to throw their toys out of the pram, this is it! You may never get another chance.

And then out of the blue, one of those emails arrives in my inbox from a Yorkshire based firm and they are in meltdown. They’ve somehow managed to make a payment from client account to the solicitors on the other side on a commercial conveyancing matter, without checking first to see whether they were in funds. Here we go. How could this of happened?  Well as is common in these situations, the processes that they have in place are only as effective as those individuals that are supposed to be following them. The firm immediately agrees to pay the missing money from office and into client account (and the good news is the missing money arrives the following day). Of course, we will now have to assist them in drafting a serious breach report to the SRA (they are no longer known as material breaches in case you’d forgotten!). Processes will need to be tightened up and certain individuals will be sent away for reprograming. This will all have to be properly reflected in the payment authorisation section of their new Accounting Policy document we are preparing for them.

And if I haven’t made this clear enough, you now really need to get on and write your own Accounts Policy if you haven’t already done so. Not only to address the issues I have already touched on above, but also some of the new things you are required to do under the new rules, such as maintaining a central record of bills and a register of bank accounts. Or some of the things you are not supposed to do, like holding rent deposits. Whilst the days are short and the evenings are long, this is a great thing to get ticked off your list. Who really wants to be writing a new Accounts manual after the clocks have gone forward!