Living the Eye Life! – July 2024
Summer has arrived! To be honest, at the time of writing I have absolutely no idea if we are enjoying a hot summer. Or even who won the general election! The last time I checked the Conservatives were trailing by 27 points in the polls so an educated guess would lead me to believe that we are now living under a Labour government with a thumping majority. But what do I know, I didn’t get Brexit right! It’s possible that we are already on to our second Labour Prime Minister. I mean PMs do seem to have the shelf-life of a lettuce these days! But hopefully not. Too much chopping and changing cannot be good for the economy, not least because of the uncertainty that accompanies it. A period of calm has to be a good thing.
The real question for all of us is what impact does a general election have on the legal sector we all work in? I can only base my views on the feedback I have received from the various law firms I talk to up and down the country. For the first half of the year, most of the firms we work with experienced a healthy increase in new instructions, but this was followed by a slowdown in billing, particularly for those firms involved in conveyancing The fee earners are no less busy during this kind of environment as they battle take on new matters. However the knock-on effect in the finance department is that there are considerably less conveyancing completions to process.
Finance departments in law firms are notoriously under resourced so there is a temptation to take a little breather. Alternatively, it is a wonderful opportunity to do some much needed tidying up!
At a recent ILFM conference, ILFM Council Member and Hazelwoods accountant Ian Johnson identified some problem areas that reporting accountants were beginning to see during their year-end audits. One of which was general inactivity with Rent Deposits. The SRA has made it clear to all firms that they should not be holding historic Rent Deposits unless they are providing ongoing regulated legal services (Rule 3.3). A firm’s reporting accountant may look for evidence that attempts have been made to rectify the position in respect of historic leases. The point is, the situation will vary from lease to lease, each one of which should be looked into so that action can be taken if necessary. Find time to take a look at your rent deposits and decide whether they are compliant or whether further action is required.
Which leads nicely on to another point raised by Ian. That is the client account and client convenience. This is another area that can easily end up as a breach of Rule 3.3. Without going into too much detail, I have a very simple rule of thumb approach which is, when the matter has completed – close it down! Any balance on client account should be returned to the client so that the matter can be closed and archived. It doesn’t matter that the client may have another potential matter that may somehow be linked to the original matter. That will a require a new client care letter and a new onboarding and AML process.
This is very similar to the risk faced by all firms making company to company payments where the companies concerned appear to be related but are in fact distinct entities. The risk is that insufficient AML checks are being carried out and that HMRC might take an interest into why company money is being moved around in s solicitors client account.
There are plenty of other areas where a general tidying up exercise may be of value to the COFA and the finance department. Comprehensive breaches registers are must. Providing the reporting accountant with a handwritten notebook that looks like it was recently found down the back of the sofa is probably not going to cut it. They will wish to understand the internal process that the firm goes through to identify breaches and then how they decide whether the breach is reportable or not. This process will need to be documented so that it can be tested and so that any necessary changes to procedures and processes can be implemented.
Charity ledgers not being cleared on a regular basis will also catch the eye of your reporting accountant. They are great way of moving payments to a ledger that will then be used to make payments to charity in accordance with the Accounts Rules – but not if the money sits in client account for another 12 months! Regularly clearing these ledgers means monthly at best or at least quarterly. You can decide what works for you but just make sure you follow you own policy in this area.
Delays in sending bills is another concern and will not help your cash position if cash is an area you are focused on and particularly if you have an overdraft. The same applies to holding office money in client account. If its your money it should be in your office account.
Addressing all of the behaviours described above will massively reduce the chance of you receiving a qualified report from your reporting accountant. They will be focussing more than ever on the usual telltale warning signs which are, residual balances, using client account as a banking facility, unreconciled suspense accounts and a failure to follow your own written accounting policies. And remember the golden rule, if it’s not written down, it cannot be a policy!
For those of you who managed to get away over the summer or who are planning to do so, I hope you have a wonderful time. My eldest is tying the knot in August and has decided that this will be in Italy. Whatever your summer ends up looking like here, I think I am in for a long hot wedding!
David Thorpe
Director – Financial Eye