For law firms in England and Wales, compliance with the Solicitors Regulation Authority (SRA) Accounts Rules is a fundamental obligation. These rules govern how firms handle client money, and breaches can lead to regulatory action, reputational damage, and financial penalties.
As the legal sector continues to evolve, with increasing regulatory scrutiny and shifting client expectations, financial directors (FDs) and senior management must stay alert to the key areas that affect how SRA audits are conducted.
Understanding the latest developments, risk areas, and auditor expectations is crucial for maintaining compliance and ensuring client confidence.
The Shift to Outcome-Focused Regulation
One of the most significant changes in recent years has been the SRA’s move towards a more outcome-focused approach. The current Accounts Rules, effective since November 2019, replaced prescriptive, rule-based guidance with a more principles-led framework.
While this shift offers firms some flexibility in how they manage client money, it also places a greater onus on financial directors and partners to exercise sound judgment and demonstrate that their systems and controls effectively safeguard client funds.
This shift means that auditors are no longer checking compliance against a long list of specific requirements but are instead assessing whether a firm’s processes achieve the intended outcomes.
For financial directors, this requires a clear understanding of the rationale behind each control in place, ensuring that policies not only exist but also work effectively in practice. It also means documentation of processes, decision-making, and risk assessments is more important than ever.
The Continued Focus on Client Money Handling
Despite the regulatory changes, the handling of client money remains the primary focus of the SRA Accounts Rules, and of SRA audits. For financial directors, this means ensuring the firm’s systems can accurately segregate client funds from office money, maintain up-to-date client ledgers, and monitor transactions in real time.
Particular attention should be paid to timely banking of client funds, prompt disbursement of monies when appropriate, and ensuring residual balances are dealt with in accordance with the rules.
The SRA remains especially vigilant about firms holding on to client money longer than necessary. Auditors are therefore expected to review not just whether the correct processes are in place but whether they are being consistently applied in day-to-day operations.
Residual Balances – An Ongoing Concern
Residual client balances continue to be a key area of concern for the SRA and, by extension, for auditors. Firms are required to return client money promptly once a matter concludes. Holding onto funds unnecessarily, even in small amounts, is viewed as a breach of the Accounts Rules.
Financial directors must ensure there are clear, active processes for reviewing and returning residual balances on a regular basis. This includes periodic reviews of client ledger accounts and clear escalation procedures when efforts to return funds have been unsuccessful. Auditors will expect to see evidence that residual balances are actively monitored, with a documented trail of actions taken to resolve outstanding amounts.
The Importance of Strong Financial Controls
The effectiveness of a firm’s financial controls is often at the heart of an SRA audit. Auditors are not just looking at the numbers but also at whether the firm has adequate systems in place to detect and prevent breaches.
For financial directors, this means regular internal reviews of processes, training of finance staff on SRA requirements, and ensuring that reconciliations are performed correctly and on time.
Monthly reconciliations of client accounts, bank statements, and client ledgers remain a cornerstone of good financial governance. Mistakes in reconciliations or a failure to investigate discrepancies can be red flags for auditors. Financial directors should lead on setting robust processes for these reconciliations and ensure they are reviewed by senior personnel within the firm.
Transparency, Record-Keeping, and Auditor Access
One of the frequent pitfalls in SRA audits is poor record-keeping and inadequate transparency with auditors. Financial directors need to make sure that records relating to client money are complete, accurate, and readily accessible.
This includes clear documentation of policies and procedures, comprehensive transaction records, and detailed audit trails for any corrective actions taken.
Firms should also be prepared to provide auditors with full access to relevant financial data, systems, and personnel. An open and cooperative approach with auditors not only facilitates the audit process but also demonstrates a commitment to good governance and compliance. Any resistance to auditor access, whether intentional or due to disorganisation, may raise concerns with both auditors and the SRA.
The Impact of Remote Working and Technology on Compliance
The widespread shift to remote and hybrid working models has introduced new risks around the handling of client money and the effectiveness of internal controls. Financial directors must consider how technology is being used to maintain compliance in this new environment.
This includes secure online banking procedures, maintaining control over electronic authorisations, and ensuring that access rights to financial systems are properly managed.
Auditors may now be more attentive to how firms have adapted their financial control frameworks in response to increased remote working. Financial directors should ensure that remote processes, such as digital approvals and remote reconciliations, are just as robust as those conducted in a traditional office setting.
Regulatory Expectations Around Reporting and Breaches
Under the Accounts Rules, firms have an obligation to report material breaches to the SRA. Financial directors need a clear understanding of what constitutes a reportable breach and ensure that there are systems in place to detect, document, and escalate potential issues promptly. Auditors, while independent, may also have an obligation to report serious concerns directly to the SRA.
This highlights the importance of fostering a culture of openness around compliance and error reporting within the firm. It is far better for financial directors to identify and report issues proactively than for them to come to light during the audit or, worse, through client complaints or regulatory investigations.
Final Thoughts – Why Financial Directors Must Take a Proactive Role
SRA audits are no longer about ticking compliance boxes; they are about demonstrating that your law firm has meaningful systems in place to protect client money and manage financial risks.
For financial directors and law firm leaders, this requires proactive engagement with the firm’s financial controls, training, technology systems, and compliance culture.
If your firm is looking for audit support or advisory services on SRA compliance, Williamson & Croft can help.
Our expert team have a deep understanding of both the legal sector and the regulatory landscape, providing practical advice and audit services that protect your firm and your clients.
Contact us today for a confidential discussion about your firm’s SRA audit needs.