Accountants must be wary of red flags in SRA guidance

Accountants who have solicitors as clients must be careful of the evolving risks in the regulator’s guidance, Mercia’s Solicitors Conference was warned. The Solicitors Regulation Authority (SRA) last updated its guidance in September 2020 but practical and reporting issues have continued to develop over the past five years. So, accountants must bring a 2025 perspective to the guidance when dealing with solicitors.

Straightforward whistleblowing

Some of the red flags listed in the SRA Accounts Rules are likely to lead to a qualified report, Janet Taylor FCA, Owner of Taylor Mowbray told the conference.

However, she warned that some of the issues listed as red flags were far more serious: for example, actual or suspected fraud or dishonesty by managers of employees (that may impact on the safety of client money).

Taylor says: ‘That’s not a case of three months before we decide whether you qualify it, that’s a straightforward case of whistleblowing. That’s specifically referred to under our terms of engagement. Don’t put that to one side and assume it is not relevant.’

Similarly, accountants should not overlook significant and/or un-replaced shortfalls of client money unless caused by bank error and rectified promptly.

Taylor adds: ‘You have to think about that in terms of what’s significant for the clients. And by clients I don’t mean your client the law firm, I mean their clients. For them, a small amount is going to be significant if it hasn’t been replaced.’

Beware amber changing to red

Taylor says that although it is difficult to argue with the SRA’s list of red flags, practitioners must be careful with those issues listed as amber by the regulator.

She continues: ‘The mood has shifted and the reality has shifted with some of these. The moderate and possibly reportable always were that if you had more than one of these then you probably had to qualify. They’ve always looked like slightly lesser versions of the red flags.’

‘But if you look at issues like longstanding residual balances due to clients, if they’re not doing anything about that then that’s not an amber. In the world in which we operate that has surely shifted on to the red.’

‘Likewise improper use of suspense accounts has become a real hot one for the SRA. What is improper use or overuse? Not having any evidence about what the firm is doing to sort this out, money is just sitting there long term and they haven’t really done anything to address it. Those really are serious and the reality is that this isn’t September 2020 anymore.’

Financial stability to consumer protection

The conference heard from six expert speakers on a range of hot topics for law firms, including financial stability and issues around holding client money.

Sophie Cisler, Head of Risk and Compliance at Jonathon Bray, looked at how the SRA's current focus on consumer protection impacts on accountants while Mercia’s James Hurst focussed on navigating the VAT issues in the sector.

In the final session of the day, Andrew Baker, a Partner in RSM’s accounting and business advisory team, highlighted the need to future proof businesses due to a generational shift in attitudes to careers.

Succession planning and corporate structures

Many of the Millennial and Generation Z lawyers now practising have different priorities to previous generations, according to Baker.

Achieving partnership is no longer the goal of many, he added, particularly due to the risks of funding that ambition with debt. This raises a number of issues for law firms around succession planning, funding outgoing partners and reviewing the corporate structure.

Baker says: ‘People that like me joined their professional service firm as a graduate, qualified, worked towards partnership, became a partner and are still here. But those behaviours are changing and while it would be unfair to label that cohort as one there are certainly a number in those two cohorts who have a different view on careers.’,/p>

‘It is not necessarily about work/life balance. People are wanting to change careers more often; they have shorter horizons. One of the things we have seen is conflict between senior partners, what they expect and anticipate, and the behaviours exhibited by Millennials and Gen Zs in terms of what they want. We’re also seeing those generations think very differently about partnership loans.’