Question of Ethics
Interest earned on general client account
I am the COFA for my firm. We opened a general client account with a building society earlier this year, but we have now discovered that the building society is crediting the interest earned on the client account to that account, rather than to our office account. I raised this with the building society, but they say that due to their computer software the interest earned on the account must be credited to that account and the software cannot be altered.
It has been suggested to me that the interest can be transferred immediately it has gone into the client account to the office account. However, I am not sure that this avoids a breach of the rules. What is the correct position?
You are right to be concerned. Rule 12.7(b) of the SRA Accounts Rules 2011 states that interest in respect of a general client account is office money and must be paid into the office account. If the computer software cannot be altered, then there will be an ongoing breach of rule 12.7(b), notwithstanding that you immediately transfer the monies out of client account.
This is a material breach and, as such, you will have to report it to the SRA as soon as reasonably practicable (for what constitutes a 'material' breach, see guidance note (x) to rule 8, SRA Authorisation Rules 2011. Moreover, if picked up by your reporting accountant, it is likely to lead to your accountant's report being qualified; it cannot be described as a trivial breach bearing in mind that it is a deliberate act and not a clerical or book-keeping error (see rule 44, guidance note (vi)).
We will expect your firm to take immediate action to prevent this situation from arising again. You may wish to contact the building society's head office, if you have not already done so, to discuss what is required by the rules; for example, the society may be able to offer another type of client account which would meet our requirements. However, unless the problem can be resolved speedily, you will have to move the monies to a client account at another bank or building society.