Ethics guidance

Accountant's report and the exemption to obtain one

Issued on 1 August 2017 | Updated 4 July 2019 | Effective from 25 November 2019

Effective from 25 November 2019

This guidance relates to rules coming into force on the 25 November 2019. The current guidance should continue to be used until that date.

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Status

This guidance is to help you understand your obligations and how to comply with them. We may have regard to it when exercising our regulatory functions.

Who is this guidance for?

This guidance is for all SRA authorised firms, and their staff, that:

  • received or held client money
  • operated a joint account; or
  • operated a client's own account as signatory.

Reporting accountants might also find this guidance helpful.

Purpose of this guidance

The purpose of this guidance is to help firms understand when the exemption to the requirement to obtain an accountant's report will apply and to provide guidance on how to assess whether those criteria have been met.

Obtaining and delivery of accountants' reports

Rule 12.1 of the SRA Accounts Rules requires firms that hold or receive client money to obtain an accountant's report within 6 months of the end of the accounting period to which the report relates. The report should only be delivered to us if it is qualified.

Please note you should always deliver an accountant's report regardless of its qualification if:

  • you are required to under conditions on your practising certificate/firm authorisation, or
  • your firm has ceased to operate as an authorised body and to hold or operate a client account and has been asked to obtain and deliver a final report under rule 12.4.

Exemptions from the requirement to obtain an accountant's report

Any firm which holds or receives client money during an accounting period and all that money is from the Legal Aid Agency will not be required to obtain a report.

Rule 12.2(b) of the SRA Accounts Rules confirms that the exemption will also apply where during the accounting period the average balance on client account does not exceed £10,000 and the maximum balance does not exceed £250,000.

During the accounting period a firm must carry out reconciliations of the statement or passbook balance of the general client account and associated accounts.

These reconciliations must be carried out, as a minimum, at least once every five weeks (rule 8.3).

Based on the multiple reconciliations taken over the accounting period the firm must establish:

  1. the average client money balance (calculated by taking the sum of all reconciliation balances and dividing this by the number of reconciliations), and
  2. the maximum of these reconciliation balances.

If, based on these balances, your firm satisfies both of the exemption criteria, you will not be required to obtain an accountant's report, unless otherwise required under rule 12.4 for example, where you are subject to conditions to deliver a report.

The exemption applies to a single accounting period which could span over 12 months. There may be circumstances where in one calendar year you are exempt but in the second calendar year, the level of client account balances held means that you cannot rely on the exemption. It is your firm's responsibility in all cases to make sure that the rules are complied with and if an accountant's report is required, that the report is obtained.

Note that the exemption will only apply for accounting periods ending from 1 November 2015 onwards. If your last accounting period ended before that date, then you must obtain a report regardless of the amount of client money you held or received.

Example 1

The accounting year for Firm A runs from 1 April 2019 to 31 March 2020. The firm undertakes reconciliations at the end of each calendar month:

Reconciliation numberReconciliation dateClient money balance (including all applicable accounts)
130/04/2019£11,214
231/05/2019£7,487
330/06/2019£9,107
431/07/2019£9,255
531/08/2019£11,394
630/09/2019£9,947
731/10/2019£11,959
830/11/2019£10,053
931/12/2019£8,255
1031/01/2020£4,681
1129/02/2020£11,105
1231/03/2020£7,988
Average balance

Add together the individual reconciliation totals. Total equals £112,445. Divide total by number of reconciliations to obtain average balance. Average equals £112,445 / 12 = £9,370.

Maximum balance

Establish the highest balance from all reconciliations taken. The highest balance from the 12 reconciliations = £11,959.

Test against exemption criteria

Is average balance below £10,000? Yes, average balance = £9,370. Is maximum balance below £250,000? Yes, maximum balance = £11,959.

As both criteria are met the firm is exempt from submitting an accountant's report.

Example 2

The accounting year for Firm B runs from 1 January 2019 to 31 December 2019. The firm undertakes reconciliations once every four weeks (28 days):

Reconciliation numberReconciliation dateClient money balance (including all applicable accounts)
101/01/2019£23,172
229/01/2019£124,891
326/02/2019£18,184
426/03/2019£10,634
523/04/2019£2,686
621/05/2019£2,209
718/06/2019£654
816/07/2019£19,277
913/08/2019£7,260
1010/09/2019£12,016
1108/10/2019£21,391
1205/11/2019£4,121
1303/12/2019£7,107
1431/12/2019£8,347
Average balance

Add together the individual reconciliation totals. Total equals £261,949. Divide total by number of reconciliations to obtain average balance. Average equals £261,949 / 14 = £18,711.

Maximum balance

Establish the highest balance from all reconciliations taken. The highest balance from the 14 reconciliations = £124,891.

Test against exemption criteria

Is average balance below £10,000? No, average balance = £18,711. Is maximum balance below £250,000? Yes, maximum balance = £124,891.

As both criteria have not been met, the exemption does not apply, and an accountant's report must be obtained.

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Further help

If you require further assistance, please contact the Professional Ethics helpline.