COFAs asked to vouch for management of client accounts

By George Bull (interviewed by Sarah Perry)

Proposals to remove a mandatory requirement for firms to submit an annual accountant’s report to the SRA, and to require Compliance Officers for Finance and Administration (COFAs) to sign a declaration of satisfaction with the firm’s client account management, are the focus of an SRA consultation. The proposals are part of a programme of reforming the SRA’s regulatory regime to reduce unnecessary burdens and provide flexibility to deliver good financial management.

Why is the SRA consulting on the removal of mandatory requirement that firms must submit an annual accountants report to the SRA?

The reasons for this are set out in the consultation document itself. This should be seen in the context of the SRA confirming or modifying aspects of its regulatory approach as it comes to grip with its role as regulator. The SRA Handbook has recently been updated as part of the process of continuous monitoring and updating.

A review of the reporting accountant’s role in respect of client money was recognised as an important task in the early days of the SRA. However, at the time it was felt that the existing rules worked sufficiently well – as a result, the SRA was able to prioritise its resources to deal with other major tasks which it faced as a new regulator. As it is asserting its presence as regulator, and becoming familiar with the issues of the legal sector, it is now able to turn its attention to topics such as the SRA Accounts Rules.

What’s the reasoning behind the plan to require COFAs to sign a declaration they are satisfied that the firm is managing client accounts in accordance with the SRA Accounts Rules?

If the role of the reporting accountant is diminished or eliminated, COFAs will face far greater personal responsibility. While in-house and external support can be used to assist an organisation in ensuring its compliance with the Accounts Rules, the SRA might reasonably believe that the emphasis on personal accountability will improve client money handling.

If these proposals go ahead, what is the likely effect on law firms?

There is a gap between the real-time reporting of material breaches by COFAs, which is currently required by the SRA, and the content of the current independent accountant’s report. The scope of this report is such that it routinely identifies issues which do not represent material breaches but which do represent shortcomings in respect of the application of the Accounts Rules as required by the SRA. In other words, if the level of accountability required by the SRA remains the same, then the removal of the role of independent accountant will place far greater onus on the COFA to identify and remedy issues currently identified by independent accountants. Under the regime being considered by the SRA, the COFA must put systems in place to ensure that he or she is made aware of breaches as they arise. Every individual in a firm who has the slightest dealing with client money must comply with every aspect of the rules at all times.

How will this impact COFAs?

The changes, which on the face of it may represent a modest cost saving in respect of the fees paid to independent accountants, will lay additional burdens of responsibility on many COFAs. They will take on personal responsibility when they sign the declaration to the SRA that all is in order with their client accounts. On the face of it, signing a declaration to that effect is not unreasonable—after all, client money should be safeguarded at all times. If a COFA isn’t comfortable with the new responsibility, then they should not accept the role without changing their firm’s systems to meet SRA requirements.

If these changes are implemented, will law firms potentially need to reconsider who holds the COFA role?

If the law firm has the right systems in place, and everybody in the firm adheres to those systems, then the formal taking-on of responsibility for client money operation by the COFA should not represent an unreasonable step forward. Having said that, changes along the lines contemplated by the SRA do emphasise the importance of having a COFA of appropriate seniority. If the incumbent COFA feels unable to cope with the new regime, then it is far more likely that the firm’s systems need to be changed than that the COFA needs to be changed.

Have you any idea of the general feel in the profession on these changes?

There is no surprise about the changes as such – they have been on the SRA’s “to do list” for a long time. The timing has, however, caught out some firms – many people were expecting that the consultation would not be published for another 6-12 months. While many firms have taken the initial view that few if any major changes will be required to their systems if the role of the independent accountant is scrapped, some tacitly admit that – if the comfort blanket of a genuinely independent accountant’s report is removed – those firms will need to change their systems and ensure compliance at all levels within the firm.

Comments are requested by 18 June 2014.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on Lexis®PSL Practice Compliance.

Filed Under: Practice of Law

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