Proportionate regulation: reporting accountant requirements

Comments from ACCA to the Solicitors Regulation Authority
January 2015

Question 1
Do you agree with the proposal that we should rely more on the professional judgement of the accountant completing the report? Do you see any specific issues or concerns with this approach?

ACCA is of the view that greater reliance should be placed on the professional judgement of the reporting accountant.  This focuses the process on outcomes - helping to ensure that more relevant information reaches the SRA. Reporting accountants are required to be members of specified accountancy bodies and can, therefore, be presumed to be professional and competent to carry out this type of work. The reporting accountants themselves, and their firms, are subject to monitoring (within a robust regulatory framework) by their professional accountancy bodies.

The key to the success of this approach will be in the implementation of a suitable and agreed upon form of reporting.

Question 2
Do you agree with the revised criteria for qualification as reflected in amendments to the format of the accountant's report located at Annex 1?

ACCA agrees broadly with the criteria but believes that the content of the report could be improved.

ACCA is of the view that, if our suggestion to include on the form a statement / declaration by the COFA (see question 7) is implemented, paragraph 2 of section two may be removed.

We recommend that, in paragraph 3 of that section, there should be reference to the International Standard on Related Services (ISRS) 4400 - Engagements to perform agreed-upon procedures regarding financial information. We are conscious of the fact that the exercise of professional judgement should not extend to an expression of opinion within the accountant's report.  Such an expansion of the scope of the reporting accountant's work would result in costs being incurred which would be disproportionate to the objectives of the accountant's report.

The same paragraph should also make clear that the procedures carried out have been planned and performed with due regard for the relevant guidance issued by the professional accountancy bodies (see question 6). This would reduce the need for the bullet points to be so detailed, and encourage the exercise of judgement in performing the agreed upon procedures. The SRA could then consider amending, or removing altogether, some of the bullet points in the draft form.  For example:

• bullet point one would appear to be unnecessary, given the general requirement of the final bullet point;
• in bullet point two it is not clear what is meant by 'effective' and, as management oversight is simply a part of a robust system of controls, which would be covered by the final bullet point, bullet point two could also be removed;
• in bullet point four it is not clear what 'on a timely basis' would constitute. This should be explained in the guidance referred to above, and so these words should be deleted from the form;
• in bullet point five it is not clear what is meant by 'proper', and so ACCA suggests that the word 'proper' should be deleted;
• with regard to the segregation of duties (eighth bullet point), greater clarity would be achieved by the inclusion of the words 'appropriate to the size of the firm';
• we recommend that the wording of the ninth bullet point should be 'a robust
• system of controls to provide an adequate level of protection against fraud and error', as this would allow the exercise of judgement, and avoid the use of the word 'ensure'.

Question 3
Do you have any specific comments on the proposed revisions to the format of the accountant's report in particular do you think: that the wording covers the main areas accountants should be reporting on? that the level of detail we suggest is given by the accountant in the report if deficiencies are found is right?

The overall objective of the report - the protection of client monies - needs to be made absolutely clear and the focus should be on whether or not there are robust systems in place for recording receipts and payments and that these systems are effective.  Our response to question 2 above is relevant in this respect.

With regard to paragraph 4 of the form, ACCA believes it is likely that the reporting accountant will select the second statement whenever any deficiencies are found, regardless of how trivial those deficiencies are. This would be contrary to the objectives of this consultation process. We believe that three options should be provided on the form, in order to allow for cases where breaches are discovered, but following further sampling, they are found to be trivial or non-systemic and corrected in good time. The third option (under which it would be necessary to 'qualify' the report) should refer to serious breaches. Guidance produced by the professional accountancy bodies would explain to the reporting accountant the circumstances relevant to each of the three options (see question 6).

ACCA would be pleased to provide further input into the development of the form if required by the SRA.

Question 4
Do you think that the revised approach will have an impact on fees charged by accountants to do the work?

There will be costs to the accountants of understanding the new approach and, possibly, developing / acquiring new systems. The extent to which these costs are passed on to clients will depend largely on the number of solicitor clients retained by an accountancy practice. Inevitably, some firms will choose not to continue to offer this type of work. Whenever there is a significant reduction in the number of providers in the market, higher fees are possible as a result.

In addition, although the less prescriptive approach will enhance effectiveness, it is likely that more senior staff will be required to exercise the professional judgement necessary.

It is ACCA's view that, although in the long term the impact on fees is likely to be negligible, there is the potential for an initial increase in fees charged.  However, this is in the context of the benefits gained through a proportionate approach to regulation. This is due to a smaller population of firms requiring accountants' reports, a risk based approach to reporting and enhanced value being derived from the reporting requirement.

Question 5
Do you consider that the revised approach will have any impact on attitudes to compliance by COFAs/the firms?

Any impact is likely to be positive.  ACCA believes that the suggested approach - which is more outcome focused - will lead to enhanced engagement of reporting accountants with COFAs. This, in turn, should encourage greater engagement with the accounting requirements by both COFAs and firms.

Question 6
Do you think that the proposed changes should be supported by separate guidance to aid the accountants in the work they should be undertaking?

ACCA believes that guidance for reporting accountants would be necessary in order to relate the procedures performed to the requirements of the SRA Accounts Rules, and to provide clarity regarding the reporting requirements.  In particular, accountants (and the SRA) require a clear understanding of how to deal with deficiencies, in order to appropriately restrict the number of qualified reports.  The relevant accountancy bodies should lead in the production of such guidance.  As previously advised, ACCA would be happy to discuss this further with the SRA.

Question 7
Do you consider that it would be helpful to require a declaration of compliance by the firm with their obligation to obtain/deliver a report in accordance with the Accounts Rules as some stakeholders have suggested to us? If you do it would be helpful if you could explain why.

ACCA suggests that it would be helpful to require an annual declaration from firms to confirm to the SRA that the firm has obtained an accountant's report, unless the firm is exempt. This would focus the attention of the COFA and firm on their responsibilities for the protection of client monies.

If this annual declaration was to be independent of the Accountant's Report Form itself, we would also recommend that there should be a further declaration on that form (perhaps in section one), which would be completed by the firm, and would include:

• confirmation that all relevant documents concerning the client accounts have been made available to the reporting accountant;
• confirmation that the SRA Accounts Rules have been complied with in all respects; and
• approval of the contents of sections one and three of the form.

This declaration should be signed by the COFA, on behalf of the firm, before the reporting accountant signs the relevant section of the form.

Question 8
Do you think that the existing obligations on reporting accountants to notify us immediately of significant concerns during the course of preparation of their reports should be tightened or enhanced in any way?

The obligation of immediate notification where the accountant considers there is a risk of loss of client money is a very important safeguard. The SRA Accounts Rules must be very clear concerning both the circumstances under which immediate notification would be required, and the meaning of 'immediate' with regard to the time frame for reporting. The firm's understanding that this is a duty of the reporting accountant is also a useful safeguard, and so this responsibility may be usefully included in the reporting accountant's engagement letter.

Question 9
Do you think we should be exploring the option to require reporting accountants to deliver reports to us as opposed to leaving the obligation on the firms?

ACCA has two opposing concerns.  Firstly, as the SRA will no longer be receiving unqualified reports from firms, there is the potential for 'qualified' reports to remain undisclosed (a fact acknowledged by the SRA in paragraph 26 of the consultation document).  However, if the requirement was for the accountant to submit the report to the SRA, this might be seen as imposing an unreasonable responsibility on the accountant (ie to ensure the report is submitted on time), and would also establish a direct relationship between the accountant and the SRA, which would be a fundamental change.

ACCA believes that the obligation to deliver 'qualified' accountants' reports to the SRA should remain with the firm.  However, in order to protect from a failure to deliver a 'qualified' report, ACCA proposes that the reporting accountant should also submit a copy of the report where it is 'qualified'. As the number of 'qualified' reports is expected to be much lower in future, ACCA considers that dual reporting would neither be disproportionately burdensome for accountants nor for the SRA.

Question 10
Do you agree with the proposal to introduce risk-based criteria that will exempt firms with a certain profile from the requirement to obtain and deliver an accountant’s report?

Subject to appropriate criteria being identified, ACCA supports this proposal, as it represents a further move towards proportionate regulation.  ACCA has expressed its willingness to engage with the SRA further on this subject.

Question 11
Do you agree that our proposed criteria capture a lower level of risk to client monies? Are there any concerns that these criteria pose an unacceptable level of risk to client monies? Or do you think we have missed other criteria?

ACCA agrees that the average aggregate balance on a firm's client accounts would be a suitable measure of risk. The information would be readily available and the figure easy to determine.  A concern, however, is that firms may be inclined to manipulate data such that the average balance appears to remain below the threshold. In addition, this basis of risk assessment may present an incentive for firms to defer business which involves receiving client monies.

It is not clear whether or how the SRA envisages this being monitored, although we allude to this in our response to question 7 concerning declarations of compliance.

The SRA has provided two examples of the possible number of firms that would be exempt from the obligation to obtain a report, based on the size of the average balance being either £10,000 or £50,000.  Paragraph 36 of the consultation document suggests that £10,000 is the SRA' preferred option, although the reason for this is not given.

ACCA believes that there is a range of criteria that could be used to assess risk. However, we would caution that firms conducting certain types of activity should never be eligible for exemption. This would include, for example, firms carrying out estate and trustee work, where the client may have no sight of the transactions being handled by the firm.

Question 12
Do you have any suggestions for themes or specific areas or issues we should consider in our forthcoming review of the Accounts Rules as a whole?

ACCA has discussed this with the SRA in the past and would be happy to engage further with the SRA in the light of its analysis and feedback on the current consultation responses.