By Karen Edwards, Head of Professional Development at Legal Futures Associate ILFM [1] (The Institute of Legal Finance & Management)
All SRA-regulated law firms in England and Wales (unless exempt) must undergo an annual SRA audit of client accounts, prepared by an external accountant who is a member of one of the chartered accountant bodies, and is a registered auditor.
This audit is a critical process to get right and requires thorough preparation and comprehensive financial management. This guide outlines essential insights for accounts teams to ensure robust compliance and to help audits run smoothly. Further information is available on the SRA website or at ILFM.org.uk
Key compliance areas
Financial record keeping
Financial record keeping extends beyond simple transaction logging, requiring law firms to maintain contemporaneous, accurate, and chronological documentation that demonstrates the precise movement of client funds, including detailed narratives for each transaction, clear audit trails, and robust systems that can reconcile accounts and provide a complete financial history that meets both SRA regulatory requirements and professional standards of financial management.
Firms should ensure that they:
- Maintain accurate and up-to-date financial records
- Implement robust accounting systems compliant with the SRA Accounts Rules
- Ensure comprehensive documentation of all financial transactions
- Retain records for a minimum six-year period as per regulatory requirements
Steps to help prepare the firm
Run an internal financial audit
- Conduct a comprehensive pre-audit internal review
- Reconcile all client office and client’s own accounts
- Verify accuracy of ledgers and transaction records
- Check compliance with client account management protocols
Check documentation management
- Organise all financial documentation systematically
- Prepare clear audit trails
- Ensure accessibility of historic financial records
- Create a comprehensive index of financial documents
Carry out a compliance checklist
- Confirm appropriate use of client funds
- Check detailed records of all financial transactions
- Validate disbursement processes
- Ensure transparency in financial reporting
- Review compliance with the firm’s policies and procedures
Technology and systems
When it comes to technological requirements firms must ensure that they have invested in approved financial management systems. These can provide real-time compliance monitoring, automated risk detection, secure data encryption, seamless audit trail generation, and scalable solutions that can adapt to evolving regulatory requirements while ensuring financial transparency and operational efficiency.
Firms should:
- Utilise approved legal accounting software
- Implement secure digital record-keeping systems
- Ensure robust cybersecurity measures
- Enable comprehensive financial tracking and reporting capabilities
Common pitfalls to avoid
Firms should be aware of several common areas that can cause an issue during the auditing process and ensure they have taken steps to mitigate any risks around:
– Incomplete financial records
– Inadequate transaction documentation
– Delayed reconciliation processes
– Insufficient audit trails
Developing a proactive and inclusive culture of compliance will help ensure that preparation for an audit is done all year round, rather than retrospectively or in a panic before the audit is due. Firms should also offer regular training and updates to staff, in order to stay up to date with regulatory changes and requirements.
If firms adopt a systematic approach and ensure they stay on top of meticulous record-keeping, they should be well-prepared for their audit and able to proceed without complications. Once the audit is completed by the reporting accountant, the report will only need to be sent on to the SRA if it is qualified (i.e.shows a failure to comply with the SRA Accounts rules such that money belonging to clients or third parties is, or has been, or is likely to be placed at risk.
The ILFM provides regular training for legal accounts teams as well as offering a supportive community for sharing best practice and answering any questions that arise on day-to-day issues.
Click here to find out more: https://www.ilfm.org.uk/site/about/information-pack/ [2]