The risk of you appearing before the Solicitors Disciplinary Tribunal (SDT) may be greater than you think. Here’s why :
In the period 1st May 2011 to 30th April 2012, of all the allegations substantiated at the Solicitors Disciplinary Tribunal (SDT) 34% related to breaches of the Solicitors’ Accounts Rules (SAR). A further 5% related to the improper use of client money. Further allegations related to failures to file an annual accountant’s report.
The most serious SAR allegations heard by the SDT involve those where there is a shortfall on client account. Perhaps surprisingly, these can occur quite innocently e.g. where you and your bookkeepers fail to spot errors.
Errors may not be flagged up in monthly reconciliations either as the error could be duplicated in the client ledger, or as happens, because you fail to understand the bookkeeper’s reconciliations.
If you see terms such as ‘unreconciled items’ or ‘suspense account’ in the reconciliations there could well be a problem. If so, these should be investigated immediately and may justify a short-term payment into client account to protect client funds from a potential breach.
In a small practice all partners will be expected to have seen the monthly reconciliations and to satisfy themselves that the firm’s books of account are being properly written up.
The typical response from principals
Regularly defending solicitors before the SDT, time and time again we hear similar complaints from solicitors, ‘my bookkeeper never raised any issues’, ‘we had a clear s.34 report’, ‘there was confusion transferring to new accounts software’, or just plainly, ‘I had no idea’.
Rule 6 of the SAR imposes responsibility for compliance on all principals in a firm. Rule 7 imposes a duty on all principals as well as the person causing the breach to remedy promptly upon discovery.
The obligation on you to comply with SAR is a matter of ‘strict liability’. No matter how innocent the error, a disciplinary finding will be made against anyone found to have breached the SAR.
Even salaried partners, who may not have management function, will be guilty of misconduct when a breach of the SAR takes place.
If allegations are proven, the SDT could impose a reprimand, fine (usually anything up to £25,000), suspend you from practise or strike you off the roll. It may also fine the entity. You will also likely have to pay the SRA’s legal costs which could be anything from £8,000 to £50,000. It is also likely that you will be bound to inform your professional indemnity insurer. The consequence could mean an increased premium the following year, or you could find that your firm is uninsurable.
The increased risk
With the Code of Conduct 2011 having introduced the requirement for solicitors to self-report material breaches, the requirement of the COLP and COFA to note or report breaches alongside the duties of a Reporting Accountant each year, the risk of principals being investigated for an innocent breach of the rules is at an all-time high.
What can you do?
The good news is that there are a number of steps you can take to reduce the risks for you and your firm:
- Most importantly, ensure you have good accounts software. Software with an integrated bookkeeping service will reduce the risk of the rogue bookkeeper that goes unnoticed.
- If hiring in-house, take proper references on your choice of bookkeeper and supervise them appropriately;
- Ensure bookkeeper enquiries are given the priority they deserve;
- Ensure partnership responsibilities are clearly defined by partnership agreement, COLP and COFA agreements or even by memoranda;
- Ensure that adequate time is given in partnership meetings to inspect monthly reconciliations;
- Ensure that all fee earners (and your bookkeepers) are adequately trained in SAR; and
- Ensure you have systems to investigate longstanding debit and credit balances.
From time to time issues will arise. Disciplinary proceedings can be avoided when issues are remedied quickly. Ensure that you seek external expert assistance before it’s too late.