Residual client balances can be a cashier’s nightmare, whether inherited from a predecessor or left due to time constraints.
Unfortunately, unless action is taken the number of residual balances on client account will simply increase and it will become more difficult to rectify them.
The SRA’s consultation on the Accounts Rules states that there will be no requirement for the annual accountants report to be submitted to them unless it is qualified. The SRA consider un-rectified residual balances on client account material and will therefore trigger a qualified report.
The time to act on residual balances in client account is now!
It is estimated that the changes to the SRA Accounts Rules will be implemented in May 2018. Most year-ends are March and April, meaning that there is approximately one year to get a grip of the matter balance listing!
Below is a step by step guide on how to efficiently get back in touch with old balances that have been plaguing your accounts for too long!
Your cashier will need to:
1. Produce a matter listing at the next period-end & sort it by last-movement-date. Filter the report and remove any matter showing which has had movement within 6 months or 3 months for very small firms.
2. This will leave a core list of matters which have not moved for 6 or 3 months and will require investigation.
3. Produce client ledgers for each matter on the list and analyse them. There are many reasons why a matter will have a residual balance on client account. Examples of which are:
- Genuine balance left over at the end of the case that is due to the client.
- Costs bill which was raised at the time of the work but not entered onto the accounts and therefore the funds are due to the firm. NOTE: It must be proven that the bill is genuine and that non-entry was a genuine mistake. Bills raised in-order-to clear up client funds into office account is known as “sweeping up” and is strictly prohibited.
- Error made on statements of account or completion statements resulting in funds remaining which are due to the client.
- Third party payments and disbursements which have not been paid out and are overdue.
- Mis-postings resulting in the ledger not balancing off correctly.
4. Upon analysis, full notes need to be made for the file, determining the course of action so that an audit trail can be followed come the year-end audit. Accurate documentation of each corrective transaction must be kept to prove that the residual balance has been moved to the correct place.
5. If the residual client balance is due to the client and not the firm or a third-party then the following steps must be taken:
- Attempt to return the money to the client. If this is an old client, steps may need to be taken to locate them. Notes of each attempt must be taken and kept in a central register.
- If reasonable attempts to locate have been undertaken and the client still cannot be found, then there are two options.
PAY TO CHARITY: If the balance is under £500.00 without SRA authorisation.
ASK THE SRA: If the balance is over £500.00 the SRA will need to grant authority for the firm to pay the money to a charity. The SRA will require written evidence that adequate attempts have been made to return the funds to the rightful owner. The form to use for each instance can be found here: www.sra.org.uk/documents/rules/sar/sar-rule-20-1-k-application.doc
6. Full documentation must be kept of all residual client balance movements.
Once the above has been undertaken, we recommend that each month residual balance checks are undertaken. We recommend that any balance which has not moved in three months is investigated and dealt with. The sooner this is done, the easier it is to return funds to their rightful owner. It also means that the firm has a tight grip over its client funds, satisfied that only monies that should reside in client account are those held.
The SRA guidance can be found here: www.sra.org.uk/solicitors/code-of-conduct/guidance/guidance/Withdrawal-of-residual-client-balances.page
The Law Factory regularly performs client matter listing analyses for our clients. We scrutinise ageing balances to make sure that all matters are current and accurate. Please do not hesitate to contact The Law Factory if the above is of any concern and you require assistance.
Alex Simons MAAT ILFM
Outsourced Accounts & New Business Manager
The Law Factory LLP
21st March 2017