How Accounting Errors Can Result In An SRA Investigation

Under the SRA Accounts Rules, law firms are required to “have systems and controls in place to ensure compliance with these rules [the SRA rules] and the nature of those systems must be appropriate to the nature and volumes of client transactions dealt with and the amount of client money held or received.”

Keeping up with the administrative duties generated from running a successful, busy practice is difficult enough at the best of times. However, throw in a global pandemic, resulting in staff having to regularly self-isolate or have time off to care for children during school closures, and administration and accounting disciplines can quickly disappear.

Unfortunately, accounting errors, especially involving client monies, can result in a stressful SRA investigation and a possible appearance before the SDT. This is what happened to a sole practitioner with almost 50 years’ experience. In March 2021, it was agreed between the SRA and the Respondent that he should pay £26,000 in fines and costs after he acknowledged a string of accounting errors.

The accounting mistakes included:

  • Overseeing the transfer of £290,000 for a house purchase to the wrong account following a cybercrime incident.
  • Failure to properly investigate or rectify client debit balances of £129,000 across 109 matters and office credit balances of £36,000 across 115 matters, as of the end of August 2019.

The SRA raised a number of allegations in relation to breaches of the SRA Principles and Accounts Rules, including (but not limited to):

  • Causing or permitting a client account shortage to exist, and show as a minimum of £26,448.05 as of 31 August 2019. This was in breach of any or all of:

a) Principle 6 of the SRA Principles 2011 (“the Principles”);
b) Principle 10;
c) Rule 1.2 (a) of the SRA Accounts Rules 2011 (“the Accounts Rules”);
d) Rules 20.1, 20.3 and 20.6 of the Accounts Rules;
e) to the extent applicable from 25 November 2019, Rule 4.1 of the SRA Accounts Rules 2019 (“the 2019 Accounts Rules”).

  • Failing to maintain proper accounting records to ensure compliance with the Accounts Rules. In doing so, he breached or failed to achieve any, or all of:

a) Rule 1.2(e) and/or 1.2(f) of the Accounts Rules;
b) Rules 29.1 and/or 29.2 of the Accounts Rules;
c) Rule 29.9 of the Accounts Rules;
d) Outcomes 7.2 and/or 7.3 of the SRA Code of Conduct 2011 (“the Code of Conduct”);
e) Principle 6.

  • Failing to carry out client account reconciliations as per the requirements of the SRA Accounts Rules 2011, breaching Rule 29.14 of the Accounts Rules.

The Respondent admitted to all of the allegations against him and the matter was resolved by way of an Agreed Outcome.

In considering sentencing, the SDT recognised that the Respondent had a long, unblemished practice history and had fully co-operated with the SRA investigation. He had also taken steps to remedy the breaches. However, the Tribunal stated that the Respondent was entrusted with clients’ monies and he had violated that trust by not looking after it properly. The SRA had advised him on similar matters in 2012/13, however, serious errors continued to occur.

The SDT found the one-off cybercrime incident and the failure to insist on extra authentication steps when receiving instructions as to the payment of property sale proceeds, was “particularly troubling given the critical importance of such steps to counter attempted fraud and criminality.”

Final words

One important element of this case is there was no dishonesty or lack of integrity discovered or alleged in the Respondent’s actions. Had there been, it is likely he may have been struck off.

This case illustrates the importance of having carefully overseen accounting policies and procedures. Those handling client accounts need to receive regular training on SRA Principles and the Accounting Rules. It is also imperative to have a set procedure in place to ensure attempts by cybercriminals to attack large conveyancing transaction payments are recognised and quickly thwarted. Steps include:

  • Getting your clients to provide their bank account details over the phone.
  • Insisting to the client that they should phone to check should they receive an email asking them to transfer money.
  • Have your client send a £1 test transaction before transferring the entire amount.
  • Confirm with the client that the funds have arrived in your account.

If the SRA start an investigation concerning a breach of SRA Principles and/or the Accounting Rules, contact an experienced defence solicitor immediately. This could make all the difference between an investigation swiftly concluding and prosecution being brought.

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We have been helping solicitors and other legal professionals with disciplinary and regulatory advice for 25 years. If you have any questions relating to an SRA investigation or an SDT appearance, please call us on 0151 909 2380 or complete our Free Online Enquiry.