Accountants' Reports and Record Retention — SQE1 FLK2 Solicitors Accounts

A firm's accounting period ended on 30 April. Its reporting accountant finished the report in September, well within six months, and it was qualified, so it plainly had to go to the SRA. Through an oversight at the firm nobody sent it until mid-November, a fortnight after the six months ran out. The SRA had not chased for it. Nobody had noticed the date passing. Does the fortnight matter? Yes.

This is Accountants' Reports and Record Retention, the last topic in Solicitors Accounts. Two duties, and both are about proving compliance to somebody else. One looks back over a year and has an independent accountant check it. The other keeps the evidence for six years. Keep our firm and its fortnight in mind. We are coming back to it.

Here is the route. What the report is, who has to obtain one, and who is exempt. Then who may sign it, which is narrower than firms assume. Then what to do when it comes back qualified. And then records: how long, from when, in what state, and how to destroy them.

Start with the shape. Rule 12 is the report. Rule 13 is the records. The report is a backward look at one accounting period, taken by somebody independent. The records are the evidence, which has to survive for six years whether anyone ever asks for it or not. Different rules, different deadlines, and the exam tests them separately.

An accountant's report is an independent examination of your accounting records and your compliance with the SRA Accounts Rules. Not your profit figures. Not your tax computation. Not a statement of financial standing for clients to look at. It answers one question. Has this firm handled client money in accordance with the rules?

Rule 12.1 sets the deadline, and it is one date doing two jobs. The first is that you must obtain the report within six months of the end of the accounting period. So try one. Your accounting period ends on 31 December. By when must you have the report? 30 June. Not the end of January, and not the end of the calendar year.

The second job that date does is delivery. You deliver the report to the SRA only if it is qualified, and then within the same six months. An unqualified report is not sent anywhere. You keep it at the firm. The exceptions are narrow: conditions on your authorisation, or the SRA requiring delivery under rule 12.4.

Which brings back our firm and its fortnight. Obtaining the report in time is no answer to delivering it late. They are two duties sharing one date, and missing either is a compliance failure in its own right, whatever the report actually says. If you can see the deadline coming and you know you will miss it, tell the SRA before it passes rather than after.

Now who is exempt, because plenty of small firms are. Rule 12.2 gives two routes. The first is about size, and it has two limbs, both of which must be met. The average balance on client account during the accounting period was no more than £10,000, and the maximum balance was no more than £250,000. Fail either limb and you are not exempt.

The second route has nothing to do with size. If all the client money the firm held during the period was money from the Legal Aid Agency, the firm is exempt, however large the balances happened to get. A criminal defence practice whose client account was well over £250,000, all of it Legal Aid Agency money, still needs no report.

But be careful what the exemption exempts you from. It is an exemption from obtaining a report. Nothing else. The record-keeping obligations still apply, the five-weekly reconciliations still apply, and the six-year retention still applies. A firm that reads an exemption as a general relaxation has misread it completely.

Who can sign it? Rule 12.5, and it is two limbs, both required. The accountant must be a member of one of the chartered accountancy bodies, and must be, or work for, a registered auditor. Try this one. A chartered accountant, in practice on her own account. She is not a registered auditor and does not work for one, and she will do it for half last year's fee. Can she sign? No. The second limb is the one firms forget.

Now a point worth getting right, because it is often stated wrongly. Rule 12.5 does not contain an independence test. It states the qualification limbs and nothing else. Independence comes from the accountancy bodies' own ethical codes, and from the purpose of the exercise. The report is an outside check, and a check by the people who made the entries is no check at all.

So the practice that writes up your day-to-day bookkeeping, prepares your management accounts and files your VAT returns cannot be your reporting accountant, however external and however qualified it is. It would be reviewing its own work. The same goes for a partner, an employee, or anyone with a financial interest in the firm.

What will the accountant look at? The client ledgers, the reconciliations, the bills, the bank statements, and a sample of transactions, tested against the rules. Not the annual accounts. Not the client-account bank statements on their own. And not a selection of files that the firm has helpfully picked out in advance.

Which leads to the obligation firms break under pressure. You must give the accountant access to all relevant records. Holding back the ledgers for an awkward matter and saying they are not available is itself a breach, and a worse one than whatever you were covering up.

Three possible outcomes. An unqualified opinion, which means full compliance. A qualified opinion, which means the accountant found something that stopped them giving a clean one. And an adverse opinion, the most serious of the three, which is a conclusion that the accounts do not comply. An adverse opinion goes to the SRA and will very likely trigger investigation.

And breaches go into the report whether or not they were cured. Eleven weeks without a reconciliation, and two transfers to office before any bill had been delivered, both put right the moment the accountant raised them. Do they still go in? Yes. The accountant reports what the examination found.

So what do you do with a qualified report? Deliver it, within the six months, as written. You do not ask the accountant to soften the wording and reissue it. You do not hold it back until you have corrected everything, however tempting that is when the corrections will take another three months. Deliver, then fix, then record what you did.

And separate the things that can wait from the thing that cannot. Suggestions about dual authorisation and better documentation can be worked through in due course. Money taken out of client account for costs before a bill was delivered cannot. That goes back into client account immediately, and nothing else in the report has that character.

Now the records. Rule 13.1 is short and it does two things. Store all your accounting records securely. And keep them for at least six years. Everything else in this half of the topic is an application of those two words. Securely, and six years.

Six years from when? From the record itself, not from anything that later happens to the file. So: a client-account receipt and the payment out are recorded on 10 May 2020. The matter stays open, and the file is archived on 10 May 2023. What is the earliest that record may be destroyed? 10 May 2026. Six years from the transaction, not from the archiving.

And it is all of your accounting records, not only the ones about client money. Office-account records are accounting records too. So are the reconciliations and the central record of bills, which are exactly the things firms clear out early to make space in the strongroom.

Six years is a minimum, not a settlement. A record can be caught twice over: by a longer tax requirement, or because it may be needed to answer a claim within a longer limitation period. Where that happens, the longer obligation governs. The SRA figure does not displace another obligation just because you happen to be regulated by the SRA.

Electronic records are fine, and most firms now keep nothing else. But they have to stay usable. Readable, reproducible, and intact. A system that lets any user silently edit a historical ledger entry, leaving no trace that the figure ever changed, does not maintain integrity, however diligent the backups. You need an audit trail showing who changed what, and when.

Two failures worth naming. Records sitting in a proprietary format that none of your current software can open are not retained, they are lost, even though the data technically still exists. And records in a cheap store on the other side of the country, with a twenty working day retrieval time, defeat the point of keeping them. You cannot produce them when the SRA asks.

On backups, the rules prescribe no regime at all. No number of copies, no media, no schedule. Backups are simply how rule 13.1 is achieved electronically. Judge them by that standard: copies you control, stored away from the live system, and tested to make sure they restore. And if your records sit on a supplier's platform, rule 13.1 still binds you, not the supplier.

Last, destruction. Once six years have run, nothing longer applies, and no matter or complaint is live, you may destroy. Securely: shredding or confidential waste, and a real deletion rather than a drag to the recycle bin while the backups still hold copies. And keep a log of what went and when, because a firm that cannot show what it destroyed cannot show it destroyed nothing too early.

One thing is never yours to destroy. Original title deeds and original wills held for a client are the client's property, not the firm's records. However long the six years has run, they go back to the client, or are held to the client's order.

A word on how SQE1 tests this. There is not a single case name in this topic, and there will not be one in the exam. Solicitors Accounts is a rules subject. You get a scenario, five answers, and one instruction: pick the best. What you need are the numbers and the sequence.

If you keep only three. Six months from the end of the accounting period, to obtain the report and to deliver it if it is qualified. Rule 12.5 is two limbs, and the registered auditor limb is the one that gets missed. And six years from the record itself, not from the day the file was closed.

Four traps. One: an unqualified report does not go to the SRA. Firms send clean reports in to prove they are compliant, and that is not what rule 12.1 asks for. Obtain it, read it, keep it.

Two: an exemption from obtaining a report is an exemption from that and from nothing else. Records, reconciliations and retention are all unchanged. And the Legal Aid Agency route does not care how large the balances were.

Three: independence is not in rule 12.5. If a question turns on whether an accountant is qualified to sign, apply the two limbs. If it turns on whether they can report objectively, that is a different question with a different source, and the answer is usually that they wrote up the books.

Four: the six-year clock runs from the record, not from the matter. Not from closing the file, not from archiving it, not from the final bill, and not from the client saying they no longer need it. Find the date of the entry and count from there.

Quick check. A firm that is required to obtain an accountant's report engages an independent reporting accountant, who examines the records and produces an unqualified report. The accountant is satisfied that the firm has complied with the Accounts Rules and has no reservations at all. The firm obtains the report within six months of its accounting period end. A trainee assumes the firm must now send it in to prove its compliance, and asks how to submit it.

What must the firm do with the unqualified report? Three candidate answers. One: submit it to the SRA immediately, because every report a firm obtains must be delivered. Two: keep it at the firm and not deliver it, because only a qualified report has to go. Three: submit it within twelve months, unqualified reports carrying a longer deadline than qualified ones. Pause here if you want a moment.

The answer is two. Rule 12.1 makes you obtain a report within six months. It makes you deliver one to the SRA only where the report is qualified. A clean report gives the SRA nothing to act on, so it stays at the firm, where the accountant's comments can be read and acted on internally.

Why the others fail. Option one is the instinct almost every firm has, that a clean report is something to show the regulator. It is not, and sending it in is not compliance with anything. Option three invents a second deadline. There is one deadline in rule 12.1, and it is six months.

Five things to take away. One: obtain the report within six months of the end of the accounting period, and deliver it to the SRA within that same six months only if it is qualified. Two: the exemption is two limbs on size, or all Legal Aid Agency money, and it exempts you from the report alone.

Three: rule 12.5 is chartered body membership and registered auditor status, both of them, and independence comes from somewhere else entirely. Four: six years, from the record and not from the file, for every accounting record you hold. Five: stored securely means readable, reproducible, access-controlled and retrievable, not merely backed up.

And our firm and its fortnight? The report existed in time and reached the SRA late, and those are two duties, not one. Obtaining is not delivering. That is the end of Solicitors Accounts, and the end of the course.

Practise this topic with exam-style questions at sqe1prep.co.uk. This episode is for education and exam revision only, not legal advice, and we are not affiliated with or endorsed by the SRA or Kaplan.