SRA Accounts Rules: A Guide for Accountants Acting for Law Firms

If your firm acts for solicitors, the SRA Accounts Rules are part of your professional life — whether you are the reporting accountant signing the AR1, the bookkeeper running a legal cashier function, or the practice accountant advising on systems. The current rules are shorter and more principles-based than their predecessors, but the responsibilities they place on accountants are, if anything, sharper.

What the SRA Accounts Rules are

The Solicitors Regulation Authority Accounts Rules govern how law firms in England and Wales handle client money — money held on behalf of clients or third parties in the course of regulated services. The current rules (in force since November 2019) replaced a long prescriptive rulebook with 13 principles-based rules, putting the onus on firms to design systems that keep client money safe.

The core requirements accountants check

• Separation — client money must be held in a client account, separate from the firm's own money, with "client" in the account name.
• Prompt banking — client money must be paid promptly into a client account, with narrow exceptions.
• Use for proper purpose only — client money may only be used for the matter it was received for; client account must never go overdrawn on a client ledger.
• No banking facility — the client account must not be used as a banking service for clients; payments must relate to an underlying legal transaction. This is one of the most enforced provisions.
• Systems and reconciliations — firms must keep accurate, contemporaneous ledgers and perform five-weekly bank reconciliations of client accounts, signed off by a manager or the COFA.
• Interest — firms must account to clients for a fair sum of interest on client money held.
• Withdrawal of costs — money for costs becomes office money only once a bill or written notification has been issued.

The reporting accountant's role

Firms that hold or receive client money must obtain an accountant's report (AR1) within six months of the end of each accounting period — unless they qualify for the small-balances exemption (broadly: average client balances not exceeding £10,000 and a maximum of £250,000 in the period, or client money limited to legal aid payments).

The report must be prepared by an accountant who is a member of one of the chartered bodies and whose firm is registered as an auditor. Crucially, the AR1 is only submitted to the SRA if qualified — the reporting accountant's professional judgement on whether breaches are material to the safety of client money is the heart of the engagement.

What a qualification looks like

Judgement is exercised against the risk to client money, considering factors such as: significant or unreplaced shortfalls on client account, systematic failures in reconciliations, use of the client account as a banking facility, and weaknesses in the control environment that leave money exposed. Trivial, promptly corrected administrative breaches do not normally trigger qualification — persistent or structural ones do.

Common breach patterns worth knowing

• Residual balances left on completed matters — small sums, big cumulative compliance failure.
• Client-to-client transfers without proper authority or documentation.
• Reconciliation gaps — done late, not reviewed, or differences carried unexplained for months.
• Office money parked in client account (or vice versa) "temporarily".
• Banking-facility breaches — moving funds through client account with no underlying legal work, a money-laundering red flag as well as a rules breach. The discipline here overlaps directly with client due diligence obligations.

Practical advice for accountants serving law firms

• Agree the engagement scope clearly — AR1 work is not an audit, and the letter should say so.
• Test the five-weekly reconciliation cycle first; it is the single best indicator of control health.
• Review the firm's residual-balance policy and its actual ledger tail.
• Check how the COFA evidences oversight — sign-offs, breach registers, escalation.
• Document the qualification decision tree applied, whatever the conclusion.

Frequently Asked Questions

Does every law firm need an accountant's report?

Every firm that holds or receives client money must obtain one within six months of period end, unless it meets the small-balances exemption. Only qualified reports are submitted to the SRA.

Is the AR1 an audit?

No. It is a specific assurance engagement on compliance with the Accounts Rules as they affect client money — narrower than a statutory audit, but with its own professional requirements.

How often must client account reconciliations be performed?

At least every five weeks, and they must be signed off by a manager or the firm's COFA. In practice most well-run firms reconcile monthly or more frequently.

Do the rules apply to Scottish or Irish solicitors?

No — Scotland (Law Society of Scotland) and Ireland (Law Society of Ireland, under the Solicitors Accounts Regulations) have their own regimes with similar principles but different detail and reporting deadlines.

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