The SRA Accounts Rules run to a handful of pages — a deliberate contrast with the 52-rule regime they replaced in 2019 — and they contain almost no detail about how a law firm should keep its books. That is the point, and it is also the difficulty: the rules state principles, and the firm has to demonstrate it has met them. The obligations that matter are short enough to quote and serious enough that breaching them is a regulatory matter, not a bookkeeping one.
The four obligations everything else hangs from
Strip the regime back and it rests on a small number of duties:
- Keep client money separate. Rule 4.1 requires client money to be kept separate from money belonging to the authorised body. Not tracked separately — kept separately;
- Pay it in promptly. Under rule 2.3 client money must be paid promptly into a client account, subject to narrow exceptions including Legal Aid Agency payments and alternative arrangements agreed in writing with the client;
- Return it promptly. Rule 2.5 requires client money to be returned to the client or third party as soon as there is no longer any proper reason to hold it;
- Account for it accurately, with records that show at any time what is held for each client and that reconcile to the bank.
The word doing most of the work is "promptly". It is not defined, and the SRA has been consistent that the absence of a deadline is not an invitation to set your own. Residual balances left on the ledger after a matter concludes — the single most common finding in accountants' reports — are a breach of rule 2.5 from the moment there stopped being a proper reason to hold the money, not from some later date when someone noticed.
The accountant's report, and who does not need one
A firm that has held or received client money during an accounting period must obtain an accountant's report within six months of the end of that period. The report is not filed automatically: only a qualified report — one revealing a failure to comply such that client or third-party money is, has been, or is likely to be placed at risk — must be delivered to the SRA, and that delivery is also due within six months of the period end.
Two exemptions exist under rule 12.2. A firm need not obtain a report where all the client money it held or received in the period was from the Legal Aid Agency, or where the client money it held did not exceed an average of £10,000 and a maximum of £250,000 (or foreign currency equivalents). Both limbs of the second exemption must be satisfied — an average comfortably under £10,000 does not help a firm that peaked at £400,000 on a single completion, and firms with occasional conveyancing or probate work cross that maximum more often than they expect. Two refinements matter. The measurement is taken from the bank statement or passbook balances obtained under rule 8.2, across client accounts and any joint accounts and clients' own accounts you operate — not from an intraday high point in the ledger. And the exemption is not absolute: the SRA can require a report on reasonable notice where it considers it in the public interest, or where a firm stops operating a client account.
The reporting accountant must be independent and appropriately qualified, and the report is made on the SRA's own form. Its value to the firm is diagnostic rather than ceremonial: a competent reporting accountant finds the residual balances, the client-to-office transfer timing, and the reconciliation gaps while they are still fixable.
Where firms actually go wrong
The findings repeat across firms of every size:
- Residual balances — small sums left on completed matters, sometimes for years, with no attempt to trace the client or apply for authority to pay them away;
- Late or unexplained reconciliations. The rule requires a reconciliation of the bank statement balance to the cash book and the client ledger total at least every five weeks, signed off by the COFA or a manager; a monthly cycle is the usual way of meeting it, not the requirement itself. Either way it is only useful if the differences are investigated and cleared; a reconciliation with a persistent unexplained balance is a record of a problem, not a control;
- Transferring costs before billing. Money moved from client to office account without a bill or written notification of costs is a breach, however certain the firm is that the fee is earned;
- Using the client account as a banking facility — holding or passing funds unconnected with an underlying legal transaction. This attracts the most severe regulatory consequences of anything on this list, and "the client asked us to" is not a defence;
- Making good breaches late. Shortfalls must be replaced promptly and from the firm's own money, not corrected at the year end when the accountant arrives;
- Weak supervision of the COFA role. The compliance officer for finance and administration must have genuine oversight and the authority to act, not a title and a signature.
Third-party managed accounts and the shrinking client account
Rule 11 permits a firm to use a third-party managed account instead of holding client money itself, provided the client is properly informed and the arrangement is appropriate. A growing number of firms — particularly newer practices without conveyancing volumes — have taken the route and stopped holding client money altogether, which removes the accountant's report obligation and most of the risk that goes with it. It is not free: the firm still owes duties around informing clients and monitoring the arrangement, and it must be satisfied the provider is suitable.
For firms that continue to hold client money, the practical discipline is unglamorous and entirely within reach: reconciliations at least every five weeks — monthly in practice — signed off by the COFA or a manager, a standing report of balances on closed matters, a written policy on when costs may be transferred, and a COFA who sees the exceptions rather than the summary. Firms that do those four things rarely produce a qualified report.
Acumon acts as reporting accountant for law firms through SRA legal audit work, and supports practices more broadly as accountants for solicitors. If your accounting period ended recently, the six-month clock on the report is already running — and the findings are considerably cheaper to fix before it is signed.