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Earlier this year I was one of two speakers at a series of roadshows run by the Institute of Chartered Accountants in England and Wales, presenting to more than 300 Reporting Accountants in London, Birmingham, Bristol, Manchester and York.
My section of the roadshows gave a refresher on the Solicitors’ Account Rules, considered the fundamental principles behind the Rules, explained the most common breaches that we come across from our audit work at Hazlewoods, and looked at the recent changes and developments to the Rules themselves. We have covered all of these changes in our recent Legal Focuses.
The other speaker in the roadshows was Mike Calvert, Head of Forensic Investigation for the Solicitors Regulation Authority.
Mike is responsible for the detection and investigation of misconduct, breaches of all professional obligations and dishonesty within the legal profession. It is Mike and his team that look at and consider every qualified Accountant’s Report that is submitted to the SRA.
Mike had a lot of interesting things to say, and I thought you might like to hear about some of them.
1. Qualified Accountant’s Reports
Each year the SRA receives around 3,600 qualified Accountant’s Reports, out of a total of 9,000 or so, i.e. about 40% overall. Mike believes that this figure should be much higher than this, given the levels of precision required by the SAR.
Last year, only 28 qualified Reports resulted in a visit from Forensic Investigations, mainly due to the following:
- many qualifying breaches are considered by the SRA to be trivial in nature (note that the SRA’s definition of trivial is not necessarily the same as the definition used by Reporting Accountants).
- Qualified Accountant’s Reports can provide reassurance to the SRA that corrective action is already being taken, or that risks of misconduct and dishonesty are low.
It is important to distinguish visits from Forensic Investigations from visits from the Practice Standards Unit. The role of the Practice Standards Unit is to improve standards of practice in the profession through the promotion of client care and practice excellence, whereas Forensic Investigators visit firms and audit potential evidence of the misuse of client money, serious misconduct or malpractice, dishonesty, fraud, money laundering, etc.
2. Forensic Investigations visits
Each year the SRA receives around 18,000 complaints against solicitors. In addition, the SRA collects 3,000 – 4,000 pieces of ‘intelligence’ about solicitors not related to complaints.
The Forensic Investigations Team perform a risk assessment, based on intelligence, complaints and other information they have gathered about a practice, and use this to identify priority cases.
Very little notice (only 3 – 5 days) of a FI visit will often be given, and the date is almost always non-negotiable. There is no requirement for a Reporting Accountant or internal accountant to be present, or even for all partners to be onsite.
Reasons are never given for a visit by FI, so as to safeguard the SRA’s sources of information and so as not to alert a defaulting principal or employee to conceal or compound his or her misappropriations.
The SRA is, however, considering changes to this, so that in future they may be able to provide a reason for a visit in some circumstances.
Last year the FI team made around 400 visits to legal practices across the country. Approximately 70% of these resulted in a critical report or disciplinary action.
3. Legal Services Act 2007
As reported in our Winter 2008 Legal Focus, the Legal Services Act 2007 provides for two new forms of ownership in legal practices: legal disciplinary practices (LDPs effective date 31 March 2009) and alternative business structures (ABSs effective date likely to be 20 February 2013).
In addition, the Act gives the SRA a number of new powers:
- a requirement for all practices to provide the SRA with more detailed accounting information.
- enhanced intervention powers, with no need to give advance notice.
- a proposed power to charge practices for the cost of any forensic investigation.
- Reporting Accountants are now required to make an immediate report to the SRA if they discover evidence of fraud or theft in relation to client or trust money (previously we were only ‘encouraged’ to do so).
4. Client Money Fraud
Mortgage fraud continues to be rife, with an increasing number of solicitors becoming involved in corrupt relationships involving facilitation. Whilst the overall number is very low in percentage terms, Mike noted that a growing proportion of legal professionals under investigation are found to be the perpetrators of the frauds.
The SRA is also seeing an increase in the numbers of solicitors being “groomed”, with a bank of wills being drawn in their favour, and a rise in the number of generic scams, where solicitors have a hidden interest in a separate business which adds no value to a client’s matter, but is used to procure a product or work and to generate cash flows for the solicitor.
The amounts involved in some of these frauds are quite astonishing.
5. Secret Profits
We have covered this topic several times in our previous Legal Focuses. To recap, the SRA has been looking very closely at practices that recharge telegraphic transfer fees to their clients at a higher amount than the actual cost they pay to their bank, mainly in conveyancing transactions, to check that the client is aware of what the practice is charging for.
The issue here is purely down to the practice’s contract terms with clients. Where it is made clear that the charge is not a disbursement, but an additional profit cost, there will not be a problem. But, please do make sure that every single piece of correspondence with clients or potential clients spells this out, including the initial fee estimate communication, any meeting notes, and of course your engagement terms, website, adverts and invoices.
If you do not do this, or use the word ‘disbursement’ when you are charging the client more than you are paying your bank, the SRA will view this as the practice making a ‘secret profit’ from its clients, and therefore as an inherent deception on the client (their words not ours). As reported in our last Legal Focus, the SRA has begun coming down very hard on practices that are found to have fallen foul of the above.
Where practices have been penalised for this, a common argument has been that recharging TT fees at a profit is very common amongst legal practices, and therefore for the SRA to single out a particular practice is unfair. Mike acknowledged that only a very small proportion of practices had been targeted for this, but went on to say that this was purely down to the fact that his team is not large enough to visit all practices. If he could, Mike noted that he would like to send his investigators into far more practices, focusing solely on this one issue. Be warned.
If you would like more information about any of the points mentioned in this article, or are concerned that you may not be doing enough to satisfy the SRA in any area, please do get in touch with me on 01242 237661 or email andrew.harris@hazlewoods.co.uk.
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