Background
On 21 October 2024, an independent review of the regulatory events leading up to the SRA's intervention in Axiom Ince ("the Axiom Report") was published.
The Axiom Report was primarily focussed on the apparent failings of the SRA in not investigating and intervening in Axiom earlier than it did. These issues have received a great deal of media coverage, and discussion within the legal fraternity of how the SRA goes about its business.
However, what may be overlooked in the media furore is that some of the Axiom Report recommendations could have implications for accountants who prepare SRA Accountants’ Reports and potentially their insurers.
There are two recommendations in particular that are of interest, if adopted.
1. A return to all firms filing their annual Accountants' Reports with the SRA?
Under the current Solicitors Accounts Rules ("SAR"), law firms must obtain the Accountants’ Report, but they are not required to file this with the SRA unless the Accountant's Report is "qualified". In this context, "qualified" means the Reporting Accountant has identified a problem with the law firm not complying with the SAR, to the extent that client monies might be at risk.
The Axiom Report notes that the rules on filing relaxed in 2015. Prior to this, firms were always required to file their Accountant's Reports with the SRA regardless of any qualification. The pre-2015 rules contained much more detailed and prescriptive rules on what the Reporting Accountant was required to do, including tests to undertake.
In 2018, the SRA reported that between June 2012 to December 2013, of around 7,500 law firms holding client money, more than 50 percent of Accountants’ Reports filed (approximately 3,750) were qualified. However, of these, less than one percent (around 38) were deemed serious enough for the SRA to consider further investigation. So, in an effort to avoid being deluged in Accountants’ Reports flagging only minor issues, the SAR reporting requirements for both law firms and the stipulations for Reporting Accountants were changed.
The Axiom Report seems to suggest that the relaxation of the SAR reporting rules went too far and potentially contributed to the Axiom debacle. The problem identified in the Axiom Report is not that the accountants were not preparing their reports competently but rather troubled law firms were not asking their accountants to prepare the requisite report at all. Since the accountants are not required to pro-actively inform the SRA of this, the law firm's breach goes unnoticed and unrecorded. The SRA know law firms do this, because in many cases where they have intervened, they have subsequently discovered that no Accountants’ Report has been obtained by the relevant law firm, sometimes for many years beforehand.1
The Axiom Report recommends reverting to the annual filing of Accountants’ Reports. This would mean a failure to obtain and file a report would be a red flag on an SRA system. If the SRA accept this proposal, there will be a number of law firms that will need to obtain Accountant’s Reports and get their house in order. It follows that accountants in the sector will receive more requests for Accountants’ Reports, and the task will undoubtedly be more challenging as the Reporting Accountants will review documentation suggesting their solicitor client has been facing difficulties.
2. Rotation of Accountants firms every 3 years?
The other recommendation2 that could impact the industry is that the Axiom Report recommends that Reporting Accountants change on a regular basis, and suggests it be done every three years. This is presumably to avoid overfamiliarity between the law firm and the Reporting Accountant. The Axiom Report notes that Axiom had the same Reporting Accountant since 2009, when the firm was very small.
Compulsory rotation of accountancy firms is not a new concept. Major UK companies are generally required to change their auditors every 10 years. The idea behind it is to avoid an auditor and its client from becoming overfamiliar with each other's processes and procedures, leading to a possible loss of objectivity and/or diligence.
The proposal that the rotation be every three years could be extremely far-reaching. Law firms often commission their own financial, management and/or LLP accounts from the same accountants who also prepare their Accountants’ Reports for reasons of efficiency and practicality. Such a change might lead law firms to regularly look at rotating their overall accountants.
What next?
The LSB is now consulting on whether it should impose directions on the SRA as a consequence of the identified failings in the Axiom Report. The outcome of that consultation is awaited.
While the SRA have stated that there is much in the Axiom Report that they disagree with, they say, "We also agree more will be needed in future to check firms are complying with our Accounts Rules." The SRA has also commented that more radical solutions, like stopping law firms holding client money altogether, is something it is prepared to look at.
So it seems possible, if not probable, that some change will happen in this area in the medium term.
Conclusion
The first recommendation, requiring firms to file Accountant’s Reports annually, if adopted, will lead to a flurry of activity amongst solicitors' firms and their accountants as the many firms who have not filed reports seek to rectify the issue.
We may also see cases where a Reporting Accountant prepares a "clean" Accountant's Report for a law firm, which subsequently collapses with allegations of client money being misappropriated. It will be hard for the Reporting Accountant to deny it owes the SRA a duty in circumstances where it prepares a report that it knows will be sent to the regulator for the purposes of it deciding whether to take active steps to protect the public. The accountant firm itself will be under the spotlight on whether it has properly reviewed the controls and systems in place within the law firm in order to prepare a thorough Accountants’ Report, which will be relevant to the accountant's insurers.
[1] Para 265 of the Axiom Report
[2] Para 363 of the Axiom Report
