Inactive Matters in SRA Accounts Rules

As a Reviewing Accountant, or auditor as we are commonly referred to, one of the tests that we always undertake during our SRA Accounts Rules review work is to check for inactive balances. The SRA have had residual balances on their high risk agenda for many years, and it looks unlikely to fall away due to the related issues of banking facilities that have recently hit the SRA’s worry list.

SRA Accounts Rules

Under Rule 2.5 of the SRA Accounts Rules 2019, firms are required to ensure that “client money is returned promptly to the client, or the third party for whom the money is held as soon as there is no longer any proper reason to hold those funds.” A residual balance will usually occur when there has been a slight miscalculation on the costings of a case, for example if a quoted disbursement price is higher than what is eventually billed; or additional funds are received into a probate matter once the presumed final distribution has been made. Historically, another key issue leading to residual balances was losing contact with the client. However electronic banking and obtaining a client’s bank account details at the start of a matter, has made this less common.

A lot of case management software platforms now allow for inactive matter reports to be run. These can be filtered by looking for matters with no activity over set time parameters, and can be further filtered to look at those matters with only either office or client balances. Office balances would be indicative of where there are outstanding bill amounts, or unbilled disbursements, so could be useful to consider as part of the firm’s billing processes.

The reports themselves, although useful, need the buy-in of the leaders of the firm to actively work with fee earners and the finance team to be successful in clearing residual balances. A good time to review the firm’s inactive matters is as part of the monthly bank reconciliation process. Assuming the software allows for the reports to be run, it is commonplace for the list of inactive matters to be included in the month-end pack, for the COFA to review. The review can be performed based on expectations for the case types operated by the firm.

For instance, residential conveyancing matters have shorter case lengths so are less likely to see significant funds held, but many smaller balances, for instance costs on account paid upfront may remain inactive on matters of this nature. One of the main reasons given for why funds are held on inactive matters is that they are in respect of a retention. Although a legitimate reason, it is important that the firm is keeping a log of these retentions, so that they can released in a timely manner.

Next steps

Firms need to consider how their procedures are written to cover checking for residual balances. As part of this review, are the inactive matter lists distributed to the fee earners for them to confirm the funds are legitimately required to be held? Is there a follow-up on these to ensure adequate responses are received, or these reports distributed to the Heads of Departments to review? Are the reports reviewed on a more global basis to determine any trends on specific types of work or fee earners which could indicate system issues or potential training requirements?

If a residual balance is flagged up by the fee earner, then what does the procedure note next? Who takes responsibility for clearing this balance by either returning the funds to the rightful owner, or sending to charity, with or without SRA prior approval. Many firms leave this to the fee earner to process, and unfortunately work pressures can take over and this task gets ignored.

Where these funds are held onto without a legitimate purpose, this can also give rise to a potential banking facility issue (SRA Accounts Rule 3.3), where the firm is deemed to be holding on to the funds for no proper reason. Commonly this can be due to the fact the client states they will have another matter commencing with the firm shortly and have given permission for the firm to hold onto the funds. However, this is not permitted, as in line with the Rules, once the initial matter has been concluded, the regulated services are ceased. Therefore there are no reasons to be retaining these funds and they should be returned to the client or rightful recipient at this point.