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If you’re a law firm authorised by the Solicitors Regulation Authority (SRA) then you’ll know you’re required to appoint a Compliance Officer for Finance and Administration (COFA). With the main purpose being to ensure compliance with the SRA Accounts Rules (the Rules).
But who should perform the role of COFA, and what does best practice look like?
As auditors for many of East Anglia’s solicitor firms, we’ve got a unique perspective on how the role should be performed for compliance, which Audit Partner Steven Burgess provides guidance on in this article.
Who performs the role of COFA?
Foremost, since the role is primarily concerned with the management and safekeeping of client money, the person who performs it needs to have a good understanding of the Rules and be financially well informed.
They should be in a position to appraise the firm’s control environment and capable of scrutinising all financial reports regarding compliance with the Rules.
The person also needs to be sufficiently senior to hold everybody else in the firm to account for implementing the firm’s procedures and controls for compliance. And they must be able to bring about any changes necessary to strengthen the systems in place in response to any identified weaknesses.
Finding the correct balance between these requirements can be difficult.
The Head of Finance will often have the strongest financial background and best command of the firm’s systems. However, they will not necessarily be able to raise concerns with senior fee earners and make changes.
The Managing Partner may have the power to make changes but not have enough visibility of the financial systems or the requisite financial acumen.
A formal job description should therefore be drawn up to make sure both aspects of the role are adequately covered.
This will then provide the person performing the role with clear seniority with respect to compliance with the Rules. It should also set out any parts of the role which can be delegated e.g. to members of finance. Where this is the case, it’s important for the persons who perform the work to report to the COFA.
Whoever is appointed will need to be approved by the SRA and receive appropriate training on a continuing basis.
How should the role be performed?
How the COFA performs the role is largely left to their judgement. However, the SRA does require firms to maintain a register of breaches of the Rules.
So, any material individual breaches or common breaches which are collectively material must be reported to the SRA on a prompt basis. Making it important for the COFA to establish a formal system for reporting breaches internally.
The COFA needs to make sure that all employees at every level are aware of the need to identify, remedy, and report breaches, and they should regularly review the register.
We’d suggest this is performed at least monthly so that any material issues are identified and reported to the SRA on a timely basis as required. Meaning any systematic issues will be addressed soon after they arise and before their effect starts to escalate.
The Rules also require monthly client account reconciliations to be approved by the COFA or a manager of the firm. Ideally, we recommend that this is performed by the COFA rather than a fee earner to make sure the COFA maintains oversight. They’re also likely to be better positioned to scrutinise the results.
We also recommend that the COFA approves the monthly office account reconciliations. Although not explicitly required by the Rules, these office account reconciliations can often highlight potential breaches.
Other important practices to consider when performing the role are:
- Undertaking regular reviews of the systems and controls for possible weaknesses
- Making sure all employees receive appropriate training
- Reviewing the management accounts for any indications of financial distress which may give rise to increased risk to client money
- Reviewing the professional indemnity insurance notifications and client complaints for any relating to the mismanagement of client money
- Reviewing the balances held in the sundry and suspense ledgers
- Circulating reports of matters on which there has been no recent activity (e.g. in the last 3 months)
- Performing internal tests on key transaction types to ensure the applicable controls are being implemented correctly
The return of residual balances and balances otherwise held when there is no longer proper reason (as per point 5) continues to be an area of SRA focus.
We recommend that fee earners are required to formally document the reasons the client money is being held, and the COFA should review these reasons and discuss if required.
And although most of the SRA’s guidance on this issue refers to 3 months, we generally recommend that the COFA undertakes their procedures monthly. With a suggestion that it could form part of monthly management reporting.
For point 6, there are some suggested tasks that you can action to make improvements:
- Reviewing a sample of client account payments (to third parties) to ensure they were properly required and approved correctly
- Reviewing a sample of client account receipts to ensure they were identified and posted to the correct ledgers on a prompt basis
- Reviewing a sample of disbursements to ensure they were properly required
- Reviewing a sample of office account receipts to ensure they did not include any client money which should have been paid into the client account
- Reviewing a sample of client-to-client transfers to ensure they were in in the interest of both clients and there were no conflicts of interest
- Reviewing a sample of office to client transfers to confirm why they were made, and any related breaches have been reported
- Reviewing a sample of credit notes to ensure they were approved correctly, and no client money was previously collected which should not have been
- Reviewing a sample of bills to ensure they were approved correctly, the work had been performed, and any disbursements had been incurred
Suffice it to say, sample sizes will depend on the size of the firm and the volume of transactions. And the full set of procedures do not necessarily need to be performed every month. Instead, you could perform one or two a month on a rolling basis.
We’re here to help
The role of the COFA is not only a regulatory requirement, but an important part of maintaining your firm’s financial integrity, building trust and protecting your reputation.
To discuss how we can further support compliance within your firm through our Audit services, get in contact with Steven or one of the team by calling 0330 058 6559 or email hello@scruttonbland.co.uk
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