Law firms regulated by the Solicitors Regulation Authority (SRA) that hold client money must, unless an exemption in rule 12.2 of the SRA Accounts Rules applies, obtain an annual accountant’s report from an independent reporting accountant. The report gives the accountant’s conclusion on whether the firm has complied with the Accounts Rules, and a qualified report, one identifying significant breaches or weaknesses that put client money at risk, must currently be sent to the SRA within six months of the end of the accounting period.

Where does the requirement come from?

The legal basis is section 34 of the Solicitors Act 1974. It allows rules to be made requiring solicitors to provide reports signed by an accountant, and lets those rules set requirements for the report and for the accountant who signs it. A solicitor who fails to comply can face a complaint to the Solicitors Disciplinary Tribunal.

The rules in force are the SRA Accounts Rules that replaced the SRA Accounts Rules 2011 from 25 November 2019. ICAEW’s Technical Release TECH 01/21 AAF notes that they were cut from 52 rules to 13, replaced fixed timescales such as 14 days with a requirement to act “promptly”, and removed the detailed instructions to reporting accountants, whose expected approach is now set out in SRA guidance rather than in the rules.

Who can act as reporting accountant?

ICAEW’s helpsheet on the Accounts Rules explains that the report must be prepared and signed by an accountant who is a member of ICAEW, ICAS, ACCA or ICAI and who is, or works for, a registered auditor. The engagement is not a statutory audit, but it is an assurance assignment carried out by audit qualified firms, and TECH 01/21 AAF stresses that there is no detailed framework for the work equivalent to the one that surrounds a Companies Act audit. Professional judgement fills the gap.

Some law firms also ask their reporting accountant for a wider compliance review to help improve internal standards. That is a separate service and the engagement terms should make the difference clear.

What does the reporting accountant actually check?

TECH 01/21 AAF summarises the areas the SRA guidance expects the work to cover:

  • client accounts and their uses;
  • withdrawals from client account;
  • the duty to correct breaches on discovery;
  • client accounting systems and controls;
  • joint accounts and the operation of a client’s own account; and
  • storage and retention of accounting records.

The work is risk based. The technical release lists risk factors including a history of significant breaches, the firm’s own breach register kept by the Compliance Officer for Finance and Administration (COFA), complaints and indemnity claims, the experience of the accounts team, the firm’s financial performance, and the type of work done. It identifies probate, personal injury and residential conveyancing as likely to be high risk.

A suggested order of work is to document and test the systems and controls over client money, then test client account reconciliations in detail, then review client files. Reconciliations with old, unexplained or uncorrected differences point to where the effort should go. Other higher risk areas include residual balances, transfers between clients and transfers from business account to client account. The SRA has said it does not want a purely controls based approach and expects detailed transaction testing to form a significant part of the work in most cases.

Several rule points shape the testing. Rule 2.2 lets a firm hold money for fees and disbursements in advance in its business account where that is the only client money it holds and the client is told in advance. Rule 2.3 deals with payments from the Legal Aid Agency, which can be paid into the business account. Rule 4.3(a) requires a bill or other written notification of costs before money is transferred from client account for fees.

When must the report be qualified?

The SRA has deliberately not defined when a report must be qualified. Its guidance, quoted in TECH 01/21 AAF, relies on the accountant’s judgement of whether money belonging to clients or third parties is, has been or may be placed at risk, considering the firm’s size, work, controls and compliance history. If the accountant finds significant breaches, or significant weaknesses in systems and controls that put client money at risk, the report should be qualified and the details given on the SRA’s Accountant’s Report form (AR1), including the sums involved, dates and any corrective action.

Weaknesses can justify qualification even where no significant breach has been found. The technical release gives lack of oversight and poor segregation of duties as examples. Where the firm says it has corrected a problem, the accountant should either test the correction or state on the form that it has not been verified. The reporting accountant is not there to act as the firm’s advocate.

What must be reported straight away?

Section 34(9) of the Solicitors Act 1974 requires the accountant to report immediately if, while preparing the report, they discover evidence of fraud or theft involving client money, or obtain information likely to be of material significance in deciding whether a solicitor is fit and proper to hold client money. Section 34(10) provides that making such a report does not breach any duty of confidentiality. The SRA also expects to hear where a firm puts commercial pressure on its accountant to avoid a qualification, for example by replacing them, or where a qualified report has not been submitted.

What should the engagement letter cover?

The SRA is not a party to the engagement, but the report is addressed to it and the SRA expects to be owed a duty of care. TECH 01/21 AAF says the terms agreed with the law firm should set out the scope of the work, who the work is for, the fees, the purpose, the firm’s responsibilities, the accountant’s rights and obligations to report directly to the SRA and to provide further information on request, and any limit on the accountant’s liability to the firm. See engagement letters for accountants and limiting liability in engagement letters.

The technical release notes that the SRA has historically taken action against reporting accountants only rarely, typically where work was not done properly rather than over a judgement call. Good protection comes from documented planning, a tailored work programme, trained staff, a robust review process and well supported conclusions. The principles in audit documentation are a sensible model.

What changes has the SRA proposed?

In January 2026 the SRA consulted, with a closing date of 20 February 2026, on strengthening the regime. As summarised by ICAEW, the proposals were:

  • all accountant’s reports, qualified or not, to be submitted to the SRA, each with the reporting accountant’s declaration;
  • reporting accountants to submit reports directly rather than through the law firm;
  • every firm holding client money to declare either that it is exempt or that it has instructed an accountant;
  • guidance expecting reporting accountants routinely to obtain bank confirmations for client accounts; and
  • fixed financial penalties on firms for procedural failures, not on reporting accountants.

ICAEW said TECH 01/21 AAF would be updated. Check the SRA’s website for the outcome and any new effective date before planning a reporting cycle.

How might a qualification decision look in practice?

Illustration only. A four partner conveyancing firm has monthly client account reconciliations, but three months show unexplained differences signed off without investigation, and residual balances under £50 have sat on 40 client ledgers for over two years. Testing finds no shortfall on client account.

  • The unexplained differences suggest the reconciliation control is not operating. Combined with the high risk nature of conveyancing, the accountant may judge this a significant weakness putting client money at risk and qualify, describing the issue on the AR1.
  • Old residual balances are an area the technical release flags for extra testing. On their own the accountant may judge them not significant and raise them with the COFA instead of qualifying, but should document why.
  • If a partner suggests changing accountants to avoid the qualification, the SRA expects to be told.

The rules for accountancy firms’ own client money are different; see client money rules for accountants.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.