Cashiers Update: Client ledgers – a spring clean!

 

By now your COFA should have reviewed your firm’s accounting systems, policies and procedures to evaluate whether your firm is compliant with all relevant regulations.

 

Within these procedures should be various policies relating to the handling of the client files; from initial engagement with the client to completion of the matter and close down of the file, all of which should be in your office manual.

 

As reporting accountants we look for warning signs of non-compliance when we complete our SRA Accounts Rules review but with our advisor hats on we also look for improvements which can be made by the accounts department to help cash flow and enhance management information.

 

Around two thirds of law firms have March or April as their year-end, so here are some tips to get your file housekeeping up to date:

 

Receipt and transfer of costs

 

SRA guideline 4.6 stipulates that funds held in client account which have been earmarked for costs should be transferred to the office account to pay for fees and/or disbursements paid, within 14 days (in accordance with rule 17.3). We are still finding that this rule is being breached by many firms. If you are running with an office bank overdraft then you need to make these transfers as soon as you are allowed to.

 

A policy to review potential client to office transfers should be introduced where your review takes place on a weekly, or even a daily basis. This will help prevent a delay in cash rightly hitting your office account.

 

Bad debts and irrecoverable disbursements

 

SRA guideline 4.8 states that your firm should establish a policy for the timely closure of client files however we are still seeing files being left open for long periods of time with long standing office balances of irrecoverable disbursements left on ledgers when they should be written off or unpaid costs including VAT being left on ledgers in the hope that the client will ‘eventually’ pay.

 

In order to adhere to guideline 4.8, a policy should be introduced to review office balances for irrecoverable disbursements at the same time as the ledgers are being reviewed for surplus/residual balances which are due to clients. Once a month would seem prudent, however this depends on the size of your firm.

 

A policy should also be adopted where unpaid costs are written off in a timely manner. VAT on costs which remain unpaid may be reclaimed from HMRC if they are more than six months old. Unpaid costs should be written off in your accounts specifically as ‘bad’ or ‘irrecoverable’ before such a claim is made. Any claims for VAT on bad debts should be included within your purchases (Box 4) of your VAT return.

 

Work in progress

 

Within guideline 4.8 is the requirement to write off the work in progress relating to each particular client at the end of a matter, in order for the file to be closed. A policy should be adopted where the bill write off and recovery rate is calculated at the end of a matter and reported to management. This will show departments/ fee earners contribution to profits and where there may be issues with profitability.

 

As well as reporting recovery rates at the end of the matter a policy should be established to ensure fee earners report work in progress to senior management on a regular basis (say every two weeks) as this will highlight any issues with matters being ‘stuck’ in the system due to technical problems, client delays, bottlenecks at busy times etc. Any time recorded which cannot be billed must also be written off in a timely manner so that management information is not distorted by overstated work in progress balances.

 

Compliance

 

Not only are these compliance issues but also they are part and parcel of your firm’s responsibility to monitor its financial risks. These areas should also be covered by your firm’s COFA when conducting file reviews to monitor the risk profile of the firm’s fee earners and support staff.

 

For more information and advice please contact the Professional Practices team.