Essential COFA tips for stronger financial compliance

1. Identify weaknesses in your firm’s systems

Your firm should have systems in place to ensure that only authorised people can make payments from the client account and to guarantee that accounting records are accurate.  These systems should be documented in enough detail to enable you to objectively determine whether they provide an effective safeguard against human error or against an unauthorised person being able to gain access. A good question to ask your finance manager/team is where the weak points are in your procedures and then test whether it’s possible to circumvent the controls you have in place. A client of ours discovered that their two-step approval process (the finance manager plus a partner) could be easily circumvented in instances where a partner was unavailable and that on a number of occasions, payments had been made from the client account before the partner had authorised them. The weakness in the system was discovered when money was paid out of the wrong account.

2.  Check for client ledger “red flags”

These include any overdrawn balances in the “client” column of your list of client matters, which could indicate a potentially reportable breach of the SRA Accounts Rules. It’s also a very good idea to request a list of all client ledgers where there has been no movement for more than six months, to see whether the firm is holding a residual balance that should have been returned to the client.  Some accounting software packages can produce an automated list, but, if your software cannot, you can instead test-check a selection of matters.

3. Understand the bank reconciliations

A client once shared their experience of a routine SRA inspection during which the SRA officer asked to see – and to be talked through – the client account bank reconciliations. It became immediately evident that the COFA had been signing them off without really understanding what they were looking at.  There are three points to be clear about when reviewing a bank reconciliation: 

• does the bank balance match the total balance at the bottom of the matter listing?
• If it doesn’t, does the explanation make sense?
• is the same explanation being given month after month? 

If the answer to this last question is “yes”, you should probably do some further investigating, as it could indicate an unresolved error or a systematic weakness. 

4. Test-check some client files

The SRA expects COFAs to do this on a regular basis, but it doesn’t prescribe how often or how many client files should be reviewed. A good starting point would be to review at least one matter per fee earner per month and then to supplement this with reviews of higher risk matters. These could include very long-standing clients, unusual matters, and/or matters where nothing appears to have happened for more than six months (as noted in point two above).

When you’re checking a client file, you’re looking for the entries in the client ledger to make sense in the context of the legal matter undertaken. Warning signs include no activity for several months, payments and receipts that don’t appear to be supported by partner/fee earner authorisations or correspondence with the client, and, crucially, if your Finance Manager seems unfamiliar with the matter or the client.

5. Regularly review the internal breaches register

I would expect every firm to record at least a few breaches each year - human error is unavoidable. As COFA, you’re looking at how the breach was handled and ensuring controls have been strengthened to try to prevent a similar breach from happening again. It is a good idea to mandate annual SRA Accounts Rules refresher training for all fee earners and accounts staff.

6. Be aware of your firm’s financial stability

As COFA you should regularly review your firm’s management accounts and look out for red flags which might include:

• A bank balance that is often very low or frequently close to/exceeding an overdraft limit
• Supplier balances (creditors) that are not being paid
• Client fees (debtors) remaining unpaid well beyond the agreed payment terms
• WIP balances that include unbillable time
• Income/expenditure that deviates significantly from expectations or budget.

Contact us

It can be useful to define your firm’s key performance indicators (KPIs) and check them regularly. A lack of recent, understandable management accounts is itself a red flag. If you would like more information or need guidance on any of these areas, please reach out to Claire Watkins or your usual Buzzacott contact, and we’d be happy to help.