There is a certain dread that accompanies a letter from the Regulation Department of the Law Society notifying you that you are going to be subject to an inspection.

In general, a practice will be subject to a routine inspection every five years, with new firms being inspected around three years after opening.

However, the Society has moved to a more risk-based approach so, for example, if your reporting accountant’s report is late or qualified, or if there are complaints against you, this may trigger an inspection. Follow up inspections are also quite common.

Once you are on notice of the inspection, a certain amount of panic and action ensues to make sure you are compliant with the Solicitors Accounts Regulations.

It is a better long-term approach, however, to ensure that your practice complies with the regulations on an ongoing basis.

The starting point of any inspection is to ensure that your books of accounts are up to date. They need to be completed and reconciled within two months of every six-month accounting period.

A practice should, ideally, be reconciling the client and office account on a monthly basis. If there are deficiencies in your book-keeping, they will show up in this process, and can – and should be – addressed and rectified.

Once the investigating accountant completes the report, it will be classified as either contentious or non-contentious. A non-contentious report is precisely that. There are no issues of concern.

Contentious reports

A contentious report, on the other hand, will require you to write a letter of explanation and, if the issues raised are serious or if you do not respond, you will be requested to appear before the Regulation of Practice Committee, which comprises solicitors and a lay member, to provide an explanation of how you are addressing the issues raised.

The committee reviews the case and, if the solicitor deals with the issues to the satisfaction of the committee, the matter can be closed.

The committee has the power to refer the case to the Solicitors Disciplinary Tribunal or the High Court in the case of serious issues, such as non-cooperation or a deficit in the client account.

In the majority of cases, issues are resolved, some over months. The approach adopted by the committee is proactive and can be summarised as: ‘Solve the problems so we can close your case.’

The best advice to any solicitor who has concerns about an inspection or appearing before the committee is to speak to a colleague experienced in dealing with accounts and regulation.

Advice

It is difficult to run a practice, do all the work, manage the accounts, and deal with all the regulations that operating a practice involves. We all need some help. If you are not sure what to do, take advice and get assistance. A panel of solicitors who can assist you is sent out with the call-up letter.

After the crash, many practices cut back on their staff or resources, with the result that oversight might not be as robust as it ought to be.

Lack of resources in handling your accounts will cause difficulties in complying with the accounts regulations, with knock-on effects for the practice.

Many solicitors practising for years, if not decades, have not kept up with the gradual changes in the regulations and are taken by surprise by the depth and rigour of an investigation.

Common problems

Common problems that result in contentious reports include:

• Poor book-keeping: accounts are not written up to date or are not being monitored by the principal; records such as ledgers or returned client account cheques are not available. There may be debit balances or deficits in the client account or credit balances in the office account.
• Costs: are left in the client account undrawn for over three months.
• Client ‘inactive’ or dormant balances: there are a substantial number of client ‘inactive’ or dormant balances where there has been no movement on the client account for over six months. These funds should be distributed. Where not actively managed, a practice can have substantial funds in dormant balances, which can take months and a substantial amount of work to resolve and distribute.
• Files: should be compliant with section 68. Section 68(6) tends to cause most problems and has to be complied with, even if a solicitor/client fee is not charged. (Section 68(6) requires a solicitor to furnish to the client a copy of the bill on completion of a transaction where he gets paid by a third party, such as an insurance company.)
• Probate files: ensure that beneficiaries are paid without undue delay. If there are beneficiaries in an estate who can’t be located, a tracing agent should be used to locate the beneficiaries.
• Anti-money laundering legislation: you must adopt policies and procedures to prevent and detect the commission of money laundering or terrorist financing offences. You must verify the identity of certain clients and keep records. In simple terms you need to obtain photo ID (such as a passport) and proof of address for these clients. This is notwithstanding the fact that the client may have been a client for decades. In some circumstances, you may need to enquire about the source of funding, and in others, where a number of money laundering red flags arise, you will need to consider whether what is being proposed is money laundering or terrorist financing. In such circumstances, you should not proceed with the transaction, and you will need to consider your reporting obligation.

The above list is not exhaustive, but accounts for probably 80% of the issues that solicitors’ practices have when inspected. Prevention is better than cure, and some active practice management can resolve most of these matters.

If you have any concerns in relation to the topics outlined above, you may consider availing of the confidential Practice Advisory Service provided by the Law Society through Outsource, which offers a ‘health check’ on your practice.

This lasts for half a day, is a good way of checking how your practice is performing, and will give you sound advice on how best to address problematic areas in your accounts and practice management