SRA audits are mandatory for most law firms that handle client money, with certain thresholds defining who qualifies for an exemption. Whether your firm needs an accountant’s report depends on your client’s money balances, whether you deal with Legal Aid Agency funding, and how you comply with the Solicitors Regulation Authority (SRA) Accounts Rules.
What constitutes an SRA audit
An SRA audit involves an independent reporting accountant reviewing how your firm manages client accounts and whether you comply with the SRA Accounts Rules. This process culminates in an accountant’s report (AR1) confirming whether you manage client money appropriately.
You must engage a qualified reporting accountant who is a member of a recognised professional body. The accountant examines your client account reconciliations, verifies balances, and keeps client and business money separate.
The audit scrutinises all client money financial transactions during the accounting period. This includes funds held in general client accounts, separate designated accounts, and joint accounts where your firm is a signatory.
The reporting accountant will issue a qualified report if they identify compliance issues. Such qualified reports must be submitted to the SRA within six months after your accounting period ends.
Who must obtain an accountant’s report
Your law firm must obtain an accountant’s report if it received or held client money during the accounting period. This obligation applies to all SRA-authorised firms and their staff.
Two primary exemptions exist under Rule 12.2 of the SRA Accounts Rules:
- All client money originates from the Legal Aid Agency.
- The average client account balance remains below £10,000, AND the maximum balance does not exceed £250,000.
To calculate these thresholds, reconciliations must be performed at least every five weeks. Add all reconciliation balances and divide by the total reconciliations to determine the average. The maximum is the highest single reconciliation balance recorded.
Both conditions must be met simultaneously for exemption. If your firm exceeds either threshold, you must obtain an accountant’s report regardless of the other figure.
Core SRA rules for client accounts
Rule 12.1 mandates firms holding client money to obtain an accountant’s reports within six months after their accounting period ends. The accounting period typically spans twelve months but may be extended up to eighteen months.
The accounting period commences on the date your firm first holds client money. Any changes to your accounting period must be promptly communicated to the SRA.
Qualified reports must reach the SRA by the six-month deadline. Unqualified reports only require submission if special conditions apply to your practising certificate or firm authorisation.
Rule 12.4 permits the SRA to request final reports when firms cease operating client accounts or undergo legal status changes. For example, transitioning from sole practice to partnership necessitates separate reports for each entity.
If your firm did not hold client money during the accounting period, you are exempt from obtaining an accountant’s report. The obligation begins from the date you first hold client money.
Criteria and exemptions for SRA audit requirements
Law firms holding client money may qualify for exemptions from obtaining an accountant’s report, based on balance thresholds and the source of client funds. Exemption applies if all client money originates from the Legal Aid Agency or if average balances remain below £10,000 with no balance exceeding £250,000.
Exemption conditions and common scenarios
Your firm receives a full exemption if all client money during the accounting period derives from the Legal Aid Agency. This removes any accountant’s report requirement, regardless of the amount involved.
The balance-based exemption applies only if both conditions are satisfied. Your average client account balance must not exceed £10,000, and your maximum balance must not surpass £250,000 during the accounting period.
To calculate the average, sum all reconciliation balances and divide by the number of reconciliations. The maximum is the highest balance recorded during any reconciliation.
Typical scenarios triggering exemptions include small practices predominantly handling legal aid work, firms winding down, or new practices with minimal client money. Personal injury firms rarely qualify, as settlement amounts often exceed the maximum threshold.
Trust account activity and SRA audit exemptions
The frequency of reconciliations impacts your exemption calculations. As stipulated in Rule 8.3 of the SRA Accounts Rules, you must perform reconciliations at least every five weeks.
Each reconciliation provides a snapshot of your client account balance, enabling you to calculate the average and maximum balances for the accounting period.
The timing of substantial settlements can significantly affect your exemption status. A single large settlement payment can push your maximum balance above £250,000, resulting in loss of exemption for that accounting period.
Accounting periods may be shorter than twelve months or up to eighteen months. You must independently assess exemption eligibility for each full accounting period.
Annual turnover thresholds
Exemption rules focus on client account balances, not your firm’s annual turnover. Total fee income or business turnover does not determine exemption eligibility.
However, higher-turnover firms generally handle larger client transactions and are likelier to exceed the £250,000 maximum balance. Due to transaction sizes, commercial law firms and property practices often surpass exemption limits.
The £10,000 average balance threshold can be challenging. Even with mostly low reconciliations, a few months with higher client money can elevate your average above the limit.
Your exemption status may vary each accounting period. You might qualify one year, but as your practice grows or you take on larger matters, you may require an accountant’s report the next.
Practical steps for law firms navigating SRA audit compliance
Achieving SRA audit compliance involves maintaining detailed financial documents per the Accounts Rules and proactively addressing common regulatory issues. Understanding these fundamentals helps protect client money and avoid qualified reports.
Documentation and record-keeping best practices
Your firm must keep comprehensive accounting records that clearly link each client, complying with Rules 8.1, 8.2, and 8.3. This entails detailed documentation of every client’s financial transactions and segregation of client and business accounts.
Implement a reliable system for client account bank reconciliations, performed at least every five weeks under Rule 8.3. Record who completed each reconciliation, the date, and any discrepancies identified.
Maintain an organised filing system for essential financial documents, including:
- Client ledgers with detailed transaction histories.
- Bank statements for all accounts.
- Bills and invoices with appropriate approvals.
- Client instructions authorising money movements.
- Reconciliation records evidencing supervisory review.
Retain all accounting records for at least six years, as required by Rule 13.1. Establish backups and access controls to prevent unauthorised alterations if using digital storage.
Provide staff training on diligent record-keeping and establish transparent approval processes for client money transactions. Document these procedures in your office manual and update them regularly to reflect actual practice.
Common pitfalls and how to avoid them
Client account shortfalls can cause significant compliance issues. Monitor client balances daily and promptly address any negative positions to prevent escalation.
Under Rule 3.3, avoid treating client accounts as your firm’s banking facility. Transferring money between clients or using funds for purposes unrelated to the specific client’s matter is prohibited.
Do not bill for costs before incurring them. Charge only for fees and disbursements that have genuinely occurred, and ensure clients understand the risks if you request money up front into business accounts.
Poor reconciliation practices often lead to qualified reports. Conduct reconciliations regularly, have a supervisor review them, and resolve discrepancies immediately rather than allowing them to accumulate.
Failure to report breaches to the SRA promptly exacerbates compliance problems. Establish clear procedures to escalate serious issues swiftly to your Compliance Officer for Finance and Administration (COFA), who can notify the regulator as necessary.
Closing thoughts
Whether your firm needs an SRA audit depends on how you handle client money and whether you meet the exemptions in the Accounts Rules. Even if you qualify for an exemption, the responsibility for compliance does not disappear. The COFA and partners must ensure records are accurate, reconciliations are up to date, and residual balances are dealt with promptly.
An SRA audit is not just about satisfying the regulator; it also reassures solicitors that systems are working, risks are under control, and client money is fully protected. For many firms, the annual report is an opportunity to strengthen internal controls and demonstrate good governance.
At Cottons, we support solicitors of all sizes with SRA audits and wider audit and assurance services. We know how to interpret the rules in practice and highlight areas for improvement before they become issues. Our dedicated solicitors sector team works across the UK, helping firms stay compliant and confident in their financial systems.
If you are unsure whether your firm needs an SRA audit or want guidance on exemptions, contact us; we will be happy to advise.