Accounts Rules Breaches: pre-empting the fall out

Rulings from the Solicitors Disciplinary Tribunal can be a useful tool to prompt firms into ensuring they continue to comply with their regulatory obligations, not least because they can remind solicitors of the fall out in the wake of breaches.

A recent ruling involved a small Liverpool practice that allowed a string of accounting failures to take place over a 7-year period dating from 2013, leading to the two-year suspension of its owner.

Jonathan Simon was the sole owner/director of J A Simon & Co, a firm that was closed last summer following an SRA intervention. He had one qualified staff member and one other employee. He admitted all the allegations. Sadly, prior to the intervention Simon had enjoyed an unblemished career lasting more than 40 years.

Accounts breaches

Following accountants’ reports to the SRA, and forensic investigations in 2016 and 2018 which had raised concerns, Simon gave assurances that issues would be resolved, however they continued. A further forensic investigation ensued, leading to formal proceedings.

There was no evidence that client money had been lost, though the firm had failed to promptly return client money and to tell clients of retention of client funds. The tribunal heard evidence that Simon failed to maintain proper accounting systems, proper control of those systems or proper accounting records for eight years up to the firm’s closure.

The failures included:

  • Numerous files showed historical client balances including cases already archived or where no progress had been made for more than a year. In fact, an accountant had reminded him that clients should be contacted at least once a year where balances were held.
  • Simon retained large amounts of client money in the form of residual balances for a substantial number of years.
  • The firm had not paid out legacies promptly to estate beneficiaries.
  • There was a continued failure to ensure adequate client account reconciliation.
  • The state of the accounting records was dire.

The tribunal noted that while Simon’s behaviour was neither malicious nor dishonest, maintenance of accurate accounts was a “vitally important responsibility”. As such, he had failed significantly to discharge this responsibility over an extended period.

It didn’t help that, on his own admission, he placed too much reliance on the abilities of a book keeper who had dealt with the accounts between 2012 and 2016. Simon was, after all, the firm’s COLP and COFA and responsible for the management and regulatory compliance requirements of running his firm.

Also, his failure to remedy the breaches as highlighted by the regulator on numerous occasions amounted to a “complete dereliction of duty”.

Key takeaways

The accounts rules are in place precisely to keep client money safe and to instil public confidence that their money will be kept safe.

They require that proper accounting records are kept to show accurately the position with regard to the money held for each client; accounting records must be kept at all times and properly written up to show the firm’s dealings with client money; they must be appropriately recorded in a client cash account or in a separate client ledger for each client; and accounting records retained for at least six years.

The simple but damning indictment on Simon was, “the firm’s books of account could not be relied upon”. The buck stopped with him. In mitigation, Simon acknowledged that relying on the book keeper was an “error of judgment” which he deeply regretted.

The worst thing a firm’s leaders and compliance professionals can do is, as Simon acknowledged that he did in mitigation, is ‘burying your head in the sand’. Though no dishonesty or any aggravating features had been proved, the consequences of his failures were severe - he was suspended for two years under the agreed outcome procedure and agreed to a costs order of £12,000.

Firms would do well to undertake a spot check – or a detailed review of their accounting processes and procedures if required – to ensure they do not attract the regulator’s attention.


Posted on 07.07.21