In short
Under rule 12 of the SRA Accounts Rules, a law firm that held or received client money in an accounting period must obtain an accountant's report within six months of the period end. Firms are exempt if all client money came from the Legal Aid Agency, or if their client account balance averaged no more than £10,000 and never exceeded £250,000. A qualified report must be delivered to the SRA.
Key takeaways
- Any firm that held or received client money, operated a joint account or operated a client's own account as signatory during an accounting period needs an accountant's report for that period, unless exempt.
- The report must be obtained within six months of the end of the accounting period and prepared by a chartered accountant who is, or works for, a registered auditor.
- A firm is exempt if all its client money came from the Legal Aid Agency, or if its client account balance did not exceed an average of £10,000 and a maximum of £250,000.
- Under the current rules only a qualified report, one showing that money has been or is likely to be put at risk, must be delivered to the SRA, within six months of the period end.
- In June 2026 the SRA announced, subject to Legal Services Board approval, that all firms holding client money will have to submit their report whether qualified or not, with fixed penalties for late or missing reports.
What the accountant's report is
The accountant's report is an independent annual check, carried out by a qualified accountant, of whether a law firm has complied with the SRA Accounts Rules. The SRA's power to require it comes from section 34 of the Solicitors Act 1974, and the detail sits in rule 12 of the Accounts Rules. The accountant tests the firm's records, reconciliations and controls, then completes the report in the form the SRA prescribes, known as the AR1.
Rule 12.5 requires the accountant to be a member of one of the chartered accountancy bodies and to be, or work for, a registered auditor. The SRA can disqualify an accountant found guilty of professional misconduct or who failed to take due care. Section 34 of the Solicitors Act also places a duty on the accountant to report to the SRA immediately any evidence of theft or fraud involving client money, or information likely to be material to whether a solicitor is fit to hold client money.
Who needs an accountant's report
Rule 12.1 applies to any firm that, at any time during an accounting period, held or received client money, or operated a joint account or a client's own account as signatory. A single receipt of client money during the period is enough to bring the firm in scope unless an exemption applies. For what counts as client money, see our guide to the SRA Accounts Rules.
Rule 12.4 lets the SRA require a report on reasonable notice when a firm stops operating as an authorised body and closes its client accounts, or whenever it considers this in the public interest. SRA guidance adds that the exemption does not help a firm whose practising certificate or authorisation carries a condition requiring a report.
The exemptions and how the thresholds are tested
Rule 12.2 sets two exemptions. The first covers a firm whose client money during the period was all received from the Legal Aid Agency. The second covers a firm whose 'statement or passbook balance' of client money did not exceed an average of £10,000 and a maximum of £250,000, or the equivalent in foreign currency. Both limits must be met. Rule 12.3 defines the balance as the total of all client accounts, joint accounts and clients' own accounts operated by the firm, as shown by the statements obtained under rule 8.2.
SRA guidance explains how to work out the figures. Add together the balances at each reconciliation in the period and divide by the number of reconciliations to get the average; the maximum is the highest of those balances. The exemption applies to a single accounting period, which may be shorter or longer than 12 months, and a firm's first period starts on the date it first held client money.
| Exemption | Rule | Condition |
|---|---|---|
| Legal Aid Agency money only | 12.2(a) | All client money held or received in the period came from the Legal Aid Agency |
| Low balances: average | 12.2(b)(i) | Average client account balance of £10,000 or less |
| Low balances: maximum | 12.2(b)(ii) | Maximum client account balance of £250,000 or less |
| Exemption overridden | 12.4 | The SRA may still require a report on reasonable notice |
Worked example: testing the exemption
A two-partner employment practice reconciles its client account monthly. Across the 12 reconciliations in its year to 31 March, the balances add up to £101,000.00, an average of £8,416.67, and the highest balance is £15,200.00. Both limits are met, so the firm is exempt for that year and need not obtain a report, though it should keep the reconciliations as evidence.
The next year the firm takes on one settlement in which £280,000.00 passes through client account in September. That month's reconciliation balance rises to £295,200.00. The maximum now exceeds £250,000 and the average rises to £31,750.00, so the firm fails both tests and must obtain an accountant's report for the year. One large matter is enough to end the exemption.
| Measure | Year 1 (GBP) | Year 2 (GBP) | Limit (GBP) |
|---|---|---|---|
| Sum of 12 reconciliation balances | 101,000.00 | 381,000.00 | Not applicable |
| Average balance | 8,416.67 | 31,750.00 | 10,000.00 |
| Highest balance | 15,200.00 | 295,200.00 | 250,000.00 |
| Result | Exempt | Report required | Both limits must be met |
The deadline: six months after the period end
Rule 12.1(a) requires the report to be obtained within six months of the end of the accounting period. The SRA's own example is a period ending 31 December with a deadline of 30 June. A qualified report must also be delivered to the SRA within the same six months under rule 12.1(b), through the mySRA portal, usually on the SRA's AR1 form.
The deadline is for obtaining the finished report, not for starting the work. Firms that leave the engagement until the final month often find that missing statements, unresolved reconciliation differences or untraced residual balances push the accountant towards qualifying the report.
| Accounting period ends | Report must be obtained by |
|---|---|
| 31 December 2025 | 30 June 2026 |
| 31 March 2026 | 30 September 2026 |
| 30 April 2026 | 31 October 2026 |
| 30 June 2026 | 31 December 2026 |
| 30 September 2026 | 31 March 2027 |
Qualified reports: when and what to deliver
A report is qualified when the accountant records a failure to comply with the rules such that money belonging to clients or third parties is, has been, or is likely to be put at risk. SRA guidance says reports should be qualified only where there has been a significant breach, that the decision rests on the accountant's professional judgement, and that it does not expect every minor breach to reach it as a qualified report.
The guidance gives examples. A significant shortage on client account that has not been replaced, systematic billing for costs not incurred, and actual or suspected fraud or dishonesty are likely to lead to qualification. Other breaches may or may not, depending on how many there were and whether the firm found and corrected them itself. Isolated administrative errors are unlikely to be significant unless they are persistent or show a breakdown of controls. A firm should never try to persuade its accountant not to qualify, and an accountant whose work has been limited in scope should qualify the report.
| Weight in SRA guidance | Examples | Likely outcome |
|---|---|---|
| Serious | Significant shortage not replaced; systematic billing for costs not incurred; actual or suspected fraud or dishonesty | Report likely to be qualified |
| Moderate | Breaches whose significance depends on the number of instances and whether the firm identified and corrected them | Depends on the accountant's judgement |
| Minor | Isolated administrative errors that are not persistent and do not show a control breakdown | Unlikely to be significant on their own |
What the accountant will test
SRA guidance expects testing to be proportionate to the size of the firm and its work. Typical areas are client account reconciliations, a sample of withdrawals checked for authorisation at the time, whether receipts, payments and transfers were recorded promptly, debit and credit balances on client and business ledgers, residual client balances and suspense ledgers, and the firm's own controls, including its breaches register and the COFA's reviews.
Rule 12.8 requires the firm to give the accountant details of every account it held or operated in connection with its practice during the period, and any other information the accountant needs. The fastest way to an unqualified report is a year of signed client account reconciliations, a current breach register and a residual balance list with evidence of the steps taken on each item. Our guide to SRA Accounts Rules breaches explains what a good breach register records.
Changes announced in 2026
On 2 June 2026 the SRA announced, subject to approval by the Legal Services Board, that all law firms holding client money will have to submit their annual accountant's report to the SRA, whether qualified or not, and provide key information through a declaration. Firms relying on an exemption will have to declare their exemption status, and fixed financial penalties will apply to late or missing submissions. The SRA said it expected the changes to take effect by early 2027.
The draft rules the SRA Board made on 21 April 2026 show the new structure: a duty to deliver the report within six months of the period end, a declaration of exemption status in the prescribed form and by the prescribed date, and fixed penalties for failing to do either. The commencement date is for the SRA to set, so firms should check the SRA website for the confirmed date. In practice, every firm should now plan as though its report, and its exemption calculation, will be seen by the regulator.
Safeheld reconciles client money every day for regulated firms, works every difference to its cause and keeps the record auditors ask for, and is extending that work to law firm client accounts. If your firm holds client money under the SRA Accounts Rules, talk to us about SRA client money.
Frequently asked questions
Who needs an SRA accountant's report?
Any SRA-authorised firm that held or received client money, operated a joint account or operated a client's own account as signatory during the accounting period, unless an exemption applies.
What is the SRA accountant's report exemption?
A firm is exempt if all its client money came from the Legal Aid Agency, or if its client account balance did not exceed an average of £10,000 and a maximum of £250,000 in the period.
When is the SRA accountant's report due?
Within six months of the end of the accounting period. A period ending 31 March must be reported on by 30 September.
Do I have to send my accountant's report to the SRA?
Under the current rules, only if it is qualified. The SRA announced in June 2026 that, subject to Legal Services Board approval, all reports will have to be submitted.
What makes an accountant's report qualified?
A failure to comply with the Accounts Rules that has put, or is likely to put, client money at risk, such as an unreplaced shortage or suspected dishonesty. The accountant decides using professional judgement.
Who can prepare an SRA accountant's report?
An accountant who is a member of a chartered accountancy body and who is, or works for, a registered auditor.
References
- SRA Accounts Rules
- SRA guidance: Accountant's report and the exemption to obtain one
- SRA guidance: Planning for and completing an accountant's report
- SRA: Accountant's reports
- SRA news release, 2 June 2026: Safeguards to protect client money
- Solicitors Act 1974, section 34
About Safeheld
Safeheld reconciles client money every day, resolves every difference and prepares every regulatory return for sign-off, for regulated firms in the United States, the United Kingdom, the European Union, Canada, Australia, Singapore and Hong Kong. To discuss your operations, contact us at safeheld.com/contact.
This article is for general information and does not constitute legal or regulatory advice.