Spring Clean: Housekeeping tips for legal practices

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As reporting accountants, we not only review for non-compliance when we complete our Solicitors Accounts Rules review but we also look for improvements that can be made in order to help cash flow and enhance management information.

Housekeeping often takes a secondary place in firms due to the time constraints on all staff. However  housekeeping is crucial for the cashflow of the business and ensures accurate management information is produced. Here are some key areas for your consideration.

Bad debts and irrecoverable disbursements

The SRA guidelines state that you should ensure the timely closure of client files, however we continue to see files being left open for long periods of time. This is often due to long standing irrecoverable disbursements or unpaid costs including VAT in the hope that the client will ‘eventually’ pay.

A policy should be in place to review office balances for any items that are irrecoverable. The regularity of which depends on the size of your firm and the number of ‘old’ files still in place.  Any irrecoverable disbursements should then be written off.

A policy should also be adopted to ensure irrecoverable costs are written off in a timely manner, as VAT on irrecoverable costs may be reclaimed from HMRC if they are more than six months old. Unpaid costs should be written off in your accounts specifically as ‘bad’ or ‘irrecoverable’ before such a claim is made. Any claims for VAT on bad debts should be included within your purchases (Box 4) of your VAT return.

Work in progress

Another area to consider on the conclusion of a matter is the requirement to clear any work in progress before the file is closed. It is also important to complete a monthly review of write offs and recovery rate to show departments/fee earners contribution to profits and highlight any issues with profitability.

Any time recorded which cannot be billed must also be written off in a timely manner so that management information is not distorted by overstated work in progress balances.

Residual client balances

Client ledgers can also be left open on the conclusion of a matter due to small residual client account balances. The SRA rules state that any residual client money should be returned to the client promptly on the conclusion of a matter. Client ledgers should be reviewed for residual client balances on the conclusion of a matter and the return of the monies actioned immediately. Any delay in returning monies to clients only creates more administration issues as over time it can become difficult to locate the client.

For more information and advice on the review or implementation of the above policies, please contact one of the Larking Gowen Legal team and we would be happy to discuss your specific circumstances.