Does a small law firm have to get an accountant's report? The £10,000 average and £250,000 maximum tests, worked through twelve reconciliations

Yes, unless it is exempt. Rule 12.1 of the SRA Accounts Rules says a firm that held or received client money at any time in an accounting period, or operated a joint account or a client's own account as signatory, must obtain an accountant's report within six months of the end of that period. Rule 12.2 lifts the duty in two cases: all the client money came from the Legal Aid Agency, or the balance did not exceed an average of £10,000 and a maximum of £250,000.

Obtaining and delivering are two duties

Every firm that is not exempt obtains a report. Only some send it in. Rule 12.1(b) requires delivery to the SRA, inside the same six months, where the report is qualified to show a failure to comply with the rules such that money belonging to clients or third parties is, has been or is likely to be placed at risk.

The SRA's guidance to reporting accountants says it expects a qualification only for a significant breach, and that minor breaches happen in many firms and need not all be notified. An unqualified report stays on the firm's file.

Three points from the rules and the guidance are easy to miss.

• The accountant must be a member of one of the chartered accountancy bodies and be, or work for, a registered auditor (rule 12.5), and must use the SRA's prescribed form.
• Delivering a qualified report is the firm's responsibility, even where the accountant posts it.
• A report must always be delivered where a condition on the firm's authorisation says so, or where the SRA asks for a final report from a firm that has closed (rule 12.4).

The SRA's own example of the deadline: an accounting period ending on 31 December 2019 means a report obtained by 30 June 2020.

How the SRA says to do the sum

Rule 8.3 requires a client account reconciliation at least every five weeks. Rule 12.3 says the balance to test is the total of all client accounts, plus any joint accounts and clients' own accounts the firm operates, as shown by the statements the firm obtains.

The SRA's guidance on the exemption, updated 25 November 2019, gives the method:

1. Add together the balance at every reconciliation in the accounting period.
2. Divide by the number of reconciliations. That is the average.
3. Take the highest single reconciliation balance. That is the maximum.
4. The firm is exempt only if the average is £10,000 or less and the maximum is £250,000 or less.

Twelve month-ends, worked

A two-partner firm does wills and probate. Its accounting period ran from 1 June 2025 to 31 May 2026 and it reconciles at each month end. Most of its client money is small sums on account. In February 2026 it received the sale proceeds of a house in an estate and paid them out to the beneficiaries in March.

The average is £127,800 divided by 12, which is £10,650. The maximum is £58,400.

The maximum is far below £250,000. The average is £650 over £10,000. Both limbs have to be met, so the firm is not exempt. It must obtain a report by 30 November 2026, six months after 31 May 2026.

One month did it. The other eleven balances add up to £69,400. For the average to stay at £10,000 the twelve could total no more than £120,000, so the February figure could have been at most £50,600. It was £7,800 higher.

Which limb decides it

For a firm that reconciles monthly, the average is the only test that can fail. Twelve reconciliations averaging £10,000 or less cannot total more than £120,000, so no single balance can be above £120,000, let alone £250,000.

The same sum works for any number. The £250,000 maximum can only be the limb that fails when the firm has more than 25 reconciliations in the period, because 25 times £10,000 is £250,000. A firm that reconciles weekly has 52 and could fail on the maximum alone. A firm on the five-week minimum has about 11 and cannot.

The practical reading for a small firm: watch the running total. With month-end reconciliations the allowance for the year is £120,000 of reconciliation balances in all, and one completion or one estate can use most of it.

Two cautions. The exemption is tested afresh each period, so a firm can be exempt one year and not the next. And rule 12.4 lets the SRA require a report on reasonable notice where it considers that to be in the public interest, whatever the sum shows.

A firm that holds only fees and disbursements

Rule 2.2 covers the firm whose only client money is payments on account of its own fees and of unpaid disbursements for which it is liable, and which keeps no client account for any other reason. It may hold that money outside a client account if the client has been told in advance where and how it will be held, and rule 12 does not then apply to it. The SRA has separate guidance on whether a firm needs a client account at all.

What to have ready

1. The signed reconciliations. Each one is signed off by the COFA or a manager (rule 8.3). Do the exemption sum from them in the month the period ends, and keep it with the date and a signature. The guide to the paused COLP and COFA rules sets out who holds that role.
2. Every account. Rule 12.8 requires the firm to give the accountant details of all accounts held or operated at any time in the period, and anything else the accountant asks for.
3. The residual balances register. The reporting accountant may ask for it; our guide to residual balances and the £500 rule shows what it holds.
4. Six years of records. Rule 13.1 sets the period, and how long a firm must keep client files sets it beside the other retention rules.
5. A second set of figures for renewal. The practising certificate renewal asks for the highest, lowest and average balances over a different twelve months, so the two sets will not match.
6. No banking facility. The SRA's guidance lists a client account used as a banking facility among the factors likely to lead to a qualified report; see what rule 3.3 allows.

A firm that believes the duty should not apply to it can ask the SRA's accountant's report team for a waiver.

The COFA or a manager signs each reconciliation and the firm's decision on the report, whatever tool prepared the figures. This page is general information, not legal or accounting advice.