Preparing for an SRA Audit: What Law Firms Should Review

Good SRA audit preparation begins well before your reporting accountant arrives. The firms that find the process easiest usually keep their client account records in order throughout the year.

Preparation also matters more than it did. New rules approved in 2026 will require firms to submit their accountants’ reports to the SRA, even if the report is clean. This guide explains how the process works, what is changing and what your firm should review now.

What Is an SRA Audit?

Firms often say “SRA audit” when they mean the accountant’s report required by the SRA Accounts Rules. If your firm holds or receives client money, or operates a joint account or a client’s own account as signatory, you must usually obtain a report within six months of the end of your accounting period.

The accountant must belong to a chartered accountancy body and be, or work for, a registered auditor. Your firm must give them details of all relevant accounts and any information they need to complete the report.

Is Your Firm Exempt?

You do not need a report if either of these applies during the accounting period:

• All the client money you hold or receive comes from the Legal Aid Agency
• Your client money balance does not exceed an average of £10,000 and a maximum of £250,000

You calculate this from your reconciliation balances. Check it for each accounting period, because a firm can qualify one year and not the next. The SRA can also require a report in some circumstances, even if the exemption would otherwise apply.

What Is Changing in 2027?

Until now, firms have only had to send qualified reports to the SRA. That is changing. The SRA announced the reforms in June 2026, and the Legal Services Board approved them on 31 July 2026.

Change	What it means
Report submission	Non-exempt firms must deliver every accountant’s report, qualified or not
Annual declaration	Client money firms must confirm key information, including their exemption status
Exempt firms	They must declare their position, although the exemption criteria stay the same
Fixed financial penalties	These will cover defined breaches such as late or missing submissions
Start date	The new reporting rules start on 1 April 2027

The Legal Services Board’s decision says the first group covers accounting periods ending on or after 1 November 2026. If that is confirmed, a firm with a 31 December 2026 year end should expect the new process to apply to its next report.

The SRA published details of the changes on 5 November 2026. Before the new rules start, every firm that holds client money must tell the SRA its accounting period through an online form, available from 6 January to 1 February 2027. The SRA will use this to work out when each firm’s accountant’s report is due.

The firm’s authorised signatory, compliance officer for financial administration (COFA) or compliance officer for legal practice (COLP) can complete the form, using their mySRA login. Check now that whoever will do this can sign in and that their authenticator app works. Firms that stopped holding client money before 1 November 2026 do not need to do anything further. The SRA will publish details of how to submit reports, and which firms are exempt, after the form closes in February.

Compliance arrangements are changing too. From January 2027, larger firms with turnover over £600,000 or client money over £2 million will begin moving to separate management and compliance roles. Smaller firms will follow later, with some exemptions.

What Reporting Accountants Review

The SRA’s accountant’s report guidance lets accountants tailor their work to your firm’s size and type of work. These are the main risk areas it identifies.

Area	What to review before the report
Reconciliations	Three-way reconciliations at least every five weeks, with evidenced sign-off by the COFA or a manager
Client ledgers	Debit balances, why they arose and how quickly you corrected them
Business ledgers	Credit balances that may show client money in the wrong account
Withdrawals	Authorisation, supervision and supporting instructions for payments
Costs	Bills for costs not yet incurred and what you told clients about the risks
Residual balances	Money you have not returned promptly at the end of a matter
Suspense accounts	Long-standing items and any unjustified use
Accounting records	Up-to-date postings and your ability to account quickly to clients
Control systems	IT access, manual processes and management review
Breach records	How you record, review and resolve breaches

The accountant may also ask about client complaints, previous reports and non-moving balances. Their test is broader than whether the figures agree: they want to know whether client money is, has been or may be at risk.

What Could Lead to a Qualified Report?

The SRA expects a qualified report where a significant breach has placed client money at risk or may do so. Minor administrative errors are not likely to be significant, unless they persist, stem from weak controls and put client money at risk.

The guidance lists factors that are likely to lead to qualification, including:

• A significant or unreplaced shortfall on client account
• Systematic billing for costs not incurred
• Missing or seriously deficient accounting records
• Failure to give the accountant requested documents
• Client account reconciliations not carried out
• Use of client account as a banking facility
• Actual or suspected fraud or dishonesty

Other issues may lead to qualification depending on the context. These include late reconciliations, poor controls, long-standing residual balances, improper use of suspense accounts and records not retained for six years.

Your SRA Audit Preparation Checklist

A practical review a few months before your deadline leaves time to fix problems.

1. Confirm your dates. Check your accounting period end and the six-month report deadline.
2. Test your exemption. Calculate your average and maximum balances from your reconciliations, if relevant.
3. List every account. Include client accounts, business accounts, joint accounts and clients’ own accounts.
4. Check your reconciliations. Make sure each one balances, falls within five weeks and shows proper sign-off.
5. Clear your exceptions. Investigate debit balances, business credit balances and reconciling items that carry forward.
6. Review old balances. Identify residual balances, suspense items and matters with no recent activity.
7. Sample your payments. Check that withdrawals have the right authority and supporting evidence.
8. Update your breach register. Record what happened, how you fixed it and whether you need to report it.
9. Gather your documents. Have statements, ledgers, bills, reconciliations and previous reports ready.
10. Book your accountant early. Agree the scope and timing, particularly as the 2027 changes may increase demand.

If you find a breach, rule 6 requires you to correct it promptly. You must immediately replace any money improperly withheld or withdrawn. Keep your accounting records securely for at least six years.

How Nichols & Co Can Help

A pre-audit review can highlight issues before they appear in a formal report. Our accountants for solicitors support law firms with Solicitors Accounts Rules reports and related accounting work. You can also read our introduction to the SRA Accounts Rules. Contact Nichols & Co to discuss your next report.