How Can an Accountant Help Prevent Breaches of Client Money Rules

At Towerstone Accountants we provide specialist accountancy services for solicitors and law firms operating under SRA regulation. This article has been written to explain How can an accountant help prevent breaches of client money rules in clear practical terms so you understand how the rules apply in day to day practice. Our aim is to help you stay compliant protect client money and make informed financial decisions.

Client money rules exist for one simple reason. When a professional firm holds money that belongs to someone else that money must be protected absolutely. Over the years I have seen how damaging even small breaches can be. Firms can face regulatory action reputational harm cash flow issues and in extreme cases the end of the practice itself.

As an accountant who works closely with regulated professionals including solicitors estate agents and financial advisers I spend a lot of time helping firms stay on the right side of client money rules. In my experience most breaches are not deliberate. They usually happen because systems drift controls are misunderstood or people assume they are doing things correctly without checking.

In this article I will explain how an accountant can play a critical role in preventing breaches of client money rules. I will focus on practical real world steps rather than theory. I will also explain where I see firms go wrong and how those risks can be reduced long before a regulator becomes involved.

This guidance aligns with how client money rules are applied by bodies such as the Solicitors Regulation Authority the Financial Conduct Authority and HMRC but my aim here is to translate those expectations into everyday accounting and operational behaviour.

What are client money rules in practice

Client money rules apply whenever a firm holds money that does not belong to it. The exact rules vary depending on the regulator but the principles are broadly consistent.

In practical terms client money rules require that

• Client money is kept separate from business money

• Client funds are held in designated client accounts

• Client balances are accurately recorded at all times

• Money is used only for its intended purpose

• Any shortages or surpluses are identified and resolved quickly

• Regular reconciliations are performed and reviewed

• Records are complete accurate and retained

Accountants sit at the centre of almost all of these requirements whether formally appointed or working behind the scenes.

Why client money breaches happen so often

Before explaining how accountants help prevent breaches it is important to understand why breaches occur in the first place.

In my experience the most common causes are

• Poor understanding of what counts as client money

• Inadequate accounting systems

• Manual processes that rely on memory rather than controls

• Staff turnover and inconsistent training

• Cash flow pressure leading to blurred boundaries

• Reconciliations being rushed delayed or skipped

• Over reliance on software without human review

None of these issues are solved by regulation alone. They are solved by robust financial systems and professional oversight which is exactly where accountants add value.

The accountant’s role as an independent control

One of the most important ways an accountant helps prevent breaches is by acting as an independent layer of control.

Fee earners and directors are focused on clients deadlines and revenue. That is natural. An accountant brings a different perspective.

I see my role as

• Questioning assumptions

• Testing whether systems reflect reality

• Spotting risks before they become breaches

• Translating regulatory rules into accounting processes

This independence is invaluable especially in small and medium sized firms where individuals often wear multiple hats.

Designing compliant client account structures

A core area where accountants help is at the very beginning by designing the right bank account and ledger structure.

This includes

• Ensuring separate designated client bank accounts are in place

• Confirming the account naming meets regulatory requirements

• Structuring the chart of accounts so client money is clearly segregated

• Preventing client balances from ever appearing in profit and loss accounts

I regularly see firms using accounting software that is not properly configured. Client money might be sitting in suspense accounts or worse passing through the main business bank account.

Correcting this early prevents countless downstream problems.

Implementing proper bookkeeping processes

Even the best account structure fails without disciplined bookkeeping.

Accountants help prevent breaches by designing processes that ensure

• Client receipts are recorded promptly and accurately

• Payments out of client accounts are properly authorised

• Transfers between client and office accounts are documented

• Residual balances are identified and cleared

• Errors are corrected transparently rather than hidden

This often involves setting clear internal rules such as

• Who can post journals to client ledgers

• How often postings must be reviewed

• What evidence is required before money is moved

These may sound basic but many breaches start with casual undocumented movements of money.

Regular client account reconciliations

If there is one area where accountants add the most tangible protection it is reconciliations.

Client money rules almost always require regular reconciliations. In practice this means

• Reconciling the client bank account to the cash book

• Reconciling the cash book to individual client ledgers

• Investigating and resolving differences immediately

• Retaining evidence of the reconciliation and review

An accountant brings structure discipline and independence to this process.

I always recommend that

• Reconciliations are performed at least monthly

• They are reviewed by someone independent of day to day posting

• Differences are documented not ignored

• Old unreconciled items are escalated

Breaches are rarely sudden. They build up over time when reconciliations are weak.

Identifying shortages and surpluses early

Client money rules require firms to identify and deal with shortages and surpluses promptly.

Accountants are trained to spot these issues quickly.

For example

• A shortage might indicate money has been paid out incorrectly

• A surplus might indicate funds held longer than permitted

• Both can signal deeper control failures

An accountant will not only identify the issue but also help determine

• The cause

• The regulatory treatment

• The correct corrective action

• Whether notification to the regulator is required

Without this expertise firms often delay action which makes the breach worse.

Preventing improper use of client funds

One of the most serious risks is the improper use of client money for business purposes.

This can happen subtly such as

• Using client funds temporarily to cover office expenses

• Delaying transfers when fees are billed

• Confusing residual balances with available cash

Accountants help prevent this by

• Monitoring cash flow pressures

• Ensuring prompt and accurate fee transfers

• Highlighting when business finances are under strain

• Acting as an early warning system

In my experience firms that breach client money rules often have underlying cash flow problems. An accountant addressing those pressures directly can remove the temptation for misuse.

Supporting compliant billing and fee transfers

Billing is a high risk area for client money breaches.

An accountant helps ensure that

• Fees are billed accurately and on time

• Transfers from client to office accounts are properly authorised

• VAT is treated correctly

• Only earned fees are transferred

• Clear audit trails exist

I often review billing workflows and find gaps where money is moved without clear linkage to invoices. That creates regulatory risk even if the amounts are correct.

Training staff and fee earners

Accountants also play an important role in education.

Many breaches happen because staff simply do not understand the rules. An accountant can help by

• Explaining client money rules in practical terms

• Training staff on correct posting procedures

• Creating simple written guidance

• Reinforcing why controls matter

This training is often more effective coming from an accountant because it links regulatory rules directly to day to day systems.

Reviewing accounting software and systems

Modern accounting software is powerful but it is not foolproof.

Accountants help by

• Reviewing whether the software setup supports compliance

• Identifying where automation creates risk

• Ensuring access controls are appropriate

• Testing reports used for reconciliations

I have seen firms assume their software guarantees compliance. It does not. Software only reflects the rules and behaviours built into it.

An accountant ensures technology supports compliance rather than undermining it.

Independent reviews and internal audits

Periodic independent reviews are one of the strongest safeguards against breaches.

An accountant can perform

• Internal client account reviews

• Spot checks of reconciliations

• Testing of client ledger balances

• Reviews of residual balances

These reviews often uncover issues before they escalate. They also demonstrate to regulators that the firm takes its responsibilities seriously.

Helping with regulatory reporting and disclosures

When issues do arise accountants help firms respond correctly.

This includes

• Quantifying the impact of a breach

• Preparing accurate supporting schedules

• Advising on corrective entries

• Supporting required disclosures to regulators

Handled properly an issue can often be resolved without lasting damage. Handled poorly it can spiral quickly.

Aligning tax and client money compliance

Although client money rules are regulatory rather than tax based there is overlap.

Accountants help ensure that

• Client money is not treated as income

• VAT is applied correctly

• Interest on client accounts is handled properly

• HMRC reporting is consistent with regulatory treatment

Misalignment between tax and client accounting is a common red flag in inspections.

Supporting directors and partners personally

For directors and partners client money breaches are not just a firm issue. They are a personal risk.

Accountants help by

• Advising on individual responsibilities

• Highlighting personal exposure

• Supporting governance decisions

• Providing reassurance when systems are strong

In many cases simply having an accountant involved provides confidence that nothing is being overlooked.

Building a culture of compliance rather than fear

The most effective firms I work with do not treat client money rules as a burden. They treat them as part of professional integrity.

Accountants contribute to this by

• Normalising good controls

• Making compliance routine rather than reactive

• Removing uncertainty

• Supporting confident decision making

When systems are clear people are far less likely to make mistakes.

Common warning signs an accountant will spot

There are certain red flags I always watch for.

• Client account reconciliations falling behind

• Long standing residual balances

• Frequent manual journals

• Unexplained timing differences

• Cash flow stress

• Informal workarounds

Spotting these early can prevent serious breaches later.

Final thoughts

Client money rules are strict because the stakes are high. Breaches damage trust and can end careers. The good news is that most breaches are preventable with the right systems and oversight.

An accountant plays a central role in that protection. From designing compliant structures to performing reconciliations training staff reviewing systems and acting as an independent control an accountant helps turn regulatory rules into practical daily discipline.

In my experience firms that involve their accountant proactively rarely face serious client money issues. Those that treat client accounting as an afterthought often do.

If your firm holds client money and you are unsure whether your systems are robust now is the right time to review them. Prevention is always easier and far less costly than cure.

You may also find our guidance on How do solicitors record client money received in advance and How does an accountant help with an SRA audit useful when reviewing related SRA and accounting obligations. For a broader overview of solicitor accounting and compliance topics you can visit our solicitors accounts rules hub which brings all related guidance together.