Business Operations and Financial Responsibility
Business Operations and Financial Responsibility covers how a practice stays solvent and compliant: client money handling, billing and collection, budgeting, segregation of duties, and the financial controls that prevent both fraud and regulatory breach. Client money questions are heavily examined because the rules are strict and the penalties are severe.
Client money
- Client money must be held in a designated client account, separate from the firm's operating account, and used only for the client's purposes.
- The cardinal rule: never use one client's money to cover another client's matter or the firm's own expenses.
- Three-way reconciliation compares the client ledger balances, the list of individual client balances, and the bank statement. All three must agree; a reconciling difference is an incident, not a rounding issue.
- Fees are transferred from client account only when properly billed or agreed in writing.
Financial controls
- Segregation of duties: the person who records receipts should not be the person who reconciles the bank account.
- Dual authorisation for payments above a threshold, plus restricted system access and audit trails.
- Regular review of aged debt, work in progress, and lock-up days (the time from doing work to being paid).
Planning and reporting
- Budgets are monitored against actuals with variance explanations, not just produced annually.
- Matter profitability accounts for the true cost of delivery, including write-offs and disbursement leakage.
- Tax, payroll, and statutory filing obligations carry personal as well as corporate consequences for those who sign.
Worked example
A monthly reconciliation shows client ledger balances of 120,000, a client balance listing of 120,000, and a bank statement of 118,500. The difference is not written off. The correct steps: freeze transfers from client account, investigate unrecorded payments and unpresented cheques, identify whether any client balance is short, restore any shortfall from firm funds immediately, notify the insurer and, where required, the regulator, and document the cause.
Traps that cost marks
- Borrowing temporarily from client account to ease cash flow.
- Treating a small unreconciled difference as immaterial.
- Allowing one person to both record and reconcile transactions.
- Billing from client account without a delivered bill or written agreement.