The latest report from the Solicitors Regulation Authority has found 'fundamental weaknesses' in the financial management of many firms it regulates. It has identified financial risk and 'dishonest misuse' of client money or assets as two of the most significant risks affecting solicitors' firms today. The two issues are not necessarily unrelated.

The reality is - solicitors are practicing in a harsh economic environment in which client money and assets are more vulnerable than ever to being misused. Fee earners who are failing to hit targets may be tempted to manipulate client billing. Partners and staff who may be facing their own personal financial difficulties may be tempted to take advantage of any loopholes in systems and procedures for personal gain.

Financial Management
As Eric Golding's recent article suggests, financial planning should be high on the agenda of all law firms. Maintaining strong cash flow is, perhaps, the single most important factor. It's not that uncommon to see WIP figures around 50% of annual turnover, with worryingly high percentages of unbilled work more than three months old.

Traditional partnerships may be even more vulnerable than incorporated practices - particularly where one or two partners hold a high percentage of equity in the firm. Has the partnership planned an exit strategy - if either the partners leave, or retire? It is critical to consider how best to manage the potential impact on the firm's finances that this might have.

Effective financial management reporting is an essential part of the mix. It helps inform accurate budgeting, helps manage cash flow, and reduces the risk of unforeseen overdraft use. The ability to produce meaningful reports also acts as a powerful risk control against fraud. Reports can identify unusual patterns of disbursements, repeat billing of the same charges, and billing in excess of estimates for routine pieces of work. Cashroom controls are often left to that department to manage – and an obvious target for an internal fraudster. The role of the COFA is key in ensuring these risks are effectively managed.

Misuse of client assets
With reported incidences of dishonest misuse of client assets reaching an all-time high in Summer 2013 (420 over three months) it's not hard to see where vulnerable firms are failing to manage the risks. Firms found to have misused clients funds - whatever the financial woes they might be facing - will be brought to book by the SRA and other authorities.

Client money and assets must be ring-fenced against any risk, protected with appropriate procedures to ensure there is no misuse of clients' funds: simply assuming your current procedures are up to scratch (perhaps there has been no evidence of any problem) will not cut it.

The latest annual report from the Solicitors Disciplinary Tribunal identifies a concerning trend, with the number of solicitors struck off for dishonesty increasing by almost 50% since 2012. While there will always remain instances of dishonest lawyers finding loopholes in procedures, preventing opportunitic criminal behaviour is at the heart of effective prevention. Being able to demonstrate that your firm's compliance procedures are up-to-date and sufficiently robust will go a long way to satisfy the SRA - and help protect the firm from censure if there is any report of suspected dishonesty within the firm.

The recent case of Alan Crickmore, a solicitor and county coroner of 30 years' experience, might be an extreme case but serves as a salutary tale for all lawyers, however experienced and trustworthy they are. Crickmore stole nearly £2m from vulnerable clients in nursing homes and deceased's estates, as well as from office accounts. It seems he was able to continue his dishonesty for 13 years until an auditor spotted irregularities in the firm's books. He was sentenced to eight years in prison. Be alert to signs of fraudulent behaviour in your own firm - and encourage confidential whistle-blowing where staff have suspicions regarding a colleague.

What should we do?
Firms would do well to treat the SRA's outlook as a health warning to spur them into ensuring their compliance priorities are appropriate to the risks unique to their firms.

Firms need to be risk-aware, review existing financial management procedures regularly- and act promptly where they identify problem issues or gaps in their risk controls.

How can we help you?
We are the leading experts specialising in advising law firms on their insurance and risk management solutions. Whatever the size of your firm, we offer full, strategic insurance and risk management solutions meeting your unique needs. We also offer clients free advice, information and guidance to help them effectively manage the financial risks in legal practice..

For more information, contact Brian Balkin