Reconciliation of Estate Bank Accounts
The IPA inspectors have noticed some marked differences in the controls operated by firms in the reconciliation of estate bank accounts and hope the following guidance is helpful in getting more consistency between firms.
The starting point is SIP 11, the latest version of which, became effective in England and Wales and Scotland on 1 January 2018. SIP 11 says, at paragraph 9g, that office holders should ensure that estate money is, at all times, held subject to appropriate financial controls and that the controls may include regular reconciliation of estate accounts.
The important thing is that the office holder can demonstrate a working control. If the office holder is simply relying on the frequency the bank chooses to issue statements, that may not be an effective control; especially in this age of online banking with the ability to obtain an electronic statement for any period instantly.
The SIP does not provide any explanation of what is meant by “regular reconciliation”; however, the SIP extends the suggested control to client accounts, and the IPA’s Client Money Regulations state, at Regulation 8.2, that each client bank account shall be reconciled against the balances shown in each client’s ledger, not less frequently than monthly and records shall be kept of such reconciliations.
To help answer that question, SIP 11 is of further assistance. Paragraph 10 of the SIP says that financial controls and safeguards applied should be proportionate to the number of estates being administered, the quantum of funds held, the number of transactions processed, and the structure and ownership of the “entity”. It is assumed that the entity is the office holder’s practice. As a result, the inspectors consider it reasonable for the frequency of reconciliations to be relaxed from a monthly “norm” to, say, quarterly when the balance held is small and/or the number of transactions is low; however, the need for proportionate financial controls and safeguards works the other way too. When transaction traffic is heavy, e.g. often in trading situations, it may be appropriate to increase the frequency of reconciliations to weekly or even daily. Office holders can demonstrate that they are mindful of this area by having standard questions along the lines of:
- On the initial strategy form – Given the total realisations and the volume of transactions expected in the first six months, how frequent should bank reconciliations take place?
- On a file review form – What is the current frequency of bank reconciliations and is it appropriate for the current balance and volume of transactions? If not, what should it be adjusted to?
What about the Insolvency Services Account (ISA)?
The inspectors are of the view that the monthly/quarterly system described above should apply.
The inspectors are of the view that, to demonstrate effective financial control, there should be independent review of the reconciliations. In all, but the smallest firms, where the IP is doing the reconciliations, this can be as follows:
- Cashier prepares reconciliation.
- Reviewer checks reconciliation and bank statement and, when satisfied, signs/initials reconciliation.
As stated above, SIP 11 suggests that records should be kept of the reconciliations. Therefore, the inspector should be able to see each reconciliation, the relevant bank statement, and the evidence of the independent review. The SIP requires that financial controls and safeguards (of which, bank reconciliations are just one aspect) are fully documented and reviewed by the office holder for their adequacy, as and when appropriate and at a minimum annually. The inspectors would expect this documentation to be available at the time of a visit.
To demonstrate effective financial control, the frequency of bank reconciliations should be proportionate to the case. The default frequency is monthly but this may be lengthened to quarterly at times when funds are low and transactions few and should be shortened when there is heavy transaction traffic.