I was at a conference recently where one of the hot topics of discussion was unsurprisingly the compliance officer roles, writes Richard Hill. One of the attendees had an interesting story to share on the methodology that a medium-sized firm had used to nominate a partner for the role of COLP – they had nominated the one partner who had not attended a management meeting to discuss the role!
So whilst finding this story quite amusing, on a more serious note how firms select their officers is a vital operating decision. This is not just because the SRA may question the appropriateness of a firms’ selection (sources close to the SRA have indicated that there have already been a number of nominations that have been withdrawn by firms after discussions with the SRA highlighted that the officers nominated did not have sufficient seniority) but because it could have serious ramifications if unsuitable individuals are nominated.
Let’s focus on the role of COFA (Compliance Officer of Finance & Administration). On the face of it, firms have a degree of flexibility in their selection, as the COFA does not have to be a lawyer. However the SRA have quite rightly indicated that notwithstanding this, the COFA needs to be of sufficient and adequate seniority to be able to properly perform the role.
Why enough seniority?
As the role is largely concerned in compliance with the SRA Accounts Rules, a detailed understanding and knowledge of these rules is essential and firms could initially be forgiven for making this their primary consideration in the appointment of COFA. However there are other aspects and skills to consider when deciding who should be the COFA if the role is to be fulfilled effectively and appropriately:
- Ability to be able to judge when a breach is material;
- Management of potential conflict of COFA responsibilities and the firm’s interest;
- Capacity to implement procedure compliance (systems and procedures) and behaviour compliance (education and influencing behaviour); and
- Access to all finance and business information
Materiality and risk
Arguably, COFAs’ judgement on material breaches is a much simpler task than it is for COLPs due to the quantitative nature of accounts. Nevertheless the COFA will need the experience and status to be able to make a sound judgement in problematic situations and particularly in being able to identify when a pattern of minor breaches becomes a material breach.
The COFA will need to have a solid knowledge of all the firm’s clients and areas of practice so they are able to highlight potential Accounts Rules breach risks and pitfalls relative to the work being carried out.
The big conflict! COFA responsibilities vs. firm’s interests
The requirement for the COFA to report any material breaches of the accounts rules may trigger potential conflicts that can occur with any self-reporting regime. Would an employed COFA want to highlight a failing of their own performance and jeopardise their position? Will the partners be more inclined to pressurise an employed COFA? Do employed COFAs understand the responsibility they are assuming and more importantly do the partners recognise and support this?
COFAs need to have the ability to carry out an independent assessment of breaches. In reality, it is likely that in some firms the perception of the COFA as the SRA’s ‘watchdog’ needs to be carefully managed. There should be no escaping breach reporting in this self-reporting environment and all senior principals need to appreciate that it is ultimately the firm overall that is responsible for compliance; the COFA is not a scapegoat. Partners need to both support and facilitate full disclosure of breaches as an absolute fundamental. If partners ordered an employed COFA not to inform the SRA they could risk being in breach of Outcome 10.7 (you do not prevent anyone from providing information to the SRA).
Compliance procedures should be built into the daily operations of the firm and must be both relevant and necessary: compliance should not impede fee earners. Achieving this will require a top down approach with senior management leading the way in order to realise the commercial benefits that good governance can bring.
Inevitably there will be discussions at management/partner meetings about compliance. I have been asked by COFA nominees: ’Do you think I should be involved in these management meetings as I am not at the moment?’ This begs the question as to whether that COFA nominee is in fact senior enough – both compliance officers need to be involved in management meetings in some capacity. Let’s not forget every legal practice needs both COLP and COFA roles fulfilled in order to practise law.
There must also be open and transparent communications to embed clear reporting lines for all legal and support staff. You can only imagine the explosive encounter that may ensue if an overzealous junior finance employee, acting as COFA, approached certain senior partners on Accounts Rules issues!
Finance and business information
To put the seniority requirement into context further, the SRA’s Quick Guide to OFR implies the role includes a responsibility to report to the SRA when the firm is in serious financial difficulties. There is no definition of what serious financial difficulty is, so this is open to some interpretation and can be quite an emotive subject. It is therefore essential that the COFA has both the appropriate financial knowledge and access to the right information to be able to form a reasonable judgement as to whether such a report is necessary or not.
It is sensible to assume a short-term cash problem will be immediately reportable. However let’s say the latest cash flow projections predict the overdraft will go above the facility level in 10 months’ time and the bank have indicated that they will not increase the facility. The COFA must fully understand the financial operations of the firm to ensure they are able to make an assessment and also be in a position to enter into dialogue with all other senior management and if necessary contact the SRA.
There are several possibilities for the appointment and none can be deemed right or wrong as it is what best suits the individual firm. In many firms cashiers will not have the adequate seniority and in others the finance partner will not have the time or skills to fulfill the role.
A recent survey shows 53% of COFA’s are employees. It will be interesting to see how many have reviewed their employment contracts or have a written agreement documenting the firm’s commitment and their own consent. Where the culture is right in a firm, there is no reason why an employee cannot play this pivotal role in compliance. Just make sure they have a place at the top table to deliver compliance efficiently into the operations of your business.