Are you in touch with reality …?

July 22nd, 2016
x
Bookmark

By the financial forensic unit of the Attorneys Fidelity Fund

Aspirant business people can be overwhelmed by the thought of running their own business and they sometimes disconsider realities of running a business. Legal practitioners often fall into this trap as well. While running a business may seem the way to go, and while running a business can be the answer to success, it can also be a roller coaster. There are times when business is booming but there are also times when business is flat or even seems to be buried. For the purpose of this article, reference to legal practitioner also includes aspirant legal practitioners.

Starting a new business requires courage. Late President Nelson Mandela once said: ‘I learned that courage was not the absence of fear, but the triumph over it. … The brave man is not he who does not feel afraid, but he who conquers that fear’ (Nelson Mandela Long Walk to Freedom (Johannesburg: Macdonald Purnell 1994) at 615).  What is clear from this quote is that one should not be stopped by fear in pursuit of success. However, what the quote does not suggest is pursuing success blindly.

Ever heard of an aspirant business person saying: ‘I don’t want to be employed once I complete my studies but will open and run my own business. Within a year of running my business I will have a fancy car, I will travel overseas, I will do this and that… the list is endless.’ Is it always realistic or a fantasy? Expectations such as these build pressure on the legal practitioner.

What is a business?

There are many definitions of a business, but the definition that captures the essence of what this article seeks to address is from the business dictionary: ‘An organisation or economic system where goods and services are exchanged for one another or for money. Every business requires some form of investment and enough customers to whom its output can be sold on a consistent basis in order to make a profit’ (www.businessdictionary.com, accessed 24-6-2016).

There are four critical elements to this definition, which will be discussed in the following paragraphs:

  • An organisation or economic system –

an economic system is one where there is an exchange of something for another. In the case of legal practice, it is generally an exchange of legal services for a fee. For the exchange to take place though, it is important to determine if there is demand to meet the proposed supply. While an aspirant practitioner could be doing well academically and may see possibilities in running a successful business, sometimes the reality may depict a completely different picture. While outside of the economic system, it may appear that things are going well, but once part of that system, the aspirant practitioner realises that things are only well for a limited time. A mistake that new entrants often make in business is to commit all their money and not invest to cater for difficult days.

  • Every business requires some form of investment –

investment entails a number of activities that need to be taken. These range from acquiring the necessary equipment, having the required skills to run the business, employing the right calibre of human resources, having some start-up capital, being able to set aside some money and not commit everything to immediate use, etcetera.

  • Enough customers –

how many customers is enough? There is no definite answer to this question. However, a proper researched business plan should be able to respond to this question. This, therefore, requires of legal practitioners to research and prepare a proper business plan before opening doors. A legal practitioner without customers/clients is as good as sitting at home and doing nothing. Enough customers are required, as it would be unrealistic to look at a few people and expect them to require legal services over and over again. Customers are key to the economic system as they provide the required demand for services, while the practitioner will meet that demand by providing the service.

  • Consistent basis –

sustainability of the practice is important and should always be at the forefront in the decision making of whether or not to run a legal practice. In order to have a sustainable legal practice, consistency in having customers becomes a necessity. As already mentioned in the foregoing paragraphs, the absence of customers in a business, spells the absence of a business.

Should a legal practice find itself without customers/clients, and therefore out of business, while there are commitments to be serviced, some practitioners find themselves resorting to unethical means of making up for the shortfall.

What can go wrong?

Once in an unfavourable position, without business, the ethics of the practitioner gets tested. A number of instances have been seen where some practitioners who find themselves in this position tap into the trust account not for or on behalf of the trust creditor, but for their own benefit. They begin to engage in a practice referred to as rolling of funds, which is known as the misappropriation of funds, wherein they use a trust creditor’s money for their own benefit with the hope that funds will flow in and they will be able to replace the used funds. They then replace the utilised funds from the funds of another trust creditor and again await another deposit into the trust account. This may work for a while, but ultimately the practitioner is trapped in a position where at some point they cannot replace the used funds. When this happens, the trust account goes into a deficit, a position where the balance on the trust creditors exceeds the actual cash available, reflecting a shortage in the trust account. This position spells trouble as it effectively means that if the practitioner is called on to refund all trust creditors, he or she will not be able to do so since there is a shortage in the trust account.

Trust creditors who cannot be refunded their money then become disgruntled and may approach the provincial law society and/or the Attorneys Fidelity Fund (the AFF) to lodge a complaint against the practitioner. A lodged complaint leads to an investigation, which if proved to be factual, leads to a disciplinary process, then to a claim against the AFF and finally to suspension and ultimate striking off of the practitioner.

It is important to note that it is not in all cases that practitioners themselves will misappropriate trust funds, but even their employees, in most cases the highly trusted ones.

Is it always evident if there is a trust shortage?

In cases where trust accounting records are maintained correctly, it may be easy to pick up a trust shortage by deducting the balance of the trust creditors from the balance of the trust funds. If the difference equals zero or is a positive amount, there is no shortage. If the difference is negative, there is a trust shortage which requires an investigation.

There are also cases where trust accounting records are not maintained correctly, and these can be difficult to find. In this case, the perpetrator of the misappropriation, be it the legal practitioner or an employee, may not record all trust creditors as and when they deposit money in the trust account, but engage in the rolling of funds activity, wherein trust creditors are recorded only once the next creditor pays in, and that one is recorded on payment by the next one, and so it continues. Merely looking at the accounting records, without looking at the source documents, namely, the trust receipt books, the bank statement, the record of direct deposits, etcetera, may be misleading and lead to incorrect conclusions about the trust position. Other forms of misappropriating funds may include – writing up of fees prematurely; taking exorbitant fees from customers; and paying fictitious beneficiaries; etcetera.

What is required?

There are a number of considerations that legal practitioners should make:

  • Legal practitioners should be alive to the fact that legal practices should be founded on a firm foundation and not as a quick money making scheme.
  • Legal practitioners should have realistic business expectations. As a general rule, businesses take a lot from the owner before they start generating a profit.
  • Legal practitioners should recognise that when things go wrong, as they sometimes will, acting unethically is not the solution as it tarnishes the reputation of the practitioner, the practice and the profession as a whole.
  • In reality, a practitioner may not be in a position to do everything and may require the services of other skilled employees, namely, bookkeepers. While the bookkeepers know what they are doing, it is in the practitioner’s interest to understand bookkeeping principles and keep an eye on the trust accounting records because the practitioner remains responsible for the trust account.
  • Running one’s own practice requires close involvement of the legal practitioner in the affairs of the legal practice, it is not for the lazy.

Conclusion

Doing a reality check should not stop you from pursuing your dream of running a successful legal practice, but should rather awaken you to possibilities of what can happen. Once woken to the possibilities, you will be prepared for a possible eventuality, and plan appropriately.

Sometimes business requires that you act like a tortoise, slowly but focusing on the destination. When storms come, as they sometimes will, just like a tortoise would swirl its feet underneath its shell, roll over with the storm while protecting the vulnerable parts, as soon as the storm is over and they no longer roll but reached a stable position, they release their feet again and continue on their journey. In the same way, you too as a professional and as a business person, grow reserves for your business and protect yourself with the reserves during tough times. Continue to look for opportunities and grow your business when the time is right.

The financial forensic unit of the Attorneys Fidelity Fund in Centurion.

This article was first published in De Rebus in 2016 (Aug) DR 16.

Loading...