Do you know whose money it was?

March 1st, 2015
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By the Financial Forensic Investigation Team of the Attorneys Fidelity Fund

Clients from time to time entrust their money and/or property to practitioners for future payments on their instructions to the practitioner/s. Practitioners are required by the Attorneys Act 53 of 1979 (the Act), the rules applicable to the various law societies and the draft uniform rules to keep accounting records for monies that they are entrusted with.

•  Section 78(4) of the Act states: ‘Any practising practitioner shall keep proper accounting records containing particulars and information of any money received, held or paid by him for or on account of any person, of any money invested by him in a trust savings or interest-bearing account referred to in subsection (2) or (2A) and of any interest on money so invested which is paid over or credited to him’.

•  KwaZulu-Natal Law Society – r 20(1) states: ‘A firm shall keep in an official language of the Republic such accounting records as are necessary fairly to present in accordance with generally accepted accounting practice the state of affairs and business of the firm and to explain the transactions and financial position of the firm including, without derogating from the generality of this rule –

(a) records containing particulars and information of all monies received, credited to, held and paid by it including interest for and on account of any person as well as of all monies invested by it in terms of section 78(2) or 78(2A) of the Act;

(b) records showing its assets and liabilities’.

•  Cape Law Society – r 13.5 states: ‘A firm shall keep in an official language of the Republic such accounting records as are necessary to present fairly and in accordance with generally accepted accounting practice the state of affairs and business of the firm and to explain the transactions and financial position of the firm including, without derogation from the generality of this Rule –

13.5.1 records showing its assets and liabilities;

13.5.2 records containing entries from day to day of all monies received and paid by it on its own account;

13.5.3 records containing particulars and information of –

13.5.3.1 all monies received, held and paid by it for and on account of any person;

13.5.3.2 all monies invested by it in terms of section 78(2) or section 78(2A) of the Act;

13.5.3.3 any interest referred to in section 78(3) of the Act which is paid over or credited to it;

13.5.3.4 any interest credited to or in respect of any separate trust savings or other interest-bearing account, referred to in section 78(2A)’.

•  Law Society of the Northern Provinces – r 68.1 states: ‘A firm shall keep in an official language of the Republic such accounting records as are necessary to represent fully and accurately in accordance with generally accepted accounting practice the state of affairs and business of the firm and to explain the transactions and financial position of the firm including and without derogation from the generality of this rule –

68.1.1 records showing its assets and liabilities;

68.1.2 records containing entries from day to day of all moneys received and paid by it on its own account;

68.1.3 records containing particulars and information of all moneys received, held and paid by it for and on account of any person as well as of all moneys invested by it in terms of section 78(2) or section 78(2A) of the Act and of any interest referred to in section 78(3) of the Act which is paid over or credited to it, as well as any interest credited to or on any separate trust savings or other interest – bearing account referred to in section 78(2A)’.

  Free State Law Society – r 16.1 states: ‘A firm shall keep in an official language of the Republic such accounting records as are necessary to reflect in accordance with generally accepted accounting practice the state of affairs and business of the firm and to explain the transactions and financial position of the firm including and without detracting from the generality of this rule –

16.1.1 records showing its assets and liabilities;

16.1.2 records containing day to day entries of all moneys received and paid by it on and from its own account;

16.1.3 records containing particulars and information of all moneys received, held and paid by it for and on account of any person as well as of all moneys invested by it in terms of section 78(2) or section 78(2A) of the Act and of any interest referred to in section 78(3) of the Act which is paid over or credited to it, as well as any interest credited to or on any separate trust savings or other interest – bearing account referred to in section 78(2A).

•  The draft uniform rules also capture these requirements under r 35.5 in more or less the same way as it is captured in the Cape Law Society rules.

Every practitioner/practice allocates a client reference for each of its clients, that reference is used in all correspondence between the practice and the client. The client is also expected to quote this reference whenever money is paid into the attorney’s trust account in order for the funds to be correctly allocated to the client’s respective account. Instances occur where clients either do not quote the reference when they make deposits or they misquote the reference resulting in difficulties for the practice to allocate the funds received in the trust account, as these become unknown/unidentified. When this happens, an account in the general ledger called ‘suspense’ is used. A suspense account can be defined as ‘an account in the general ledger that temporarily stores any transactions for which there is uncertainty about the account in which they should be recorded’ (www.accountingtools.com, accessed 29-1-2015). Once the owner of the funds is known/identified, the funds are removed from the suspense account and allocated in the owner’s account.

It is useful to have a suspense account, rather than not recording transactions at all until there is sufficient information available to create an entry to the correct account(s). Otherwise, larger transactions may not be recorded by the end of a reporting period, resulting in inaccurate reporting. However, accurate records and reports of the suspense account should be maintained by the practice, including regular reconciliations of these accounts. It is in the best interest of the practitioner to ensure that these accounts are cleared on a regular basis to avoid keeping transactions in the account for prolonged periods. In clearing these accounts, the practitioner should ensure that the rightful account is first identified and then funds are removed from the suspense account into that account. There will be accounting entries reflecting on both the suspense and the rightful account as evidence of reallocation of the funds. Should fees be due to the practice, these should not be taken directly from suspense but should first be allocated to the rightful account and fees taken from that account.

There are a number of reasons why these accounts should be cleared on a regular basis, ranging from administrative reasons to risk of misappropriation. The sections that follow explore what could happen:

• Let us assume that a client pays into the attorney’s trust account for fees due but does not put a reference or puts an incorrect reference. On receipt of the money by the practice, the amount will be allocated to suspense pending correct identification of the owner. On identification of the owner of the money, the practitioner takes his or her fees directly from suspense to business account (makes a transfer from trust to business), without first removing it from suspense to the owner’s account. The owner’s account remains open in the practice’s records as it would continue to reflect fees outstanding while these were in fact received but never correctly allocated. This becomes an administrative error, which may result in the client being called on to pay in, and putting a burden on the client to prove over and over again that the money was paid in, and in the process ruin the reputation of the practice and the practitioner/s.

• Instances have been noted for some practices where funds sitting in suspense remain in suspense for prolonged periods. There could be malicious staff working with these accounts who observe these monies on a daily basis and may get tempted to use the money as they know that it is unknown and believe it may not be noticed if it goes missing. They then start paying directly out of suspense for their own benefit. This would constitute misappropriation of trust funds. Should the rule of not paying directly from suspense have been enforced at the practice, it would be easier for the practitioner/s to notice such payments and investigate soon.

• Other instances have also been noted where malicious staff, due to enforcement of the rule not to pay directly out of suspense by the practice but to first allocate to the correct account, would create fraudulent accounts, allocate funds removed from suspense to these accounts and effect payments from those for their own benefit. This would also constitute misappropriation of trust funds. Practitioners need to have in place a system where a suspense report and reconciliation is regularly generated and reviewed as means to monitor movements in and out of suspense.

• Other instances have also been noted where malicious staff reflect having passed journals in reallocation of these amounts, thus creating an entry in suspense but the contra leg is untraced, only to find that there were payments effected and not journals passed. This is another form of misappropriation of trust funds. In order to deal with this risk, practitioners should monitor the suspense account closely and ensure that all journals are pre-authorised.

From the foregoing examples of what may happen on the suspense account, the resultant effect is that funds may be misappropriated, which may cause irreparable damage to the practice and the practitioner/s. As a principle, any money sitting in suspense is unknown and remains unknown until it is known and is removed from suspense to the correct account. It, therefore, follows that one may not make any payments or take any fees from unknown funds (suspense account). Monies entrusted are to be used only for the benefit of the owner of the funds, and that owner being known.

Sub-rule 35.10.2 of the draft uniform rules requires that a firm transfers money from its trust banking account to business banking account ‘35.10.2.2 if the trust creditor from whose account the transfer is made is identified’.

The KwaZulu-Natal Law Society issued a guideline on 14 August 2006 (https://www.lawsoc.co.za, accessed 4-2-2015), and s 87(4) of the Legal Practice Act 28 of 2014 captures this guideline which states:

‘(a) Any money held in the trust account of a trust account practice in respect of which the identity of the owner is unknown or which is unclaimed after one year, must, after the second annual closing of the accounting records of the trust account practice following the date upon which those funds were deposited in the trust account of the trust account practice, be paid over to the Fund by the trust account practice.

(b) Nothing in this subsection deprives the owner of the money contemplated in paragraph (a) of the right to claim from the Fund any portion as he or she may prove an entitlement to’.

This subsection aims to avoid monies lying in suspense for too long as people may begin to have ideas of how to misappropriate the funds as suspense money is a ‘soft target’ for misappropriation.

In summary, what to do if you receive unknown/unidentified monies in trust account:

What not to do with suspense money:

Always know whose money was used and what it was used for.

Financial Forensic Investigation Team of the Attorneys Fidelity Fund in Centurion.

This article was first published in De Rebus in 2015 (March) DR 14.

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