By the Practitioner Support Unit of the Attorneys Fidelity Fund

The funds in an attorney’s trust account are susceptible to theft, misuse and/or fraudulent activities. Due to these inherent risks, it is essential that a trust audit or inspection is carried out. The outcome of any trust audit or inspection is either a qualified or unqualified report. The Rules for the Attorneys’ Profession (the Rules) in South Africa (SA) prescribe various audits to be conducted as follows:

Opening audit reports (r 35.20)

‘A firm which commences practice for the first time shall, within six months of so commencing practice, furnish the Council with a report substantially in the form of the Fourth Schedule to the rules (or in such other form as the Council may determine after consultation with the Independent Regulatory Board for auditors) covering the first four months of that firm’s practice.’

Annual audit reports (r 35.23)

‘Every auditor or inspector who has accepted an appointment in terms of rule 35.19 shall:

35.23.1 within six months of the annual closing of the accounting records of the firm concerned or at such other times as the Council may require and subject to any conditions that the Council may impose, furnish the Council with a report which shall be in the form of the Fourth Schedule to these rules or in such other form as the Council may determine after consultation with the Independent Regulatory Board for Auditors.’

Closing audit reports (r 35.31)

‘A member shall be required to submit, within three months of the date that such member ceases to practise:

35.31.1 an audit or inspector’s report for any period for which an audit or review is outstanding, up to date of closure of the trust banking account;

35.31.2 a final list of trust creditors as at the date on which the member ceased to practise;

35.31.3 confirmation from the auditor or inspector that all trust creditors have been paid;

35.31.4 in the event of trust creditors being taken over by another firm, a list of trust creditors, signed by the member, after the auditor or inspector confirms that that list is correct, and signed by or on behalf of the partners of the firm taking over the trust creditors, confirming that they accept liability for claims of the trust creditors listed and that they have received the funds;

35.31.5 a certificate of nil balance from the member’s bank confirming that the trust banking account was closed.’

This article focuses on how attorney firms can best prepare for their opening, annual and closing audits or inspections. Six months is a relatively limited time from opening a practice, and running it in full compliance with the Attorneys Act 53 of 1979 (the Act) and the Rules. Due to this potential steep curve, the Attorneys Fidelity Fund (AFF) discuss a few pointers below on how to maintain your trust accounting environment, and thus be best prepared for your trust audits or inspections:

• Register with the Financial Intelligence Centre (FIC), and keep proof of registration. All legal firms, through the directors, partners, professional assistants and consultants are regarded as accountable institutions. The purpose of the Financial Intelligence Centre Act 38 of 2001 (FICA) is to combat money laundering activities by, among other things, imposing certain duties on institutions that may be used for money laundering purposes. For further information, visit the FIC website on www.fic.gov.za.
• Ensure that trust funds and business funds are clearly separated in the accounting records.
• Ensure compilation of a list of trust creditors, and balancing to the trust bank account on a monthly basis. A firm is deemed to have complied with r 35.9 if the accounting records are written up by the last day of the following month. Other accounting records to be compiled on a monthly basis are:

– Trial balance – this is a control account. It is a statement of all debits and credits as at a given date. All trust creditor balances can be listed individually or collectively on the credit side against the cash book balance on the debit side. Any disparities between the debit and credit columns indicate error.

– Cash book – this is a bookkeeping record (electronic or otherwise) in which all trust receipts and payments are collectively recorded over the period for which reporting is done. It reflects the opening balance, the transactions (receipts and payments) over the period of reporting, and the closing balance. Payments are recorded on the credit side and receipts on the debit side. The cash book is a mirror of the trust banking account, and the differences between the two are made up by timing differences on transactions. The cashbook is a feeder to the trial balance, and also used for bank reconciliation statements.

– Bank reconciliation statement – this is a statement that reconciles the cashbook to the bank balance as it reflects in the trust bank account and explains the difference on a specified date between the bank balance shown on the trust bank statement and the corresponding amount reflecting in the cash book. The bank reconciliation statement assists with identification of irregularities and adds value if done on a monthly basis, or an even shorter periods, in order to follow up timely on any possible and/or identified irregularities.

– Individual trust creditor ledger – each entry on the cashbook should be posted to a specific trust creditor’s ledger. The total of all the trust creditors’ ledgers should equal your cashbook balance. This should give you peace of mind that your trust account is in balance. Should you have opened investment accounts in terms of s 78(2A) of the Act, individual creditors ledgers for those accounts should also be maintained, as they also form part of the trust.

No trust ledger, or any of the trust creditors’ accounts should have a debit balance. A debit balance suggests that a payment was made out of an account that did not have sufficient funds. This in turn suggests that another trust creditor’s money was in fact used to effect the payment for another trust creditor.

– Transfer journals and schedule – transfer journals reflect all transfers for fees earned by the firm from the trust account to the business account. These can be reflected as a total of the amount transferred, which could be made up of various amounts from a number of trust creditors where fees are due and payable. Transfer schedule documents the details of the amounts involved, specifying the various amounts that make up the total transferred from trust to business.

– Suspense account – a suspense account records all receipts for money that cannot be allocated, perhaps because the owners of the funds cannot be identified. This account is susceptible to fraud and should be closely monitored. No payments should be effected out of a suspense account. Should funds that were allocated to suspense be suddenly identified, they should first be reallocated to the rightful trust creditor before any payments can be made. Payments can then be effected out of the trust creditor’s account specifically identified.

– Journal book – this records all journals passed between two or more trust creditors. Journals should always be checked and approved by a senior person in the firm. Trust journals should occur for related matters, and should be authorised by the trust creditor concerned. For every debit reflecting in a journal, there should be a corresponding credit or credits.

A firm should maintain all supporting documents giving rise to the accounting records listed above. Supporting documents refer to documents like paid cheques returned by the banks, receipt books, deposit books, EFT printouts reflecting the actual account number that was paid, payment requisitions, mandates given by clients. It is important that a firm keeps the original bank statements received from the bank, and not the bank statements printed from the Internet.

• A firm should, within a reasonable time after performance or termination of a mandate, account to its client in writing, and retain a copy of such accounting in the client file. Such accounting shall include, but is not limited to, details of all amounts received, amounts disbursed, fees charged and the amounts owing to or by the client.
• There should be segregation of duties as far as possible, for example, staff that are employed to receive funds should not have access to the entry of such transactions into the accounting system. Where segregation of duties is not practicable, as is the case with most small firms or sole practitioners, compensating controls may be used instead.
• Accounting records, including all supporting documents and client files should be maintained, and kept for a period of five years for each trust creditor.
• A firm should ensure prompt payment of amounts due to a trust creditor or for a trust creditor without any undue delay.
• Trust funds received at the office should be banked intact on the date of its receipt, or the first banking day following its receipt on which it might reasonably be expected that it would be banked.
• All interest earned on trust funds, as per s 78(1) of the Act, should be paid over to the provincial law society on a monthly basis, and records of such payments should be maintained. Interest earned on s 78(2)(a) investments can be paid over annually. In terms of the Legal Practice Act 28 of 2014, a portion will be levied on interest earned on s 78(2A) investments.
• The rules require of firms running investment practices to maintain accounting records on those investments. The Financial Services Board (FSB) requires of firms running such investment practices to comply with the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS Act), be registered with the FSB, and have a Financial Services Provider (FSP) number. These firms are further expected to comply with all the reporting requirements as required by the FSB. Readers are encouraged to read this section together with ‘In contravention of legislation …?’ 2016 (April) DR

For the new firms, we draw your attention to the Compliance Support Program (CSP). This is a program initiated by the AFF, currently rolled out in the KwaZulu-Natal and Free State Law Societies, and came into effect in January 2015. It is a compulsory program targeting newly established legal firms, whereby the AFF conducts inspections and supports practitioners in establishing a compliant operational environment before entering the mainstream external audit processes. The AFF provides these services in terms of the appointment by the respective provincial law societies.

The program, allows new entrants participate in it for a period of two years, and to exit and enter the mainstream external audit processes after two years. The AFF offers this program at no cost to the practitioner. We urge all new firms in the regions where the program is rolled out to make use of the support services embedded in this program, as far as possible, so as to ensure that their practices are run in the most compliant and efficient manner.

For more information on this program, you can visit the AFF’s website at: www.fidfund.co.za.

Conclusion

In closing, it is important for a firm to have an unqualified audit as this sends out the message that the firm is run prudently. The pointers provided above, if adhered to consistently throughout, should result in an unqualified audit report for the firm. A qualified audit report on the other hand suggests that one or more activities at the firm are not satisfactorily run, and/or the firm operated in a non-compliant environment.

Having an unqualified audit report based on prudent running of the firm projects a positive image about the firm, and the opposite is true.

The Practitioner Support Unit of the Attorneys Fidelity Fund is situated in Centurion.

This article was first published in De Rebus in 2018 (Jan/Feb) DR 18.