Results from our inspections on trust accounting records highlighted that most firms in the legal profession and in practice do not record and maintain trust client ledgers for s 86(4) investments. It is important for legal practice firms to maintain proper books of accounts that reflect a true and fair view of the trust financial position at any moment.

Section 87 of the Legal Practice Act states that:

‘A trust account practice must keep proper accounting records containing particulars and information in respect of –

(a) money received and paid on its own account;

(b) any money received, held or paid on account of any person;

(c) money invested in a trust account or other interest-bearing account referred to in section 86; and

(d) any interest on money so invested which is paid over or credited to it.’

For the purposes of this article, we are going to focus on recording and keeping of proper accounting records in respect of s 86(4) investments.

Section 86(4) of the Legal Practice Act stipulates that, ‘a trust account practice may, on the instructions of any person, open a separate trust savings account or other interest-bearing account for the purpose of investing therein any money deposited in the trust account of that practice, on behalf of such person over which the practice exercises exclusive control as trustee, agent or stakeholder or in any other fiduciary capacity.’

Section 86(5) of the Legal Practice Act also states that: ‘Interest accrued on money deposited in terms of this section must, in the case of money deposited in terms of –

(a) subsections (2) and (3), be paid over to the [Legal Practitioners Fidelity Fund (the Fund)] and vests in the Fund; and

(b) subsection (4), be paid over to the person referred to in that subsection: Provided that 5% of the interest accrued on money in terms of this paragraph must be paid over to the Fund and vests in the Fund.’

To illustrate our point of view, we are going to use practical examples to demonstrate what should be done when recording and maintaining trust client ledgers for s 86(4) investments.

Recording of initial client deposit

For example, let us say client A makes a direct deposit of R 1 020 000 into the trust bank account of the legal practice JZ Attorneys Inc for transfer of ownership of a property. When recording this transaction in the accounting records of legal practice JZ Attorneys Inc, the correct double entry would be to Debit (Trust Cash Book with R 1 020 000) and to Credit (Trust Creditor – Client A with R 1 020 000).

Recording of a s 86(4) investment

In addition, let us say that legal practice JZ Attorneys Inc then invests an amount of R 1 million on instruction of Client A into an interest-bearing account. The following double entries would need to be completed in the accounting records of the legal practice JZ Attorneys Inc to record the investment in s 86(4):

(a) Firstly, to Debit (Trust Creditor – Client A with R 1 million) and to Credit (Trust Cash Book with R 1 million).

(b) Secondly, to Debit (Trust Investments – s 86(4) with R 1 million) and to Credit (Trust Creditor Investments – Client A with R 1 million).

However, it has been observed that only part (a) of the double entry is completed by most legal practice firms, hence the accounting records would only be showing total trust funds balances of R 20 000 in the Trust Cash Book and total trust creditors balances of R 20 000 in the Trust Creditor – Client A ledger as their trust position. This trust financial position is inaccurate and incomplete because an investment of R 1 million has been omitted and should still be disclosed in the accounting records of the legal practice JZ Attorneys Inc for Client A.

Month end balances excluding interest earned on s 86(4) investment

Instead, the correct trust position for the legal practice JZ Attorneys Inc should disclose the following trust balances excluding any interest earned on investment:

• Debit Balance – Trust Cash Book of R 20 000.
• Debit Balance – Trust Investments – Section 86(4) balance of R 1 million.
• Credit Balance – Trust Creditor – Client A balance of R 20 000.
• Credit Balance – Trust Creditor Investments – Client A balance of R 1 million.

Recording of interest earned on s 86(4) investment

Let us say that an investment for Client A of R 1 million, earned interest of R 1 000 for the first month of investing. The legal practice JZ Attorneys Inc should make the following recording in the trust accounting records of the firm:

• To Debit – Trust Investments – s 86(4) with R 1 000.
• To Credit – Trust Creditor Investments – Client A with R 950 (95%).
• To Credit – Trust Creditor – the Fund with R 50 (5%).

Month end balances including interest earned on s 86(4) investment

The correct month end trust financial position for the legal practice JZ Attorneys Inc should disclose the following trust balances including an interest earned of R 1 000 on s 86(4) investment:

• Debit Balance – Trust Cash Book of R 20 000.
• Debit Balance – Trust Investments – s 86(4) of R 1 001 000.
• Credit Balance – Trust Creditor – Client A of R 20 000.
• Credit Balance – Trust Creditor Investments – Client A of R 1 000 950.
• Credit Balance – Trust Creditor – the Fund with R 50.

Hence, the total trust funds balance of R 1 021 000 made up of the Trust Cash Book balance of R 20 000 and Trust Investments s 86(4) balance of R 1 001 000 will be equal to the total trust creditors balance of R 1 021 000 made up of the Trust Creditor Client – a balance of R 20 000, Trust Creditor Investments – Client A balance of R 1 000 950, and Trust Creditor – the Fund balance of R 50.

Risk considerations for failure to account for s 86(4) investments

• The legal practice’s trust financial position is always understated. That is, the total trust funds balances and the total trust creditors balances are always understated and do not reflect the true and fair view of the firm’s accounting records.
• An opportunity to commit fraud or theft of trust funds is created due to non-disclosure of or omission of s 86(4) investments balances in the trust accounting records.
• Contravention of s 87 of the Legal Practice Act.

Conclusion

It is the responsibility of directors, partners and/or management to ensure that their trust financial records reflect the true and accurate view of their trust position at all times. Financial records should be accurate, complete, and authentic and thereby enabling the legal practice firm to manage its own risk effectively and efficiently always.

Joel Zinhumwe (FP) SA CFE BCompt (Hons) Accounting Science/CTA (Unisa) BCom (Hons) Accounting (MSU) is a Practitioner Support Supervisor at the Legal Practitioners’ Fidelity Fund in Centurion.

This article was first published in De Rebus in 2024 (September) DR 11.