Becoming a successful legal practitioner in practice demands recognition of significant aspects of running a business. What separates those that will make it and those that will not, lies in knowing the importance and value of key components of running a business. There is a common phrase that says, ‘practice makes perfect’. Practicing basic and good important habits in business is very crucial to the success of any business, regardless of its size and/or its nature. I have had the opportunity to perform inspections and investigations of legal practitioners’ trust account records across the country and have learned a lot about some of the bad habits that legal practitioners should avoid.

Not valuing the importance of keeping real time updated trust accounting records

Maintaining regular and proper trust accounting records as frequent as possible is an essential ingredient to the success of any business. It is important to develop a good habit of always keeping your accounting records updated. That way you will always be on top of things and aware of every transaction in your accounts. Rule 35.9 of the Rules for the Attorneys’ Profession prescribes that legal practitioners must update their trust accounting records monthly. Doing inspections and investigations of trust accounting records over the past years, I have noted that most law firms prefer to prepare their trust accounting records after the completion of a financial year end period. Some legal practitioners say it is costly to have trust accounting records prepared monthly and/or updated in real time because they do not see the value in it. Maintaining of proper trust accounting records is as important as performing any other key aspect of your business. It should never be trivialised because once a bad habit is developed, it will always end badly for the firm. Below are some of the points that can be avoided when trust accounting records are maintained regularly.

• Firstly, avoid having to deal with trust debit balances before you make any payment for a specific client trust ledger, you can always have a sneak peek of your client trust ledger account balance, or your accountant/bookkeeper can print the trust ledger balance for you. By definition, a trust ledger debit balance occurs when more payments are made for a particular client trust ledger than the actual trust money deposited by that client. It is important to practice good habits of avoiding instances where you find yourself having to explain to auditors or the Legal Practice Council Disciplinary Committee on how certain trust ledger debit balances occurred.

Risk implication for the law firm:

–          It will result in trust shortages for the law firm.

–          It will result in qualified financial audit reports for trust accounts.

• Secondly, always identify unidentified deposits as early as possible. Unidentified deposits refer to the funds deposited into the trust bank account from a client or individual that has no mandate with the legal firm to do so. This happens because of a mistake or due to money laundering schemes. Some legal firms always have significantly huge positive trust bank balances and in the absence of a real time and updated accounting records, it is easier for a legal practitioner to fail to identify such deposits. For example, where such deposits were made for money laundering purposes and the legal practitioner fails to identify such amounts in their trust bank account in a reasonable time. It might be difficult to prove their case of innocence when asked by authorities, especially in cases where you might have used those funds unknowingly and your trust accounting records are proved to have had a trust shortage/deficit as at the period end.

Risk implication for the law firm:

–          Failure to detect duplicate payments into the trust bank accounts.

–          Failure to detect money laundering schemes through your trust bank account.

–          It gives a false trust bank balance for trust creditors.

• Thirdly, avoid having to deal with the effects of trust deficits or shortages. A trust deficit or trust shortage occurs when total trust creditors or liabilities exceed total trust funds for the legal firm as at a particular financial period end. The effects of trust deficits are so detrimental to the practice, especially in a situation where the law firm is unable to give an explanation that is acceptable and valid. In cases, where a law firm prepares its trust accounting records after a financial year end (12-month period), it then becomes more difficult to provide acceptable reasons for the occurrence of a trust shortage. The Legal Practice Act 28 of 2014 allows law firms to report an instance of trust deficits and the reason there of. Practicing good habits of regular preparation and updating of trust accounting records in real time, will enable the law firm to quickly identify such instances, investigate the reasons thereof and remediate the situation.

Risk implication for the law firm:

–          It may result in the closure of the law firm.

–          It will result in qualified financial audit reports for trust accounts.

–          Results in bad reputation for the law firm.

Not valuing the importance of having proper and clear business processes and internal controls

According to software company Appian: ‘A business process is a collection of linked tasks that find their end in the delivery of a service or product to a client. A business process has also been defined as a set of activities and tasks that, once completed, will accomplish an organizational goal’ (Appian ‘Business Process Definition’ (https://appian.com, accessed 7-3-2023)). Wikipedia states: ‘Internal control involves everything that controls risks to an organisation’ (Wikipedia ‘Internal control’ (https://en.wikipedia.org, accessed 7-3-2023)).

Most law firms do not have clearly defined business processes as it is something that is not considered to be of importance. However, in the absence of proper business processes, legal practitioners usually develop bad habits in such environments, such as follows:

• Thinking you can do it all yourself.

Most legal practitioners find it difficult to delegate work to other people because they think that no one can do the job as well as they can. That is a bad habit to let yourself do everything because sooner or later it will become overwhelming.

• Hiring of friends and relatives as employees.

Managing a friend or relative can be awkward and can result in inefficiencies and undermining of business processes put in place. In most cases, legal practitioners become too trusting and thereby weaken the internal control measures put in place.

• Choosing the wrong business partner.

Having the right business partner is crucial for the success of any business and it is common to enter a partnership in the world of business. But it is difficult to select a good fit yourself and your law firm. The fact that someone is your friend, or someone is a family member, will not guarantee you success or mean that they are necessarily right for you and your business. A business partnership is like a marriage, which means that there will be disagreements and fights, but they are necessary. However, these disagreements should be resolved in a way that shows clear and sound reasoning.

• Neglecting business finances.

Regular checking of business financial records is significantly important for your business, and it will help you know whether you are being profitable or not. It helps to review areas that have a lot of cashflow and areas which you need to reduce your spending on.

Implications of bad habits by legal practitioners

Bad habits results in severe implications for both legal practitioners and law firms. It is significantly important that as legal practitioners you do everything possible to ensure that the important key aspects of the business are adhered to. Such implications include the following –

• disciplinary hearing;
• suspension;
• fines;
• striking off; and
• prosecution.

In conclusion, just because bad habits may be inevitable and easily justified, it does not mean you have to make the same ones everyone else does. It is the boring stuff that matters the most in business. Taking steps to avoid bad habits frequently made by legal practitioners is part of this process. As Eric Ries puts it: ‘Success can be engineered by following the right process, which means it can be learned’ and good habits can be practiced (Eric Ries The Lean Startup (New York: Crown Business 2011)).

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 2023 (April) DR 5.