Inspection of accounting records

February 1st, 2021
x
Bookmark

By Rampela Mokoena

In the article ‘Handling of trust money – dealing with the obligations of a trust account legal practitioner’ 2019 (May) DR 6, I suggested that the Legal Practice Act 28 of 2014 (LPA) and the Final rules as per ss 95(1), 95(3) and 109(2) (the Rules) create various obligatory requirements expressly or by necessary implication which a trust account legal practitioner must comply with.

In Simthandile Kholelwa Myemane’s article ‘The increased importance of maintaining proper and accurate trust accounting records’ 2020 (July) DR 6, she makes reference to the fact that the LPA, empowered both the Legal Practice Council (LPC) and the Board, through s 87(2)(a), to inspect the accounting records of any trust account practice in order to satisfy itself that the provisions of s 86 and subs 87(1) are complied with. ‘The LPC or Board may achieve this by conducting inspections itself or through its nominee.’

Myemane (op cit) further highlights that these new powers of the Board will require that instances be clearly determined when the Board may require to conduct inspections at trust account practices. It also mentions that ‘[t]o achieve this and for the Board to fulfil its responsibility in respect of these inspections, the Fund is developing systems that will collate information and assist with the profiling of trust account practices and/or legal practitioners. Profiling of trust account practices and legal practitioners will consider a wide spectrum of issues, including how trust accounts are managed in trust account practices, which may point to elevated risks to the Fund. Risks to the Fund are risks relating to theft or misappropriation of trust funds and professional negligence that is covered through the Legal Practitioners’ Insurance Indemnity Fund (LPIIF).’

This article expands on those provisions dealing with the inspection of accounting records. These provisions simply in the view of the Legal Practitioners’ Fidelity Fund (LPFF), also creates certain obligatory responsibilities for trust account practices – albeit indirectly in some instances. They are also contained in ch 7 of the LPA.

The Attorneys Act 53 of 1979 empowered only the council of a law society to inspect the accounting records of an attorney. In terms of s 70(1) the council could do so for the purposes of an inquiry under s 71, or to determine whether such an inquiry should be held. The council could also, in terms of s 78(5) by itself or through its nominee and at its own cost, inspect the accounting records of any legal practitioner in order to satisfy itself that the provisions requiring an attorney to open and conduct separate trust and business accounts and to keep proper accounting records (and other requirements) are being observed.

As alluded to above, the LPA (s 63(1)(e)) now empowers the Board of the LPFF to make rules relating to the inspection of trust accounts of trust account practices. The section recognises that ‘[i]n addition to the powers conferred upon it in this Act, and in the furtherance of the purpose of the Fund’ the Board may, as determined in the rules, ‘inspect or cause to be inspected the accounts of any attorney or an advocate referred to in section 34(2)(b).’ Rule 50, titled ‘Inspections of accounting records’, was published under GenN401 GG41781/20-7-2018.

In addition, s 87(2)(a) of the LPA makes provision for the Board (or the LPC) – or through a nominee – at the LPC or Board’s own cost, to inspect the accounting records of any trust account practice in order to obtain satisfaction that the provisions of ss 86 and 87(1) are being complied with. If on an inspection it is found that the provisions have not been complied with, the LPC or the Board may write up the accounting records of the trust account practice and recover the costs (from the legal practitioner of the firm concerned) of the inspection and the writing up of the accounting records.

Discussion

The Board appoints an inspector and issues them with a certificate of appointment signed by the Board’s Chief Executive Officer, to be produced at inspection. It contains certain prescribed details – including the extent of the inspector’s power to inspect. An inspection may be conducted by one or more inspectors. The firm may be required to complete a pre-inspection questionnaire to allow for more efficient planning and conducting of the inspection.

Inspections may only be conducted during normal business hours, on not less than seven days’ notice in writing, unless circumstances dictate otherwise. Inconvenience and disruption to the firm and its staff must be avoided as much as possible. The person in charge of the firm, or their nominee, shall be entitled to be present and to observe the inspection, but the failure of that person to be present at the inspection shall not prevent the inspector from proceeding with the inspection. The procedure for an inspection will be determined on a case-by-case basis by the inspector.

The inspector may –

  • enter and inspect at any reasonable time and on reasonable notice where appropriate, any premises where the trust account practice is being conducted;
  • in writing direct a person to appear for questioning at a time and place they determine;
  • order any person who has or had any document in their possession or under their control relating to the accounting records of the firm to produce that document or to furnish the inspector, at the place and in a manner determined by the inspector, with information in respect of that document;
  • require reasonable assistance from any person on the premises to use any computer system on the premises, to access any data contained in or available to that computer system, and to reproduce any document from that data;
  • examine or make extracts from, or copy, any document in the possession of the firm or any other person, which is relevant to the inspection or, against the issue of a receipt, remove that document temporarily for that purpose; and
  • against the issue of a receipt, seize any document obtained as contemplated above which, in the opinion of the inspector, may constitute evidence of non-compliance with the provisions of ss 86 and 87 of the Act or of the rules.

The trust account practice must provide reasonable assistance to the inspector. No warrant is required for the purposes of an inspection in terms of the rules. An inspector may request the firm to provide to the Board with such additional information or documentation relating to the subject matter of the inspection.

If an inspector, having complied with any other reasonable requirements, is not immediately given admission to the premises or access to documentation relating to the firm’s accounting records, the Board may apply to court for an order that the inspector be admitted to the premises to enable the inspection to be carried out. If the firm wishes to object to making disclosure of documentation or information, which is called for by the inspector, the firm must set out its objection in writing, with detailed grounds of the objection, and the matter shall be determined by the executive officer of the Board.

The firm must make such facilities available to the inspector as may reasonably be required for the purpose of conducting the inspection.

Unless otherwise stipulated or ordered by a court, the firm must produce documents as they are kept in the normal and ordinary course of business, or must otherwise organise and label the documents to correspond to the categories in the request. If the request does not specify a form for producing electronically stored information, the firm must produce the information in a form(s) in which it is ordinarily maintained or in a reasonably usable form.

At the conclusion of the inspection the inspector prepares a report to the Board on the findings of the inspection, a copy is made available to the firm. If the firm objects to any of the findings it must do so in writing to the Board, outlining the basis of the objection. The Board shall consider the objections and shall take such further action in relation thereto as the Board considers appropriate.

Conclusion – duty to cooperate

The firm or legal practitioner must cooperate with the inspector who has been authorised by the Board or the LPC, in the performance of the inspection. The legal practitioner must recognise and respect the power granted to these institutions to inspect the accounting records, which they have been granted in the interests of the protection of the clients and of the public in general. In Mothuloe Incorporated Attorneys v The Law Society of the Northern Provinces and Another (GP) (unreported case no 67128/2014, 18-9-2015) (Louw J) at para 13, the court held: ‘The applicant’s reason for refusing to produce his records for inspection by the respondent is, in my view, misconceived. … The applicant appears to believe that the respondent should simply accept Mr Mothuloe’s explanation for not repaying the trust creditors as valid, and that it should therefore not execute its statutory duty to investigate complaints which are prima facie serious. This is clearly an erroneous view’.

In Mothuloe Incorporated Attorneys v Law Society of the Northern Provinces and Another (SCA) (unreported case no 213/16, 22-3-2017) (Shongwe JA (Cachalia, Wallis and Dambuza JJA and Mbatha AJA concurring)) at para 16 the Supreme Court of Appeal said: ‘The appellant voluntarily became a legal practitioner and thus became a member of the Law Society. He was free to choose a profession, but could not opt out of the consequences of his choice. Every institution has rules and such rules must be observed at all times. The Law Society is empowered by law to direct that a practitioner produce for inspection records and books in pursuance of its duty to protect the interests of the public. On the undisputed facts of this case the appellant was not justified to respond to the request by imposing conditions before complying with the directive. It may be so that the appellant had issues with Koikanyang attorneys, – but those issues cannot provide him with a free pass to the directive and may not prejudice the trust creditors who bona fide paid money for purposes of purchasing property.’

The cooperation shall include complying with any lawful request, made in pursuance of the Board’s or LPC’s authority and responsibilities under the LPA, including a request to –

  • provide access to, and the ability to copy, any accounting record in the possession, custody or control of the firm or of that person; and
  • provide information by oral interviews, written responses or otherwise.

Any person who refuses or fails to produce a book, document or any article for purposes of an inspection, or obstructs or hinders any person in the performance of their functions in conducting the investigation, shall be guilty of an offence.

The obligation to provide information and documentation is not affected by confidentiality rules.

Rampela Mokoena BProc (University of Zululand) is a curatorship officer at the Legal Practitioners’ Fidelity Fund in Centurion.

This article was first published in De Rebus in 2021 (Jan/Feb) DR 5.

X
South African COVID-19 Coronavirus. Access the latest information on: www.sacoronavirus.co.za