The importance of a trust audit and the value thereof for the legal practice

July 1st, 2021
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Legal practitioners hold a high level of trust with their clients and are perceived as trustworthy in the eyes of the public. They have and fulfil a fiduciary duty and obligation towards their clients to manage and safeguard entrusted money and property in terms of the mandates provided. Clients and the public have this inherent expectation that the legal practitioner and firm can be trusted, and that the legal practitioner will act with the highest level of integrity, adhering to legislative requirements, rules, regulations, and code of conduct. Without this high level of trust, the public would lose faith in the justice system in South Africa, one of the corner stones of our democracy.

This high level of trust is earned by the profession through their conduct on a day-to-day basis. The annual audit of a trust account practice’s trust is a key assurance process that underlies and support the trust of the public in the legal profession. The requirement for an audit is contained in s 87(2)(a) of the Legal Practice Act 28 of 2014 (the LPA) and further set out in r 54.20 to 54.30.

According to the revised audit guide (‘Engagements on Legal Practitioners’ Trust Accounts’ (revised March 2020)), issued by the Independent Regulatory Board for Auditors in March 2020, a current audit engagement ‘is a reasonable assurance engagement within the scope of the International Standard on Assurance Engagements (ISAE) 3000 (Revised)’.

In many instances, legal practitioners consider the requirement for an annual audit as a cumbersome and expensive annual requirement, imposed on them by the regulator (the Legal Practice Council (LPC)) through legislation, which contributes to significant anxiety, stress, and anger. These views are also expressed where legal practitioners are not able to derive value from the annual audit, which would be to the benefit of their practices.

The most important benefit of the trust account audit relates to the legal practitioner’s ability to practice, receive, and hold client’s money, while earning their fee for services provided. An independent audit report reflects the compliance status of the legal practice trust account environment for the period the report covers. However, the responsibility for compliance remains with the legal practitioner.

The approval of the trust account practice’s annual audit report by the LPC is a significant determining factor whether the legal practitioner will receive their Fidelity Fund Certificate (FFC), which would enable them to practise, having met the requirements of the LPA. An unqualified audit report expresses reasonable assurance to the regulator that the trust account, in all material respects is compliant with the LPA and the Rules. An unqualified report, subject to the assessment and approval by the LPC, would contribute to an easier FFC application process.

If the audit report is qualified or concerns are raised by the LPC, approval will most likely depend on the resolution of the qualification or concerns, to the satisfaction of the LPC. The timeous resolution would require a proactive approach by the legal practitioner and their appointed auditor to ensure that the qualification and concerns are resolved. The auditor would be in the best position to assist and guide the legal practitioner in resolving the matter that gave rise to the qualification or concern where it relates to compliance matters within the scope of the audit.

The audit provides valuable recommendations to business and system improvements and deriving efficiencies. The auditor is required, through their standards and professional code of conduct, to understand the operations of a legal practitioner’s trust account environment and must be up to date with all developments in the legal profession, to accept the appointment. Legal practitioners can benefit from this knowledge to ensure that their trust account practices continually improve their internal control environments.

The existing accounting rules impose certain minimum internal controls on a practice on which the auditor expresses a reasonable assurance opinion on compliance by the trust account practice. In addition, trust account practices must also implement adequate internal controls to ensure compliance with the rules and to ensure that trust funds are safeguarded (r 54.14.7). The minimum internal controls, as contained in the rules would normally be encapsulated in the standard operating procedures and processes of the trust account practice. These procedures and processes will be assessed through the audit process, allowing the auditor to express their opinion.

During an audit, the auditor obtains an understanding of the control environment of the practice. This enables the auditor to identify control weaknesses or deficiencies, which they will report to the legal practitioner. The benefit resides in the experienced guidance contained in the auditor’s recommendations to resolve the identified risks. Standard operating procedures can be improved, and the internal control environment will be enhanced. The auditor’s recommendations should also consider efficiencies that can be derived through the improvement of processes and internal controls.

These recommendations should be inclusive of system improvements. Where the legal practitioner considers the implementation of new system solutions, or migrating to a new environment, it would be beneficial to include your auditor in the process to provide assurances and make recommendations to address identified risks.

Legal practitioners are encouraged to build and maintain their professional relationship with their appointed auditor. Legal practices do not need to wait to engage with their auditors only on an annual basis. Concerns and clarification can be sought earlier with the auditor, providing an opportunity to rectify matters on a proactive basis.

Throughout the audit process, the auditor must exercise professional judgement and apply their professional scepticism where necessary and will always seek to resolve inconsistencies, as required, and highlighted in the audit guide. Legal practitioners place significant trust in their staff and would thus seek assurances that there is compliance to operating procedures and processes. The audit procedures adopted by the auditor, combined by their approach, even though it is not its primary purpose, can result in the detection of fraud and/or the misappropriation of funds. The audit process should provide the legal practitioner some assurances that entrusted money and property is properly safeguarded.

Where fraud and/or the misappropriation of trust money is detected, or suspected, the auditor is best placed to assist with the identification of the control breakdowns and responsibilities and the quantification of the losses, and the potential rectification thereof.

The audit report is of significant value whereby it provides reasonable assurance on the compliance status of the firm to the LPA and the Rules. Trust account practices can utilise this independently verified status to their benefit in retaining existing clients, where they reinforce their trust relationship, where the legal practitioner wishes to be appointed to client panels, or approach prospective clients, as an effective marketing instrument. Legal practitioners should not hide their compliance status as clients derive significant assurance from the independent auditor’s report. It forms a foundation for the trust relationship between the legal practitioner and the existing or prospective client. Clients could require a copy of the audit report as part of their due diligence process. It is, however, important that you inform your auditor of the intended use of the report.

As is the case with the trust audit, the same benefits would apply to the audit of the legal practice business accounts. There is value in the auditor also reviewing the business accounts, as well due to the synergies flowing from the audit of the trust account environment. Normally processes, procedures, controls and systems are highly integrated and could be best approached as a combined solution.

In deriving these benefits from your auditor, it is important to ensure that you do not unknowingly impose a scope limitation on the audit, such as fee constraints, which would reduce the value for the audit and engagement with the registered auditor. Understanding affordability risks, fees would remain a negotiated position between the legal practitioner and the auditor, subject to there being no scope limitations. Equally, it is important that the auditor and their professional staff are experienced and appropriately qualified to conduct a trust audit. If they are not skilled or experienced in this specialist environment, legal practitioners will not derive the anticipated benefits associated with the trust account audit. The appointment of the auditor should be carefully considered, not just on price, but the true value the auditor can provide to the trust account practice.

The trust audit is the most important enabler in obtaining your FFC annually. Without the FFC, a legal practitioner will not be able to practice, receive and hold client money in trust and earn fees.

Legal practitioners must approach the audit engagement with a view to the value added by the assurance process and reports and not only regard it as a regulatory requirement without business value. To derive the benefits, it is important that you appoint an auditor with the skills and experience that specialise in and understand the uniqueness of a trust account practice.

Jan de Beer BCompt (Hons) (Unisa) is a Director at Acute Accountants for Legal Practitioners in Centurion.

This article was first published in De Rebus in 2021 (July) DR 6.

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