It is common knowledge that attorneys practising for own account, either as a director, partner or sole practitioner and s 34(2)(b) advocates are required in terms of s 86 of the Legal Practice Act 28 of 2014 (the LPA) to operate a trust account. Just to recap, we will be going through the various trust accounts that these legal practitioners can operate, and which accounts must be opened with a financial institution (bank) within South Africa (SA), including the banks that have an arrangement with the Legal Practitioners’ Fidelity Fund (the Fund).
Various trust accounts include:
The Fund entered into banking arrangements in terms of s 63(1)(g) of the LPA with the following banks:
Trust account practices are required in terms of s 87(1) of the LPA to keep proper accounting records containing particulars and information in respect of –
Rule 54.6 of the final rules as per ss 95(1), 95(3) and 109(2) of the LPA (the Rules) provides further clarity in terms of the accounting requirements. The various trust accounting records kept by a trust account practice must be updated monthly as contained in r 54.10 and retained for a period of seven years after the last entry recorded in each particular book or other document of record or file as provided under r 54.9. The accounting record includes all files and documents relating to matters dealt with by the trust account practice on behalf of the client.
In the article ‘Determining a trust position’ 2020 (March) DR 10, I extensively dealt with various trust accounting records that a trust account practice must maintain, specifically those used in the determination of a trust position. I, therefore, urge readers to read this article together with the article ‘Determining a trust position’ (op cit) for a clearer understanding on trusts. We will now look at the various trust accounting records that a trust account practice is expected to keep.
For the purpose of this article, reference to ‘client’ must be understood to mean a trust creditor or a client on whose behalf a deposit is held by the trust account practice.
An individual trust ledger refers to a record of transactions that the trust account practice maintains for each client. This record keeps a trail of all receipts into and payments from the trust account for each client, and records the balance remaining in trust per client following each transaction.
The individual client balances recorded in the trust creditors listing dealt with in ‘Determining a trust position’ (op cit) should be the same as the balances in the trust ledgers per client. Should these differ, the trust account practice must investigate the cause for the difference and rectify. The trust account practice, therefore, maintains various individual trust ledgers equivalent to the number of clients that the trust account practice has.
The trust cashbook was explained in ‘Determining a trust position’ (op cit). The main difference between the individual trust ledger and the trust cashbook is that the trust cashbook records all trust transactions for all clients of the trust account practice, while the individual trust ledger records transactions per client, separately. The trust account practice, therefore, maintains one trust cashbook reflecting all transactions for all clients.
Again, the trust creditors listing was explained in ‘Determining a trust position’ (op cit). As indicated in the foregoing paragraphs, the balances listed in this document must be the same as the balances reflecting on the individual trust ledgers for the various clients.
The trust bank reconciliation statements was explained in ‘Determining a trust position’ (op cit). All reconciled items should be properly investigated and clearly recorded for the trust cashbook and the trust bank account to reconcile correctly.
The trust trial balance records the cash balances reflected in the cashbook per month and trust creditors balances reflected in the trust creditors listing per month. It is important that the debits and credits reflected in this record balance out. This record can also be used as a snapshot to determine a trust’s surplus or deficit position. Where cash balances and/or trust creditors balances reflected on the trust trial balance differ from those recorded in the trust cashbook and/or trust creditors listing respectively, these should be investigated and rectified.
Trust journals record any reallocations between two or more individual trust ledgers and are susceptible to abuse by fraudsters. The funds do not leave the trust bank account, but allocations of funds change. I urge readers to read the article written by the Practitioner Support Unit of the Attorneys Fidelity Fund ‘Exposed through passing of journal entries?’ 2018 (April) DR 15 for better and in-depth understanding. It is important to note that trust journals must always be passed at the instruction of the client and must be authorised by a senior legal practitioner.
Fee journals record fees transferred from trust to business. These transfers must identify the individual trust ledgers from which they were raised, and in the same manner, they must be identifiable from those ledgers with a clear narration. Fees must only be transferred from matters with sufficient funds and not result in a debit balance.
Whether a trust account practice has an automated monthly transfer system with their banks or not, the trust account practice is still responsible for ensuring that the correct amount due is swept through or paid over. Trust account practices can make use of a schedule of interest and bank charges per month to determine the amounts due and to ensure that the correct amount was swept or paid to the Fund. For determination of which bank charges are recoverable and which are not recoverable, trust account practitioners can visit the Fund’s website at www.fidfund.co.za. Readers are advised to read the article that ‘Have you paid your dues’ 2014 (April) DR 23. Determination of nett interest due to the Fund is determined per trust bank account and not aggregated between the trust bank accounts held with different financial institutions.
Rule 54.12 requires of trust account practices to, within a reasonable time after the performance or earlier termination of any mandate, account to its client in writing and retain a copy of each such account. I urge readers to also read the following articles –
For trust account practices using tested trust accounting systems, there may be more records that they are able to produce due to the capabilities of their systems, the foregoing is the bare minimum that each trust account practice should maintain.
As has always been the case, failure to maintain proper and accurate trust accounting records leads to a qualified audit report for the trust account practice. Audit reports are submitted to the Legal Practice Council (LPC) and are used as part of the requirements, which are met by a trust account practice, for legal practitioners to be issued with a Fidelity Fund Certificate (FFC). Qualified reports often lead to non-approval of the report by the LPC, resulting in refusal of the FFC to the legal practitioner. Readers are again urged to read the article by the Practitioner Support Unit of the Attorneys Fidelity Fund ‘The clock is ticking… time to start applying for Fidelity Fund Certificates’ 2017 (Sept) DR 21.
With the promulgation of the LPA, the LPC and the Board are empowered through s 87(2)(a) of LPA to inspect the accounting records of any trust account practice in order to satisfy itself that the provisions of s 86 and subs (1) are complied with. The LPC or Board may achieve this by conducting inspections itself or through its nominee. Rule 50.1.1 also deals with this.
The new inspection powers conferred on the Board requires that the Fund determine instances when the Board may require to conduct inspections at trust account practices. To 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).
Trust account practices are faced with the reality that they employ individuals to provide certain services to their client, and at times employ people with ulterior motives – whose main intent is to enrich themselves by committing illegal acts – which may ultimately lead to claims lodged against the trust account practice for misappropriation or theft of trust money. Improper and/or inaccurate trust accounting records resulting in qualified audit reports and claims lodged against a trust account practice are some of the elements to be considered for determining whether to conduct an inspection at a trust account practice.
For this reason, trust account practices need to develop internal controls that will direct how things are done at the trust account practice, including how to prepare, maintain and oversee proper and accurate trust accounting records, and how to ensure proper segregation of duties between employees. Where the size of the trust account practice is so small that it does not allow for proper segregation of duties, the legal practitioners must ensure close monitoring of transactions and activities within the trust account practice.
It is important that trust account practices do not merely develop internal controls to deal with trust account issues but also monitor the effectiveness thereof. Readers are referred to the article ‘Adequate and effective internal controls’ 2019 (March) DR 8 to read more about internal controls.
Trust account practices should ensure that proper and accurate trust accounting records are maintained. Failure to maintain these leads to qualified audit reports, which in turn may result in denial of an FFC to legal practitioners linked with the trust account practice and may also result in claims for theft or misappropriation of funds. With the inspections responsibility conferred on the Fund, failure of a trust account practice to receive a clean audit report negatively impacts the profiling of the trust account practice, and may result in the trust account practice subjected to an inspection as the risk posed on the Fund may be elevated. This affects the reputation of the trust account practice and should be prevented. Legal practitioners must ensure that the internal controls put in place are adequate to manage any potential risks before they materialise, thus preventative.
Simthandile Kholelwa Myemane BCom Dip Advanced Business Management (UJ) Cert Forensic and Investigative Auditing (Unisa) Certified Control Self Assessor (Institute of Internal Auditors) Cert in Management and Investigation of Cyber and Electronic Crimes Cert in Fraud Risk Management Cert in Law for Commercial Forensic Practitioners Cert in Investigation of Financial Crimes Cert in Investigation and Detection of Money Laundering Certificate in Economic Crime Schemes (Enterprises University of Pretoria) is the Practitioner Support Manager at the Legal Practitioners’ Fidelity Fund in Centurion.
This article was first published in De Rebus in 2020 (July) DR 6.
