By Jannie Dannhauser
Whenever I do an audit on an attorney’s trust account, I am reminded of the uniqueness of the accounting and systems related to attorney trust accounts. As opposed to the accounts of other businesses, it reflects receipts and payments only, but instead of income and expenses, assets and liabilities are created. Client accounts are in credit, whereas in business accounts they are in debit. This is enough to throw the most experienced commercial bookkeeper off track.
But therein lies the rub. Most attorneys I speak to, place almost complete reliance on their bookkeeping staff and computer systems to ensure that the transactions related to the trust accounts are correctly recorded. In general, bookkeeping staff only obtain their knowledge of trust account bookkeeping from experience and not from formal training. They mostly receive their computer system training from the supplier of the system, so errors in the system are hardly ever noticed or questioned.
Computer systems for legal practices vary in their robustness and some even automate transactions to balance imbalances, without taking the validity of underlying transactions into account.
In a business, the clients would act as whistle-blowers to identify errors that the system does not prevent. Most of the clients of a legal practice are not ‘financially literate’ enough to determine whether their account is correct. That is, if they ever receive a final statement of account.
This places the practice at substantial risk, not only of non-compliance with the rules and the Attorneys Act 53 of 1979, but also of other business risks. The potential for claims from clients emanating from loss of funds is the most obvious risk and we do not need to elaborate on that, but the risk to the business of the legal practice is one that is most often overlooked.
Business risks would include risks of the business incurring losses through advancing undue credit, and the business experiencing negative cash flows and loss of clients, to name a few.
The outlook is mostly that the trust account does not affect the business. Therefore, if the trust account balances and is not in a shortfall situation, there is nothing to worry about regarding the business. It should be remembered that trust accounts will still balance, even if the transactions recorded are incomplete. Losses do not only occur, owing to theft or fraud, but also owing to incorrect recording of transactions, which do not highlight resultant shortfalls.
The quality of staff and the systems within which they perform their duties are of paramount importance to the practice.
There are five common reasons for increased business risk to an attorney practice:
- Inadequate training of bookkeepers/accounting staff
You want to be comfortable that the person you employ to be custodian of your clients’ money knows exactly how the transactions affect the bookkeeping entries and the legal requirement to keep the client account funded.
Different services are recorded on a ‘one size fits all’ basis.
A detailed assessment of each type of service in the practice needs to be conducted when designing your administration system. Different services bring different challenges and they can culminate in substantial business risks, if not attended to. Litigation would bring a cash flow challenge, as counsel and other expenses may be substantial and advances from clients sometimes slow in being received. Property transfer transactions are less risky, as they are backed by a property sale agreement as security.
Misallocation of transactions or their incorrect recording in the business books will cause client trust accounts to be incorrect and incorrect recoveries or fees being levied from clients. A robust system of controlling the processing of transactions by suitable levels of staff will address this problem.
- Over-reliance on computer systems
A trust account trial balance that balances is not an indication that transactions have been correctly recorded. Systems that force entries through to balance the trust account do not always highlight the root cause of a problem, which may have to be corrected with different entries. The maturity and experience of staff overseeing the process can alleviate risks attached to this problem.
The size of the accounting staff component relative to the volume of transactions being processed mostly does not leave enough time for proper checking and supervision of activities, whether by superiors or partners. The system should allow for checking and reporting functions, the frequency being relative to the amounts and risk involved, in order for errors to be identified in time. Relying on the annual audit to ascertain whether the trust account books are satisfactory is one of the extreme, unsatisfactory scenarios that I have encountered.
As Paul Ehrlich once said: ‘To err is human, but to really foul things up you need a computer’.
I submit that the greatest service a legal practitioner can do to his practice is to invest time and effort in the training of the accounting staff and develop the administration and computer systems for them to provide the controls and reports that you require to have peace of mind.
Jannie Dannhauser BCompt (Hons) (Unisa) CA (SA) RA is an audit risk specialist at the Lumenrock Group in Johannesburg.
This article was first published in De Rebus in 2016 (Sept) DR 17.
