More often than not, legal practitioners outsource their accounting duties to qualified accountants or bookkeepers. Reasons for the outsourcing will, for obvious reasons, differ from one legal practitioner to another. Reasons range from an inability to prepare and/or balance books, to the need by the legal practitioner to focus on their area of expertise.
The Attorneys Fidelity Fund (AFF) have had a number of encounters where the trust accounting records were not necessarily well prepared, maintained and/or retained. The AFF has had encounters where legal practitioners were unable to provide the accounting records, (both firm and trust records) when so required, citing reasons such as the records were kept with their accountants and/or bookkeepers.
This article seeks to clarify who is responsible for accounting records, and what should happen to the accounting records at any given point.
Legal practitioners are currently legislated by the Attorneys Act 53 of 1979 (the Attorneys Act), and will in future be legislated by the Legal Practice Act 28 of 2014 (the LPA), which is set to replace the Attorneys Act. In this article, the AFF will deal with both legislations as far as possible.
The Attorneys Act requires under s 78(4) that ‘[a] practising practitioner shall keep proper accounting records containing particulars and information of any money received, held or paid by him or her for or on account of any person, of any money invested by him or her in a trust savings or other interest-bearing account … and of any interest on money so invested which is paid over or credited to him or her.’
The Legal Practice Act under s 87 requires that:
‘(1) A trust account practice must keep proper accounting records containing particulars and information in respect of –
(a) money received and paid on its own account;
(b) any money received, held or paid on account of any person;
(c) money invested in a trust account or other interest-bearing account referred to in section 86; and
(d) any interest on money so invested which is paid over or credited to it.’
There is often a misunderstanding on what constitutes ‘accounting records’, and practitioners and inspectors would often not be in agreement in terms of what is expected. Both the Attorneys Act and the LPA define what ‘accounting records’ are, and the definitions provided by legislation are below:
The Attorneys Act under s 78(6) defines the accounting records as including ‘any record or document kept by or in the custody or under the control of any practitioner which relates to –
(a) money invested in a trust savings or other interest-bearing account … ;
(b) interest on money so invested;
(c) any estate of a deceased person or any insolvent estate or any estate placed under curatorship, in respect of which such practitioner is the executor, trustee or curator or which he or she administers on behalf of the executor, trustee or curator; or
(d) his practice.’
The Legal Practice Act under s 87(3) defines the accounting records as including ‘any record or document kept by or in the custody or under the control of any trust account practice which relates to –
(a) money held in trust;
(b) money invested in terms of section 86(2), (3) or (4) and interest thereon;
(c) any estate of a deceased person or any insolvent estate or any estate placed under curatorship, in respect of which an attorney in the trust account practice is the executor, trustee or curator or which he or she administers on behalf of the executor, trustee or curator; or
(d) the affairs of the trust account practice.’
From the definitions above it becomes apparent that source documents from which the accounting books/records were prepared also form part of the accounting records.
The Rules for the Attorneys’ Profession (GenN2 GG39740/26-2-2016) state as follows:
‘35.5 A firm shall keep in an official language of the Republic such accounting records as are necessary to enable the firm to satisfy its obligations in terms of the Act, these rules and any other law with respect to the preparation of financial statements that present fairly and in accordance with an acceptable financial reporting framework in South Africa the state of affairs and business of the firm and to explain the transactions and financial position of the firm including, without derogation from the generality of this rule:
35.5.1 Records showing all assets and liabilities as required in terms of section 78(4) and section 78(6) of the Act;
35.5.2 Records containing entries from day to day of all monies received and paid by it on its own account, as required by sections 78(4) and 78(6) of the Act;
35.5.3 Records containing particulars and information of:
126.96.36.199 All monies received, held and paid by it for and on account of any person;
188.8.131.52 All monies invested by it in terms of section 78(2) or section 78(2A) of the Act;
184.108.40.206 Any interest referred to in section 78(3) of the Act which is paid over or credited to it;
220.127.116.11 Any interest credited to or in respect of any separate trust savings.’
It should be noted that ‘Act’ referenced in the foregoing rule refers to the Attorneys Act. At the date of drafting this article, the rules in respect of the LPA were not yet finalised, and were still under consideration.
In terms of r 35.8 of the Rules:
‘35.8 A firm shall retain its accounting records, and all files and documents relating to matters dealt with by the firm on behalf of clients:
35.8.1 For at least five years from the date of the last entry recorded in each particular book or other document of record or file;
35.8.2 Save with prior written consent of the Council, or when removed therefrom under other lawful authority, at no place other than its main office, a branch office or, in the case of electronic accounting records or files, the location at which such accounting records or files are ordinarily hosted; provided that:
18.104.22.168 In the case of electronic accounting records or files hosted offsite, such records or files shall always be reasonably secured and shall remain immediately accessible to authorised persons from the office of the firm, and to the Council; and
22.214.171.124 In the case of a branch office, only insofar as they relate to any part of its practice conducted at that branch office.’
According to r 35.13 dealing with accounting requirement for trust account transactions, sub-rule 35.13.6, ‘[t]he firm’s accounting records shall not, save with prior written consent of Council or under lawful authority, and except for electronic records in terms of rule 35.12.2 and backups of computerised records, be maintained at any place other than its main office or branch office, but in the latter instance, only insofar as they relate to any part of its practice conducted at that branch.’
Outsourcing of accounting services by practitioners
Accountants’ and bookkeepers’ role in the accounting records of a legal firm is the preparation of the accounting records using the information at their disposal. This information is provided by the legal firm or legal practitioner. Accountants and bookkeepers are not responsible for determining what should be receipted and what should be paid, but the legal firm or legal practitioner is.
However, when the legal firm or legal practitioner has determined what it is that should be receipted, and what it is that should be paid, with reasons thereto, they will then instruct the accountant or bookkeeper to post or allocate the transactions or actions in the accounting books. The accountant or bookkeeper, therefore, acts on the instruction of the legal firm or legal practitioner by applying their accounting knowledge or expertise to correctly allocate the transaction in the accounting books, be it firm or trust accounting books, in terms of the acceptable financial reporting frameworks as required by r 35.6 of the Rules.
While a legal practitioner provides legal services (due to the practitioner running a business and being responsible for the running of that business, and ensuring compliance of that business with all legislative and regulatory requirements) it is in the best interest of the practitioner to appreciate accounting principles, and at least be able to interpret accounting records should the preparation thereof be outsourced to an accountant or bookkeeper.
The legal practitioner remains responsible for the accounting records of a legal firm and must ensure that the accounting books prepared by the accountant or bookkeeper correctly and accurately reflect the activities of the firm, both from a business and trust perspective. This therefore calls on the legal practitioners to review the records that the accountant or bookkeeper has prepared, as they are ultimately responsible for these records, though not physically prepared by them.
Both the legislative and regulatory prescripts, therefore, do not absolve a legal practitioner from producing the accounting records when so required, irrespective of who prepared the said records. The AFF have noted a number of instances where legal practitioners are unable to immediately produce their accounting records when required, be it for purposes of a routine inspection or a cause-driven inspection or investigation, and citing reasons of the accounting records being with their accountants or bookkeepers. Should the accountants or bookkeepers be offsite, it is entirely incumbent on the legal practitioner to get hold of the accounting records from the accountants or bookkeepers who prepare the records on their behalf, and produce the records when so required. As the rules clearly require, these should be kept in the office, be it main or branch, of the legal firm.
Inspectors appointed by the Council are often confronted with difficulty in getting the cooperation by some of the practitioners to produce the accounting records for inspection purposes.
Rule 35.21 of the Rules explicitly states that ‘[a] firm shall allow an auditor or inspector appointed under rule 35.19 access to such of its records as the auditor or inspector may deem necessary to examine for the purposes of discharging his duties under rule 35.23 and shall furnish the auditor or inspector with any authority which may be required to enable the auditor or inspector to obtain such information, certificates or other evidence as the auditor may reasonably require for such purposes.’
Section 87(5) of the LPA states as follows:
‘(a) Despite section 37(2)(a), any attorney or an advocate referred to in section 34(2)(b) or an employee of a trust account practice must, at the request of the Council or the Board, or the person authorised thereto by the Council or the Board, produce for inspection a book, document or article which is in the possession, custody or under the control of that legal practitioner or such employee, which book, document or article relates to the trust account practice or former trust account practice of such attorney or advocate: Provided that the Council or the Board or person authorised by the Council or Board may make copies of such book, document or article and remove the copies from the premises of that attorney, advocate or trust account practice.
(b) The legal practitioner referred to in paragraph (a) or employee in question may not, subject to the provision of any other law, refuse to produce the book, document or article, even though he or she is of the opinion that it contains confidential information belonging to or concerning his or her client.’
Readers are urged to familiarise themselves with the legislative and regulatory prescripts, which govern their operations all the time, and to ensure adherence thereto. Readers are further urged to read this article together with ‘Outsourcing by legal practitioners’ 2015 (Sept) DR 28.
In conclusion, practitioners are duty bound to produce and make available the required accounting records to appointed auditors or inspectors for purposes of fulfilling their appointment without any restrictions. Practitioners should shy away from citing reasons of the accounting records being with their accountants or bookkeepers, but make every effort to produce these on request, as they are responsible for maintaining these and keeping them at their offices.
The Practitioner Support Unit of the Attorneys Fidelity Fund is situated in Centurion.
This article was first published in De Rebus in 2018 (June) DR 11.