It is that time of the year where firms are busy preparing for their annual Trust audit. This should be an easy exercise if you do your bookkeeping duties on at least a monthly basis and ensure everything is in balance monthly. If you do not balance your books on a monthly basis, not only do you not comply with the rules as set out by the LPA, but you dread the annual trust audit as you are not sure if you comply or not.
The funds in an attorney’s trust account are susceptible to theft, misuse and/or fraudulent activities. Due to these inherent risks, it is essential that a trust audit or inspection is carried out. The outcome of any trust audit or inspection is either a qualified or unqualified report.
Annual audit reports
Every auditor who has accepted an appointment as auditor shall within six months of the annual closing (financial year end) of the accounting records of the firm concerned, furnish the Council with a report which shall be in the form of the Fourth Schedule to these rules or in such other form as the Council may determine after consultation with the Independent Regulatory Board for Auditors.’
This article focuses on how attorney firms can best prepare for their opening, annual and closing audits or inspections. Due to this potential steep curve, the Attorneys Fidelity Fund (AFF) discuss a few pointers below on how to maintain your trust accounting environment, and thus be best prepared for your trust audits or inspections:
Ensure compilation of a list of trust creditors and balancing to the trust bank account on a monthly basis. A firm is deemed to have complied with r 35.9 if the accounting records are written up by the last day of the following month. Other accounting records to be compiled on a monthly basis are:
– this is a control account. It is a statement of all debits and credits as at a given date. All trust creditor balances can be listed individually or collectively on the credit side against the cash book balance on the debit side. Any disparities between the debit and credit columns indicate error.
– this is a bookkeeping record (electronic or otherwise) in which all trust receipts and payments are collectively recorded over the period for which reporting is done. It reflects the opening balance, the transactions (receipts and payments) over the period of reporting, and the closing balance. Payments are recorded on the credit side and receipts on the debit side. The cash book is a mirror of the trust banking account, and the differences between the two are made up by timing differences on transactions. The cashbook is a feeder to the trial balance and used for bank reconciliation statements.
Bank reconciliation statement
– this is a statement that reconciles the cashbook to the bank balance as it reflects in the trust bank account and explains the difference on a specified date between the bank balance shown on the trust bank statement and the corresponding amount reflecting in the cash book. The bank reconciliation statement assists with identification of irregularities and adds value if done on a monthly basis, or an even shorter periods, in order to follow up timely on any possible and/or identified irregularities. There should be no unidentified payments on the reconciliation as this can indicate a trust shortfall. The bank reconciliation should balance back to the actual bank statement.
Individual trust creditor ledger
– each entry on the cashbook should be posted to a specific trust creditor’s ledger. The total of all the trust creditors’ ledgers should equal your cashbook balance. This should give you peace of mind that your trust account is in balance. Should you have opened investment accounts in terms of Section 86(2) of the Act, individual creditors ledgers for those accounts should also be maintained, as they also form part of the trust. Trust investment balances should be reflected separately from your normal trust creditors. 5% of the interest earned on investments must be paid over to The Fund on a monthly basis.
No trust ledger, or any of the trust creditors’ accounts should have a debit balance. A debit balance suggests that a payment was made from an account that did not have sufficient funds. This in turn suggests that another trust creditor’s money was in fact used to effect the payment for another trust creditor.
Transfer journals and schedule
– transfer journals reflect all transfers for fees earned by the firm from the trust account to the business account. These can be reflected as a total of the amount transferred, which could be made up of various amounts from several trust creditors where fees are due and payable. Transfer schedule documents the details of the amounts involved, specifying the various amounts that make up the total transferred from trust to business.
– a suspense account records all receipts for money that cannot be allocated, perhaps because the owners of the funds cannot be identified. This account is susceptible to fraud and should be closely monitored. No payments should be effected out of a suspense account. Should funds that were allocated to suspense be suddenly identified, they should first be reallocated to the rightful trust creditor before any payments can be made. Payments can then be effected out of the trust creditor’s account specifically identified.
– this records all journals passed between two or more trust creditors. Journals should always be checked and approved by a senior person in the firm. Trust journals should occur for related matters and should be authorized by the trust creditor concerned. For every debit reflecting in a journal, there should be a corresponding credit or credits.
A firm should maintain all supporting documents giving rise to the accounting records listed above. Supporting documents refer to documents like paid cheques returned by the banks, receipt books, deposit books, EFT printouts reflecting the actual account number that was paid, payment requisitions, mandates given by clients. It is important that a firm keeps the original bank statements received from the bank, and not the bank statements printed from the Internet.
In closing, it is important for a firm to have an unqualified audit as this sends out the message that the firm is run prudently. The pointers provided above, if adhered to consistently throughout, should result in an unqualified audit report for the firm. A qualified audit report on the other hand suggests that one or more activities at the firm are not satisfactorily run, and/or the firm operated in a non-compliant environment.
Having an unqualified audit report based on prudent running of the firm projects a positive image about the firm, and the opposite is true.
This article was first published (partly) in De Rebus in 2018 (Jan/Feb) DR 18.
Does your firm comply with the above? If you require assistance with balancing your books or require training for your accounting staff, please give us a call at 083 395 8271 or visit our website www.quantim.co.za for more information.