“Come on Mister Potter, it is not a dark art.”
Harry looked at this Tormentor and thought “This is alchemy. I am not an alchemist. If I had wanted to be an alchemist, I would have studied alchemy. I wanted to be a magician, a wizard. I studied magic, not alchemy.”
The Tormentor continued in a soft, delicate, menacing tone, making even nice words sound like threats.
“You see here, and here and here? You have used rocks, instead of pebbles, and still you manage to arrive at a point of equilibrium. How exactly did you balance that?”
Harry sighed.
“I’m not even sure what the difference is between a rock and a pebble and he wants to know how it balances?”
“I should have studied law, thought Harry. My cousin John seems to be enjoying his career, and he never complains about his audit. I am sure attorneys audits are much easier.”
That is probably because John uses Dynamic to prepare his books.
A trust audit requires certain specific reports. There are general reports, and there are custom reports focused on the trust only. This is all regulated by the Legal Practice Act 28 of 2014 and the Rules as per section 95(1), 95(3) and 109(2) of Gazette 41781 starting on page 72.
Rule 54.10 states that A firm shall update and balance its accounting records monthly and shall be
deemed to comply with this rule if, inter alia, its accounting records have been written up by the last day of the following month.
Required Procedure
Rule 54.15.1: Every firm shall extract monthly, and in a clearly legible manner,
- a list showing all persons on whose account money is held or has been received and the amount of all such moneys standing to the credit of each such person, who shall be identified therein by name, and shall total such list
- and compare the said total with the total of the balance standing to the credit of the firm’s trust banking account,
trust investment account and amounts held by it as trust cash, in the estates of deceased persons and other trust assets in order to ensure compliance with the accounting rules.
This is the headline test.
Portion of a client balance list, showing trust cash books, investments and client accounts. Business and trust balances are clearly distinguishable and all trust accounts display credit balances. Courtesy Dynamic Lawyers Trust Account software.
For the trust specifically three primary reports are required:
The Client Balance List
The Trust Cash Book
The Trust Investment Balance List
There are supporting reports, which include
The Trust Bank Reconciliation
The Full Ledger
And additional activity reports, such as
The Trust to Business Transfer List
And, for verification, some of these reports rely on external reports, such as bank statements. Compliance requires that all transactions be written up at least monthly and that this can be verified using monthly reports. Update and balance monthly, see Rule 54.10.
The Client Balance List
Since the trust by definition does not have a trial balance, a custom report is required listing all client accounts with trust balances. Rule 54.14.8 requires a list of such trust credit balances.
Trust accounts not to be in debit
Rule 54.14.9: A firm shall ensure that no account of any trust creditor is in debit.
Reports to Council of non-compliance
Rule 54.14.10 states that A firm shall immediately report in writing to the Council should the total amount of money in its trust bank accounts and money held as trust cash be less than the total amount of credit balances of the trust creditors shown in its accounting records, together with a written explanation of the reason for the debit and proof of rectification.
54.14.11 requires that A firm shall immediately report in writing to the Council should an account of any trust creditor be in debit, together with a written explanation of the reason for the debit and proof of rectification.
It is suggested that these rules only apply at month end, once the books have been balanced and any unresolved deficits remain. After all, reporting on any event before the final outcome is known is a recipe for confusion.
The Trust Cash Book
Every transaction occurring on the trust bank statement must be accurately and correctly reflected on the trust cash book. Trust bank charges, interest and VAT refunds must be accurately accounted for in full detail. The Legal Practitioners Fidelity Fund is the designated trust creditor of such interest and entitled to payment in terms of Rule 54.14.16.1. Note that where trust bank bank charges exceeds trust interest, business money must be used to prevent a deficit from occurring. The trust does not have income and expense accounts, and a separate ledger should be opened dedicated to all interest and bank charges transactions in the name of the LPFF.
Withdrawals from a firm’s trust banking account shall be made only in terms of Rule 54.14.14.1 to or for a trust creditor; or Rule 54.14.14.2 as transfers to the firm’s business banking account … [see the fine print].
The Trust Investment Balance List
In addition to the list of current balances, a separate list of investments need to be maintained.
Transfers from trust investment account
Rule 54.14.7.3 specifies that unless the firm has received written authorisation for the payment of any guarantees issued by a bank on the strength of a trust investment, that any amount withdrawn by it from a trust investment account is deposited promptly by it in its trust banking account.
Generally this means money withdrawn from trust investments must be received on the trust current account.
Supporting Reports
These are the headline tests, comparing the total of the client trust balances to the total of the trust bank balance. The reports used for this headline test must be verified against themselves for integrity and accuracy.
The Trust Cash Book Reconciliation
The trust cash book should match the trust bank statement. Not only should each balance match monthly, all transactions should correspond on a one to one basis. Every single item on the trust bank statement should appear on the trust cash book.
Prompt depositing of trust monies is required by Rule 54.14.7.2 which states that all money received by it on account of any person is deposited intact into its trust banking account on the date of its receipt or the first banking day following its receipt on which it might reasonably be expected that it would be banked;
The process by which the “match” is confirmed is the reconciliation. This should result in a report which confirms the matching balances. Outstanding transactions, meaning a transaction occurring on on document but not the other should be investigated. Red Flags include recurring monthly outstanding transactions, and very old outstanding items.
The Full Ledger
A complete, detailed ledger report of all transactions for each client should be available and inspected for accuracy. The sum of transactions should match the balance on the Client Balance List and correspond with contra entries. Trust receipts or payments (cheques / EFTs) should be verified on the cash book.
Additional Reports
The Trust to Business Transfer List
Rule 54.11 Trust money shall in no circumstances be deposited in or credited to a business banking account. Money other than trust money found in a trust banking account at any time shall be transferred to a business banking account without undue delay. A firm shall be deemed to have complied sufficiently with this rule if it:
54.11.1 makes transfers from its trust banking account to its business banking account at least once a month; and
54.11.2 ensures that, when making a transfer from its trust banking account to its business banking account:
54.11.2.1 the amount transferred is identifiable with, and does not exceed, the amount due to the firm;
54.11.2.2 the trust creditor from whose account the transfer is made is identified; and
54.11.2.3 the balance of any amount due to the firm remaining in its trust banking account is capable of identification with corresponding entries appearing in its trust ledger.
Dynamic’s Analyzed Trust to Business Transfer not only auto-corrects trust deficits, keeping you out of trouble, it also separates funds transferred to cover fees and disbursements. A single bulk transfer amount reduces bank charges and the risk of error.
Portion of a trust to business transfer report, identifying each account, the amount being transferred and the total amount available for transfer. Courtesy Dynamic Lawyers Trust Account software.
This means that transfers may be done repeatedly during a month. Funds transferred from the trust banking account must be received in a business banking account. Funds transferred must be identifiable as far as the the amount and the trust creditor is concerned. Only trust funds available to a trust creditor may be transferred.
For more information on easy to read and accurate trust audit reports, please visit www.DynamicLTA.com or scan the QR tag below with your mobile device for a complete business card.
