Well, hate is probably too strong a word, but the emotion it conveys provides great clarity. These strong feelings are not limited to auditors, but often shared by legal practitioners, their staff and especially the accounts department. The pertinent question of course, is why would a routine, regular inspection cause so much apprehension?
Since no formal research has ever been done on this topic, and various training programmes are in place to facilitate skills transfer and knowledge development, one can only speculate as to the underlying reasons for animosity and apprehension. The discussion below explores various options.
Trust is Not Business As Usual
Business Audit is mainly focused on balance sheet movement, profit derived from income and expense statements, corporate and personal taxes, dividends and often inventory. Audits are based on concepts of asset value and ownership.
And this is exactly where the problem starts. A Trust audit is not based on common financial reports and the level of detail required to verify compliance may be excruciatingly precise.
To put it in other words: the familiar Financial Reports used for Business Audit are not suitable for Trust Audit. Commercial accounting systems are excellent for keeping and auditing Business books, but fall far short of the requirements of trust accounting and audit.
A popular commercial accounting system is often abused to capture trust account records. It’s lack of personal accounts for trust clients’ forces the use of supplier accounts for trust, and the trust cash book is hidden in the list of nominal accounts. This does not facilitate trust compliance verification, and may in fact contribute to obfuscating issues of non-compliance.
Trust Audit cannot be completed using Business Financial Reports.
Some Kind of System
At a certain level, trust accounting is very basic. This creates the very real possibility of attempting to keep trust accounting records in a less strict environment. Spreadsheets, trust management systems, or even hardcover paper record books may be considered.
Cheap, rough and ready solutions produced by fly by night vendors do not promote compliance. In fact, choosing such a solutions may have career ending consequences.
These solutions all present the same problem: lack of integration and automation. Using non-standard accounting protocols requires additional time, skill, effort and care to ensure that everything adds up correctly. Manual accounting raises the additional prospect of very low level errors occurring, such as mistakes in basic arithmetic. Formal accounting systems also provide structured processing with a high degree of internal consistency: each debit equals a corresponding credit. By using informal accounting protocols the risk of error in writing up a transaction wrong increases.
Unstructured, informal systems raise additional integrity concerns and require great care to ensure a high level of internal consistency.
Trust Accounting Niche Solutions
Despite what some market analysts believe, the number of true trust accounting solutions designed for clear and accurate record keeping is remarkably limited. Only a handful of vendors cater for this highly specialized market niche.
As so often in business, the ultimate question is one of make or buy. Do we invent our own system, and hope to cover all the bases, or do we buy an off the shelf solution? Basic bookkeeping is simple, anyone can write up debits and credits, what is required is the value add that produces synergy between the solution and the professional activities, increasing productivity and profit. Elegant solutions, which convince by their clarity and effectiveness.
Where such a simple, custom solution has been bought, periodic training and updates from the vendor may go a long way to ensuring compliance. Caveat vendor in a specialized market niche.
Specialized Compliance Reports
Compliance requires formal and informal reports. Formal Compliance Reports are defined by statute. More specifically some of the reports required by the Accounting Rules (Gazette 41781 20 July 2018) include:
- Client Balance List (184.108.40.206 and 54.15.1)
- Investments (220.127.116.11)
- Bank Reconciliation (54.10)
- Transfers from the Trust Banking account (54.11)
Bank Reconciliation illustrates that the individual transactions reflected on the internal cash book and bank statements correspond and periodically balance.
Investments require custom processing and reporting. These should correspond to relevant bank statements.
Trust Ledger analysis requires inspection of individual balances with a view of identifying and preventing debit balances; at the same time the sum total of trust balances should be equal to the cash book balance.
These are typically supported by a whole array of additional supporting documents and run time reports.
Custom, specialized reports with an emphasis on compliance should not only provide great clarity, but reduce the amount of time required to complete the required audit.
Not having access to the required reports, or not being able to readily identify the various elements of trust compliance undoubtedly undermines confidence in the reports and the integrity of the trust it reports on.
A perfect storm
Now, imagine an environment where the staff responsible lack confidence in the system deployed, lack insight into the nature and content of reports required and fail to appreciate the nature of queries directed at them.
Further, imagine the antagonism of the visiting auditor, confronted by an array of reports, often with exotic idiosyncratic titles, not directly transferable to the audit questionnaire.
Add to this mix a very strict time line with potential career ending implications for the legal practitioner, a truly complex and unpleasant scenario presents itself. Obviously, nothing to look forward to.
Lack of knowledge, lack of insight and ultimately lack of trust undermines all inter personal relationships and the necessary trust required to pursue the task at hand.
Which finally brings us to the ultimate question: how can this situation be remedied?
The simple, but perhaps not immediately apparent part of the solution is perhaps an extended time line. Start audit early. With additional time available for the formal final inspection, issues can be thoroughly explored and remedies applied which may not present themselves in a more pressurized environment. Rule 54.24.1 prescribes six months (after) the annual closing of the accounting records to submit the annual report. Since most firms financial year ends close at the end of February, this means the audit certificate is due no later than the last working day of August. Please note that at the time of writing, the LPC has granted deadline extension to end of September 2020. The certificate still needs to be submitted in as original hard copy, with all the incumbent risks of corona-virus infection.
Other suggestions which present themselves include the up skill and empowering staff to deal with the subject matter at hand. As recently as July 2019 the compliance regimen changed. Ensuring that directly responsible individuals are trained and aware of changes and how these affect their job tasks prevents unexpected problems. The ability to accurately identify Section 86 accounts and understand the content and composition of required compliance reports illustrates confidence.
By involving the vendor to provide training and guidance, compliance logic and report structures become and matter of course and not speculation and apprehension. If you are going to pay for the specialization, use the specialist.
Unambiguously titled reports that closely follow statutory requirements reduce confusion, and time spent matching reports to compliance check lists. Informal management reports that reduce confirmation of compliance to a few lines are invaluable in providing snapshot of the underlying data, even if not strictly required for compliance verification purposes.
There may be other, more specific avenues to explore, but with limited resources and pressing deadlines, these suggestions offer practical firsts steps in reducing animosity and building confidence. Start early; know the requirements and know the reports.
Carl Holliday is an attorney specialising in practice management and compliance.