The Zen of Work: All about Audits
With “Holly” on a mission to take control of her work situation – aiming to instil a feeling of Zen in her workspace – she has come to us seeking answers.
And we are happy to oblige Holly. As always.
After taking some time off during December to get some much-needed R&R, Holly has returned to her office rearing to get things well and truly up and running – determined to see her law firm soar in 2023.
In an effort to do just that, Holly has once again, started to focus her attention inward. Looking more closely at how her law firm is operating. Better still – how it should be operating.
And there is a lot to take in where the optimal operating of a law firm is concerned.
Take Auditing her law firm as an example.
Does Holly even need to have her law firm audited?
With Holly’s clients gearing up to prepare for their own Financial Year End, Holly has taken a long hard look at her own law firm. It’s clear that Holly needs to understand the whole process around auditing better…. And as a single practitioner, she best get her ducks in a row if she is going to confidently advise her clients on financial year end’s and auditing requirements.
So, let’s chat about all things Audit relatedand put Holly’s mind at ease.
Starting with the basics – what are financial statements or financial reports?
These terms are used interchangeably but mean the same thing.
Xero.com sets out what financial statements or reports are –
“report that shows the financial activities and performance of a business. It is used by lenders and investors to check a business’s financial health and earnings potential.
Financial statements can cover any period of time, although they’re most commonly prepared at the end of a month, a quarter, or a year.”
Financial statements can take the form of balance sheets, profit and loss statements, cash flow statements and statements of changes in equity (read more about these here), all making up the broader ‘financial statement”.
According to PwC, the purpose of financial statements is to –
“provide information about a company’s financial position and performance. This information is used by a wide range of stakeholders (e.g., investors) in making economic decisions. Typically, those that own a company, the shareholders, are not those that manage it. Therefore, the owners of these companies (as well as other stakeholders, such as banks, suppliers and customers) take comfort from independent assurance that the financial statements fairly present, in all material respects, the company’s financial position and performance.”
- Wait, what is an annual report?
Financial statements will form part of an annual report – which is a more detailed report reflecting a company’s operations and financial performance over the past year. Typically, an annual report contains highlights of a public company’s activities and performance during the previous year, future goals and objectives, a letter to shareholders from the CEO, an auditor’s report, and detailed financial statements (Xero).
What is financial year end?
According to Omni Accounts –
“Financial Year End (also known as fiscal year-end or FYE) is the closing off of a company’s accounts for their business year. At its core, it is nothing more than the 12-month (annual) accounting period for a company and is used to assess the annual profit, loss, and performance of a company’s finances.”
While a FYE doesn’t necessarily coincide with the end of a calendar year, it does often coincide with the personal tax year dates between 1 March to 28 February every year, which means that – for most South African companies – their financial year end occurs on the last day of February every year.
Now, Holly does admit that this whole scenario sounds like quite a big deal…. Is it really that important?
Well, financial year end is important for 2 reasons –
- A company’s FYE allows SARS to assess how much tax is payable to the state, and
- For listed and public companies they publish their annual financial statements so that investors can assess their investment performance and market analysts can understand their business operations.
So quite an important task then…
What is an audit?
An audit is the examination of the financial report or financial statements of a company – often presented in an annual report. This examination is conducted by someone designated as an auditor and (importantly), someone that is independent of the company.
The financial report includes a balance sheet, an income statement, a statement of changes in equity, a cash flow statement, and notes comprising a summary of significant accounting policies and other explanatory notes.
The purpose of an audit is to form a view on whether the information presented in the financial report, accurately reflects the financial position of a company at a given date – say at the end of the financial year. When examining the financial report, auditors must follow auditing standards which are set by a government body. Once auditors have completed their work, they write an audit report, explaining what they have done and giving an opinion drawn from their work (PwC).
Must a law firm be audited?
There’s no doubt that lawyers hold a certain degree of trust. So much so that as officers of the law, clients trust that their lawyer’s legal advice, opinion, and representation will always serve their best interests.
There is an unspoken fact that when a client entrusts money handed over to their lawyer, it’s not only safeguarded and protected according to the highest standards but that it will be properly accounted for according to all legislative requirements, rules, regulations, and codes of conduct. The same applies to the financial affairs of the law firm itself.
It therefore stands to reason that in the eyes of the public – it’s a fait accompli – that a law firms own financial records are accounted for, declared and audited according to accepted accounting practices, rules, regulations and codes of conduct.
It seems almost an obvious conclusion at this point – but Law firms are indeed required to have their firm audited.
Sec 86(1) of the Legal Practice Act 28 of 2014 (the LPA) states that all legal practitioners (as referred to in Sec 84(1)) must operate a trust account.
In operating a trust account, there is a requirement to have that trust account audited – set out in Sec 87((1) and 87(2) of the LPA –
“87. (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. (2) (a) The Council or the Board may, itself or through its nominee, at the cost of the Council or the Board, inspect the accounting records of any trust account practice in order to satisfy itself that the provisions of section 86 and subsection (1) are being complied with.”
The requirement to be audited is further confirmed in the Legal Practice Council Rules at Rule 54.1 to 54.30.
In fact, according to a pamphlet regarding the opening and operating of a law firm by the Law Society –
“In terms of Rule 54, every firm must submit an audit report to the LPC annually. A firm that commences practice for the first time must submit the report within six months of starting a practice, covering the first four months of practice.”
Lastly, just to drive home the point – according to the ‘Engagements on Legal Practitioners’ Trust Accounts’ (revised March 2020), issued by the Independent Regulatory Board for Auditors in March 2020, an audit as envisaged by both the Act and Rules of the Legal Practice Council, is “a reasonable assurance engagement within the scope of the International Standard on Assurance Engagements (ISAE) 3000 (Revised)”.
Suffice it to say that Holly will need to ensure that her trust account practice implements adequate internal controls to ensure that there is compliance with the Rules whilst also ensuring that all trust funds are protected and safeguarded (Rule 54.14.7).
There are a lot of attorneys who have the software packages in place but are just not sure how to fully use them, what everything does and how they can optimise their practice to ensure that it is performing with accuracy and reliability.
But, with the help of AJS, your practice (regardless of its size) can (and will) succeed.
We will continue going through tips, answering your FAQ’s, and providing you with information that will better equip the everyday user of legal tech, like you and like Holly, to achieve a state of Work Zen.
It’s all easy. If you know how… Just ask us.