MYTH BUSTING COMMON BELIEFS: Part 2

Like our non-performing staff can do the bookkeeping…

We have said this time and time again; a law firm is not just a law firm. A law firm is a business. And as a business you have expenses. Lots of expenses. It therefore makes sense that as a business owner, you would be focused on making cost-effective decisions for your business. After all, no business nowadays has the cash to throw about willy nilly like.

Least of all, you don’t want to go spending excess money on accounting services when you have a perfectly capable person already in-house to perform these tasks. We are of course referring to the capable office assistant you hired a month ago. Let’s be honest, you hired her because of how capable she is. And you have every intention of using her to do your accounting. Right?

While that might sound like a good – cost saving – plan, let’s explain why it isn’t. On both ’counts.

First things first – let’s talk about the basics. For instance, attorneys trust accounting is different from run-of-the-mill business accounting. Right?

Let’s Talk about Trust Accounting

A cornerstone of the attorneys’ profession is the client-centric approach taken by legal practitioners with all matters involving the public, their clients, and the law.

And a lot of this stems from being able to trust your legal practitioner to handle both your money and your affairs in a manner befitting someone you can trust with all your dirty secrets (ok maybe they’re not dirty secrets, just your private affairs). Like your lawyer. Trust accounting therefore fits squarely within this realm of both trust and serving the public, their clients, and of course the law responsibly. And of course, legally. After all that is the realm within which you operate.

So, while trust accounting is more onerous than run-of-the-mill business accounting, they both form part of the same broad concept.

What then is a trust account?

A trust account refers to a bank account opened by a legal practitioner (who is in possession of a **Fidelity Fund certificate) to receive or hold funds or property belonging to another person or a deposit on account of fees or disbursements in respect of legal services to be rendered. In other words, a client. The lawyer acts as a custodian of these funds and invests the money in accordance with their clients’ wishes. The funds are then only accessed by the lawyer once legal services have been provided, or expenses have been incurred on behalf of the client.

** Getting a Fidelity Fund Certificate

Legal practitioners practicing for the first time must complete a  legal practice management approved course (referred to as practice management training or PMT) as offered by Legal Education and Development (L.E.A.D), within the period of one year after the date on which he or she was required for the first time to be in possession of a Fidelity Fund certificate. Payment of a fee as determined by the Legal Practice Council will also need to be made. In the case of a first-time applicant (requiring a Fidelity Fund certificate), they will need to submit proof to the Legal Practice Council that they have indeed completed the legal practice management course (proof of completion must accompany the application for the Fidelity Fund certificate).

If an applicant was in possession of a Fidelity Fund certificate the previous year, the certificate of an auditor – who undertook an audit of the trust account bank accounts for the year ending immediately prior to the application – must have been submitted (or proof of such submission) must accompany the application.

• Note: A Fidelity Fund certificate is valid until 31 December of the year in respect of which it was issued.

NOW – 3 Reasons Why Your Business Needs Proper Accounting

1.   Most office assistants don’t have an accounting background – let’s talk about the elephant in the room. You didn’t really hire your office assistant to be your bookkeeper. You hired her because she was capable. Those are two very different things. You hired the office assistance to manage the day-to-day tasks in and around the office. Because of this, they are unlikely to have any finance or accounting background experience. When it comes to complex transactions or trust accounting, they might have to drag you, the business owner, into the process. Or worse still, make a mistake that could affect your Fidelity Fund Certificate and credibility not only with the Legal Practice Council but with your clients as well. To truly free up your time to run your business and not manage your books alongside your office assistant, you need to hire a professional accounting staff or better still utilise professional Legal Accounting Software.

2.   Your office assistant cannot focus on your business financials or offer you financial solutions – office assistants often juggle many tasks inside the office. Their primary goal is to make sure the day-to-day operations of the business run smoothly and efficiently. They may be answering phones or handling client requests or assisting you with other daily duties, constantly being pulled in different directions. If your financials are not clean and accurate, things can get missed. If things are missed, you’ll never have a clear picture of where you could be saving money. And this could, once again, have a knock-on effect when it comes to your duties with regards to your trust accounting.

3.   When your books are wrong, you are creating more work for your accountant, which ultimately costs you more money in the long run – this is where you are unlikely to be saving as much money as you had hoped by having your office assistant manage your accounting. When you have a non-accounting person in charge of your books, some complex situations may have them in over their heads. This will likely create more work for your accountant to tackle. Also, when you don’t have a dedicated bookkeeper managing your books, things are bound to get missed. When tax season rolls around and your books are not accurate, your accountant will have to spend time cleaning things up. The fees that accumulate from scenarios like this can be hefty.

The lesson here? Don’t have someone who isn’t qualified, manage a task that they are simply unable and unqualified to do. This sets you both up to fail. And the “cost saving” isn’t worth it.

You Are Required by Law to Manage a Trust Account Responsibly

The Legal Practice Act 28 of 2014  (“LPA”)requires every legal practitioner to effectively operate a trust account, which must be kept at a bank with which the Legal Practitioners’ Fidelity Fund has made an arrangement (Section 63(1)(g).

• Note: A legal practitioner may not deposit money, nor invest money in accounts held at a bank which is not a party to an arrangement as provided for above, unless prior written consent of the Fidelity Fund has been obtained.

With reference to Section 84 and 86 of the LPA as well as to the Rules at Rule 54.14 –

• The legal practitioner must deposit any money (held by such practice on behalf of the person) as soon as possible after receiving same, into the trust account.
• In addition, they may (of their own accord) invest in a separate trust savings account or other interest-bearing account any money which is not immediately required for any particular purpose. Or, if instructed to do so by the payee, open a separate trust savings account or other interest-bearing account for the purpose of investing any money deposited in the trust account of that practice, on behalf of such person (the proviso being that the legal practice exercises exclusive control as trustee, agent or stakeholder or in any other fiduciary capacity).
• If any interest is accrued in the trust bank accounts, the legal practitioner is obligated to pay over all interest generated or accruing on the separate trust savings or other interest-bearing account opened by the legal practitioner to the Fidelity Fund. Additionally, 5% of the interest generated in an investment account opened on the specific instructions of a client is payable to the Fidelity Fund. The balance of this interest must be paid to the client.
• But it must be kept in mind that a legal practice must ensure that the total amount of money in its trust banking account, trust investment account and trust cash at any date shall not be less than the total amount of the credit balances of the trust creditors shown in its accounting records.
• If a legal practitioner is not in possession of a Fidelity Fund Certificate, they (or any person employed by that legal practitioner) may not receive or hold funds or property belonging to any person, nor may they take a deposit on account of fees or disbursements in respect of legal services to be rendered.
• So, it is safe to say that having both a Fidelity Fund Certificate and operating a Trust Account are fundamental to both operating and effectively managing a legal practice.
• Note: the capital amount deposited by a client into the trust account of an attorney remains the property of the client. The attorney merely is a custodian of the funds and invests the money in terms of the client’s wishes. The attorney will only be entitled to access the funds held in trust once he has provided legal services to the client or has incurred expenses on behalf of the client.

Accounting on a Trust Account

According to Section 87 of the LPA, a legal practitioner must immediately report and account (in writing), to the Legal Practice Council the total amount held in a trust account bank account and money held as trust cash.

In addition, when it comes to reporting to the Legal Practice Council regarding non-compliance, Rule 54.14.10 finds application –

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.

Equally, and unless prevented by law from doing so, every legal practitioner is required to report to the Legal Practice Council any dishonest or irregular conduct on the part of a legal practitioner in relation to the handling of or accounting for trust money on the part of a trust account.

Therefore, a proper (and reliable) accounting program for your legal practice is an absolutely necessary and crucial tool.

Here at AJS we have a Legal Accounting System that is trusted and preferred by auditors of the Legal Practice Council thanks to our powerful accounting engine and therefore added integrity it offers.

With all the above set out – and if it isn’t clear by now – we believe that having your office and/or executive and/or administrative assistant or wife/husband/partner/friend/relative (unless they are practising accountants) manage your accounting or books is neither a good nor is it a wise cost saving idea for a law firm or any business.

At this juncture, we are sure you will agree that the answer is plain for all to see – the myth is BUSTED!

If you are in need of a service provider who has a proven track record or if you want to find out how to incorporate a new tool – like AJS’ trusted Legal Accounting – into your existing practice management suite – or if you simply want to get started with legal tech – feel free to get in touch with AJS. We have the right combination of systems, resources, and business partnerships to assist you with incorporating supportive legal technology into your practice. Effortlessly.

AJS is always here to help you, wherever and whenever possible!

– Written by Alicia Koch on behalf of AJS

(Sources used and to whom we owe thanks – MGA)