Are you worried about complications related to trust accounting? This article examines the rules that you need to follow and demystifies the process.
In trust accounting, you’re conducting bookkeeping that’s related to trust transactions. In simple terms, this means you record the payment and receipt of somebody else’s money into the trust. You do this on behalf of the person who paid the money into the trust. There are several types of trust that you may conduct accounts for. These include the following:
Licensee Trust Accounts
Project Bank Accounts
Public Accountant Trust Accounts
Solicitor Trust Accounts
It’s the last of those that this article focuses on. Specifically, we’re going to look at solicitor’s trusts and the requirements you must meet during an audit.
Why Does an Audit Happen in the First Place?
It all comes down to a combination of two documents:
1. Legal Profession Uniform General Rules 2015
2. Legal Profession Uniform Law (NSW)
These state that all law practices must have any trust records examined by an external auditor once per financial year. This is the case if the trust had held or received money.However, transit money isn’t included.
This audit will examine your records from 1st April to 31st March of the year that follows. Upon receiving the audit results, you must submit the audit to the Law Society by 31st May. It is your responsibility to find an appropriate auditor. The auditor must have registration with ASIC. Plus they need to have qualifications as per section 79 of the Conveyancers Licensing Act 2003.
Beyond that, there are some rules relating to who cannot conduct the audit:
The auditor may not be a partner or under the employment of the person receiving the audit. This requirement extends to any point within the previous two years. That means your auditor cannot conduct the audit if you employed them within the past 24 months.
The auditor may not hold shares or be a licensee in any company that is a licensee of the trust. This only applies if that company has 19 or fewer shareholders.
What Does a Trust Audit Entail?
First, let’s look at what happens if you don’t conduct a trust audit when required. You may be subject to the following penalties:
The authorities may place a condition on your license.
Cancellation of your existing license.
Disqualification from getting a different license.
The good news is that these audits can also highlight misconduct within your practice. Such was the case with Christopher Vincent Helby.
Mr. Helby began practicing law in 1979. However, a trust account audit led to The Law Society of NSW suspending his license in 2013.
They alleged that: “…He had failed to disclose costs, failed to provide trust account statements, was “grossly” overcharging” and transferred trust money without authority.”
If you have several members in a trust account, an audit could reveal such misconduct. This would allow you to take action against the offending party.
So, what does a trust audit entail? Your auditor will likely conduct all of the following activities as part of their work:
Conduct a compliance review on the trust account.
Review all relevant procedures and practices related to the account.
Identify issues that you need to consider.
Examine the trust ledger accounts.
Review of all of the relevant payments and trust receipts.
Confirm that the trust’s balances match expectations.
Acquire all required assurance reports.
Review the trust’s journal.
Examine the matter files related to the trust.
Review the general bank accounts as they relate to the trust.
Check all bank reconciliations and statements.
Examine any controlled money accounts.
It’s also important that you understand the dates related to trust auditing as mentioned above. Failure to work within these timeframes may leave you open to one, or more, of the penalties.
Audit Submission Requirements
The above gives you a good idea of the actions that the external auditor will take.
As part of this work, your auditor will need access to the following documents:
The reconciliation records that relate to the trust account. You should keep these on a monthly basis.
Any statements relating to the trust from within the auditing period.
The receipt and deposit books for the trust account.
The cash book that covers your computer systems and any manual systems that the trust uses.
Any cheque books relating to the trust.
Full details of any transfers made electronically.
Records related to any overdrafts on the account.
The client ledgers and journals for the trust account.
These are all documents that you should maintain over the course of your management of the trust. As such, you should aim to prepare them in advance of the auditor arriving. It’s best to keep all of these documents in a central location. This ensures there are no delays, which means less risk of going past the deadline for submission of the audit.
It’s also crucial that you know who needs to complete an audit. In this case, any licensees must submit an audit if they received or held trust money during the examined financial year.
The same goes for previous licensees and people who represent a licensee.
Finally, you may wonder what happens if you don’t require an audit. In this case, you must still lodge a statutory declaration to say that you have not held or received money related to the trust.
Failure to lodge this application could lead to a fine.
Completing a Solicitor’s Trust Audit
There’s a lot of information to unpack here. The key detail is that you must complete an audit every year, assuming the trust has held or received money. Even if it hasn’t, you must complete a statutory declaration.
Beyond that, your work involves finding an external auditor and collecting the required documents.
From there, the auditor handles the lion’s share of the work. You’re just responsible for submitting the audit upon completion.
Perhaps you’d like some help with your audit. If so, call Bottrell Business Consultants on 02 49 336 888 for a free consultation. We’ll help you figure out what you need to do to stay compliant.