Each year SAAS conducts external examinations of trust accounts operated by Queensland based Law Practices. We thought it would be useful to outline our role, the work conducted and list the most common breaches we reported in the 2017 reporting season.
The information presented is not intended to provide guidance for the operation of a Law Practice Trust Account – we always suggest a good first step for this purpose would be to refer to Queensland Law Society’s Trust Accounting Guide.
External Examiner Requirements
Appointment
An external examiner should be appointed within fourteen days after first receiving trust moneys. Notice of the appointment should be given to QLS within 30 days using QLS Form 31.
Annual Reporting
We prepare an external examiners report which is lodged with QLS either by 31 May for the usual March period ends or within 60 days of the Law Practice ceasing to hold trust money.
The external examiners report (QLS Form 5) includes our opinion on whether trust records have been properly kept in accordance with the provisions of the Legal Profession Act 2007 and Legal Profession Regulation 2007. A schedule of ‘Breaches of legislation’ is also included.
More on the Breaches Schedule
We have been accused of being pedantic on occasion in relation to External Examinations and consider this a compliment! We reported breaches on 80% of our reports last year.
It should be stressed that the inclusion of breaches on our report does not generally result in us concluding that trust records have not been kept within the provisions of the Act and Regulation. This overall opinion is dependent on the seriousness of, and systematic nature of breaches.
We have attended training sessions which included QLS staff & the view from QLS is that they expect external examiners to report all breaches noted during the examination. If we have any doubts we must include the matter. QLS can then form their own opinion as to whether any further action is required. In the past we have found QLS to be very understanding in relation to breaches if there is no indication of misappropriation or a failure to safeguard trust monies.
When QLS conduct their own examinations of Law Practice trust records they also assess the performance of the External Examiner by considering if breaches picked up by QLS were adequately reported in the prior External Examiner’s report.
Other Reporting Obligations
If we become aware of any matters that are likely to adversely affect the financial position of the Law Practice or represent irregularities in trust records or accounts, which we believe QLS ought to be made aware of, we have a separate obligation under the Legal Profession Act 2007 to report to QLS. Such matters must be reported within 7 days of our becoming aware of them.
Our Approach to the External Examination
We make contact with our Law Practice clients at the end of March to fix appointments for the March year end examinations which, in almost all cases are conducted at the Law Practice’s premises.
We have developed our own template using a paperless file. This was reviewed in detail last year to ensure compliance with the relevant standards on Assurance/Compliance Engagements which we early adopted ahead of 1 January 2018 amendments.
We are required to develop an understanding of the Law Practice including internal controls over trust records and to identify specific risks. The backbone of our work on compliance is done through completion of QLS external examiners voluntary checklist.
The external examiner must be an individual rather a firm. SAAS director, James Kenward, signs off on all our Law Practice external examinations. Despite the best efforts of staff to drag the work away from him, James also conducts all fieldwork and testing required.
Breaches raised are always discussed with the Practice prior to lodging our report with QLS. We lodge on the Law Practice’s behalf via email to QLS which has proven to be easier than the historic method of lodging paper copies. On conclusion of our work, we issue a management letter to the practice outlining matters arising from the Examination.
March 2017 Breaches
For the fifteen reports we lodged in 2017 only three did not include any breaches of legislation. All were considered compliant overall with the Act and Regulation.
The most common breaches of the Legal Profession Regulation 2007 reported by us were as follows:
Section 44 - reconciliation of trust records
Monthly reconciliations should be conducted within 15 working days of the month end. Failure to prepare (and document) a reconciliation during the year within this timeframe is an obvious breach. If anything unusual is noted on a reconciliation and not followed up/investigated promptly this could also be deemed a breach.
Sections 41 & 42 - recording transactions in the trust payments cashbook & trust ledger accounts
Breaches here included the failure to record cheque payments in the cashbook within the required 5 working days and insufficient details being recorded as required by the Regulation such as the use of “Trust to Office Transfer” as a description when settling fees (does not identify the purpose of the payment).
Section 34(5) – particulars required on trust receipts
The regulation is very prescriptive here & where software is used any errors tend to be repetitive. Breaches picked up in 2017 included inadequate matter descriptions and the failure to correctly record the actual date money was received, if different to the receipt date.
Section 29 - copies of trust records to be printed
Section 29 does require certain records to be hard copy printed. These include the monthly reconciliations and the listing of trust ledger balances. Other records need not be printed if they can be printed on demand.
As an external examiner we find it useful if the following reports are printed each month:
- Reconciliation & list of balances (as required by Section 29)
- Receipts cashbook for the month
- Payments cashbook for the month
- Report of overdrawn trust ledgers (hopefully will always state none to report)
- Report of trust journals (again even if none to report)
It is ‘best practice’ for the principal to sign reconciliations each month to evidence a review.
Section 35 –deposit records
We find that most funds received are now via EFT. Where cash or cheques are banked into trust there are requirements in relation to deposit records. Failure to include specific information as required by section 35 or to retain copies of deposits in order represent breaches of the Regulation.
Section 37 – payments by cheque
Where a bank issued chequebook is used we occasionally see ‘or bearer’ rather than ‘to order’ and cheques that are not crossed ‘not negotiable’ which are clear breaches. If information in relation to the payment is not recorded on the Law Practice’s software as the cheque is written, then the cheque butt must include specific information under the Regulation to avoid a breach.
Section 53(6) – the requirements to issue trust account statements
Under some circumstances there is a requirement to issue statements to clients after 30 June each year. There is also a requirement to provide a statement on closure of the matter or if one is requested by the client.
The June statements can be overlooked which would lead to a breach. We have started to issue a reminder email to our Law Practice clients at the beginning of July with the specific requirements.
We look forward to seeing our existing Law Practice clients for the March 2018 external examinations. We would be happy to work with new Law Practices, please call James Kenward or email
