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The South African Institute of Chartered Accountants Circular 10/2005

1 Issued August 2005

REPORTING ON ATTORNEYS’

TRUST ACCOUNTS IN TERMS OF

THE ATTORNEYS ACT AND THE

RULES OF THE LAW SOCIETIES

Introduction

In terms of section 78 of the Attorneys Act, 1979 (the Act) and specific

rules of the respective Law Societies, an attorney’s trust account is

required to be audited. Where an attorney’s practice is not incorporated

in terms of the Companies Act, there is no further requirement for audit

other than that referred to above. There has been some debate about the

ambit of the auditor’s duties in terms of the Act and the specific rules

of the Law Societies, particularly with regard to whether such rules

extend to the business accounts of the attorney’s practice. SAICA has

sought Senior Counsel’s opinion on this matter.

Legislation and rules

An attorney’s practice must comply with the requirements of the Act

and with the provisions of the rules of the statutory provincial Law

Society applicable to that attorney. There are four statutory Law

Societies, namely:

• The Cape Law Society;

• The KwaZulu Natal Law Society;

• The Law Society of the Free State; and

• The Law Society of the Northern Provinces.

In pursuance of their powers in terms of the Act, each of the Law

Societies has published rules regulating various aspects of the

attorneys’ practices within their jurisdiction. The rules of the Law

Societies generally are similar to each other. In this circular, reference

is made to the rules of the Law Society of the Northern Provinces, as

these were the rules referred to by Senior Counsel in his opinion.

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CIRCULAR 10/2005 REPORTING ON ATTORNEYS’ TRUST

ACCOUNTS IN TERMS OF THE ATTORNEYS

ACT AND THE RULES OF THE LAW SOCIETIES

Issued August 2005 2

In terms of the Third Schedule (the form of report of the independent

accountant) of the rules of the Law Society of the Northern Provinces,

an auditor is required to report that the attorney’s practice has complied

with certain sections of the Act and the rules of the Law Society. The

most important sections of the Act and the rules, which has

interpretation difficulties, are sections 78(4) and 78 (6)(d) and

Rule 68.1.

Section 78(4) provides as follows: “Any practising practitioner shall

keep proper accounting records containing particulars and information

of any money received, held or paid by him for or on account of any

person, of any money invested by him in a trust savings or other

interest-bearing account referred to in subsection (2) or (2A) and of

any interest on money so invested which is paid over or credited to

him
”.

Section 78(6) provides as follows: “For the purposes of subsections (4)

and (5), 'accounting records' includes any record or document kept by

or in the custody or under the control of any practitioner which relates

to - …………………

(d) his practice
”.

Rule 68.1 provides as follows: “A firm shall keep in an official

language of the Republic such accounting records as are necessary to

represent fully and accurately in accordance with generally accepted

accounting practice the state of affairs and business of the firm and to

explain the transactions and financial position of the firm including

and without derogation from the generality of this rule —

68.1.1 records showing its assets and liabilities;

68.1.2 records containing entries from day to day of all moneys

received and paid by it on its own account;

68.1.3 records containing particulars and information of all moneys

received, held and paid by it for and on account of any person

as well as of all moneys invested by it in terms of section 78(2)

or section 78(2A) of the Act and of any interest referred to in

section 78(3) of the Act which is paid over or credited to it, as

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REPORTING ON ATTORNEYS’ TRUST CIRCULAR 10/2005

ACCOUNTS IN TERMS OF THE ATTORNEYS

ACT AND THE RULES OF THE LAW SOCIETIES

3 Issued August 2005

well as any interest credited to or on any separate trust

savings or other interest-bearing account referred to in section

78(2A)
”.

Issue

Section 78(6)(d) refers specifically to the accounting records of an

attorney’s practice despite the fact that the heading to section 78 of the

Act refers to “trust accounts”. It could be interpreted that the

accounting records of an attorney’s practice as specified in this section

include the business accounts of the practice.

Rule 68.1 seems to support this interpretation, as it makes reference to

an attorney’s practice being required to keep proper accounting records

in accordance with generally accepted accounting practice, which will

represent fully and accurately the transactions and financial position of

the practice, including records showing its assets and liabilities.

An alternative view, however, is that the auditor has no statutory duty

in terms of section 78 of the Act to report on the business accounting

records. In so far as the rules purport to impose such a duty, they are

ultra vires the provisions of the Act.

The alternative view holds that section 78 of the Act addresses trust

money. Section 78(4) refers specifically to the duties of an attorney in

relation to trust money, and section 78(6) in turn refers back to section

78(4). The auditor’s duties therefore extend to reporting on the trust

accounting records of the attorney’s practice and no more.

In the light of these divergent interpretations SAICA sought Senior

Counsel’s opinion on whether, in terms of the Act and the rules of the

Law Society of the Northern Provinces, an auditor is required to audit

the attorneys’ practice business accounting records.

Legal opinion

Senior counsel, Schalk Burger’s opinion on the above issue is that the

reference to “his practice” in section 78(6)(d) of the Act is not a

reference to all accounting records of the practice including the

business accounting records, but includes the business accounting

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CIRCULAR 10/2005 REPORTING ON ATTORNEYS’ TRUST

ACCOUNTS IN TERMS OF THE ATTORNEYS

ACT AND THE RULES OF THE LAW SOCIETIES

Issued August 2005 4

records only to the extent necessary to enable the auditor to perform his

mandate in terms of Rule 70.4 (duties of an auditor). This involves an

investigation into the attorney’s trust account. This follows from the

introduction to section 78(6) (“For the purposes of sub-sections (4) and

(5)
”).

The Third Schedule of the rules (the form of report by the independent

accountant) was reviewed by Senior Counsel for purposes of his

opinion. He pointed out that, in terms of the Third Schedule, the

independent accountant (reference used in the Third Schedule for

independent auditor) has to certify, inter alia, as follows:

2. I/we examined … the trust accounting records and trust account

transactions of the firm with specific reference to the following

provisions of the Act and the following rules of your Society:

2.1 …

2.2 Rules 68.1, 68.6 …

In Senior Counsel’s opinion, the introduction to paragraph 2 makes it

clear that the accounting records were examined only in the context of

the trust account and trust account transactions and not in the wider

context, suggested by an unqualified reading of Rule 68.1.

Since Senior Counsel gave his opinion, the Third Schedule of the rules

has been replaced by a new form of report. The opening paragraph of

the report now reads as follows:

I/We have audited the trust accounts of the abovementioned firm to

determine whether those accounts were maintained in compliance with

sections 78(1), 78(2), 78(2A), 78(3) and 78(4) … and with

rules 68.1 …

The third paragraph of the report reads as follows:

This report covers the accounting records relating to the firm's trust

accounts and does not extend to the financial statements of the

abovementioned firm taken as a whole
”.

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REPORTING ON ATTORNEYS’ TRUST CIRCULAR 10/2005

ACCOUNTS IN TERMS OF THE ATTORNEYS

ACT AND THE RULES OF THE LAW SOCIETIES

5 Issued August 2005

Senior Counsel’s opinion was given on the basis of the earlier version

of the Third Schedule of the rules. The portions of the Third Schedule

quoted above lend further support to Senior Counsel’s opinion that the

accounting records” of an attorney’s practice may be examined by the

auditor only to the extent that the auditor is required to perform his

mandate of carrying out an investigation into the attorney’s trust

accounts.

Conclusion

On the basis of Senior Counsel’s opinion, auditors of attorneys’ trust

accounts should investigate the business accounts only to the extent that

they need properly to audit the trust accounts.

Johannesburg I Sehoole

August 2005 Executive President