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Keeping records

Keeping records

By Jolyon Dunn

Practice Management 

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There is a strict regulatory framework in Victoria for law practices receiving trust money. Compliance with trust accounting requirements is critical and helps to minimise risks to the business.

 

Snapshot

  • The Legal Profession Uniform Law Application Act 2014 (Vic) (Uniform Law) provides for the regulation of legal practice and professional conduct in participating jurisdictions (currently Victoria and New South Wales), including how trust money is held and accounted for.
  • The Victorian Legal Services Board + Commissioner (VLSB+C) is responsible for operational regulatory functions under Uniform Law. The LIV undertakes trust account investigations on behalf of, and under delegation from, the VLSB+C.
  • The Uniform Law provides an independent review of trust account compliance via the requirement that law practices have their trust records examined at least once a year by an external examiner.

 

Trust record keeping requirements

The requirements for record keeping of trust money are set out in Part 4.2 of the Uniform Law. Section 130 provides that Part 4.2 applies to law practices that receive trust money in Victoria.

Receiving, disbursing and reconciling trust money

The Legal Profession Uniform General Rules 2015 (Rules) set out all the information that is required, including receipts or payments. Standard forms are available from www.liv.asn.au/LawBooks and are useful for new principals. Alternatively, the LIV’s Trust Accounting Online is a cloud based computer trust recording program for small practices available at www.ta.liv.asn.au. Once set up with trained staff the process of recording is straightforward. Some of the nuances of the Uniform Law and the Rules are described below.

Trust money received by a law practice must be deposited into the general trust account “as soon as practicable” – see ss137, 139, 140, 142 and 143. This means that if a weekend or public holiday prevents next day banking, then the law practice is not immediately in breach of the Uniform Law. However, the requirement to write up the trust cash receipts and trust cash payments book is “within five working days” – see rls44 and 45. This allows for those practices where a bookkeeper attends once a week to write up the trust records. Accordingly, a law practice must update records at least on a weekly basis.

The advantage of a computer system (one written for Uniform Law trust recording) is that records are updated in real time and can be available to all practice staff.

Each month the law practice is required to reconcile the trust money in its general account within 15 working days after the end of the month – see r48(3). For a large law practice with staff performing different levels of duties, the supervisor or bookkeeper has the responsibility for ensuring that the reconciliation is completed on time and a review occurs at a senior management level.

For sole practitioners and particularly practices with a bookkeeper who prepares handwritten (ie, manual) trust records, it is best practice that the reconciliation, together with cash books and the trial balance, are brought to the principal’s office on a set date. By doing so the principal is imposing a control on the bookkeeper. It provides the opportunity to review the reconciliation and query any items that are unusual. It is the practice of the LIV trust investigators to recommend that practitioners perform these steps.

Controlled money

Division 3 of Part 4.2 of the Rules includes r64 which sets out the requirement for a Register of Controlled Money Accounts (CMA). Usually CMAs do not have movements every month, so do not require a monthly reconciliation. However, they require a monthly statement containing details of each CMA – see r64(8).

In addition, there is a new requirement at r64(9) that:

The statement required to be prepared each month under subrule (8) must be reviewed by a principal of the law practice who is authorised to receive trust money and that review must be evidenced on the statement.

It is an anomaly that at the time the Uniform Law was finalised this requirement was not also implemented for r48 regarding the reconciliation of the general trust account. The writer is in favour of the requirement applying to both the general trust account and the CMA register.

True position

Section 147 of the Uniform Law requires that trust records are kept in accordance with the Rules and “in a way that at all times discloses the true position in relation to trust money”. To comply with this requirement, the following processes can be implemented:

System review: Consider the responsibilities of staff and whether they have access to receipting trust money and/or payment allocations of trust money. Allocations is the step of directing to which trust ledger the money is allocated. Consider if one person has control of both receipts and payments. Is an opportunity created where that person can “rob Peter to pay Paul”?

Review of files: Perform a personal check of files to establish that the files match the client trust ledger in respect of the receipts and payments. Evidence this by a worksheet checking that money received and paid agrees with the evidence on the file. Where there are branches of a law practice or a number of staff operating files, the reviewer should not be the usual supervising partner.

Risks to law practices

Risks: A loss of trust money, disciplinary action and/or external intervention by the VLSB+C, loss of the affected client, and reputational damage to the firm and practitioner.

Too much control vested in one person, be they bookkeeper, office manager, conveyancer, partner or sole practitioner, without appropriate checks and balances, creates an opportunity to misappropriate trust money and delays the early identification of defalcation and errors made in the recording of transactions.

The do’s and dont's of trust account record keeping

Do

  • Decide at the start to set out to comply with the record keeping requirements. If separation of duties is not practicable, then the reviewer of the reconciliation should approach the review with curiosity informed by the client matters.
  • Determine a set date or time for file reviews to occur and document whether the money received and paid agrees with the evidence on file.
  • Ensure that trust account statements are given to each person for whom, or on whose behalf, trust money is held – see rls52 and 53. The statement is the best tool for communicating costs and funds on hand, particularly in litigation matters.
  • If EFTs of trust money is to occur, ensure that control of passwords is kept so that the authorisation requirements of r43(2) are met – an EFT is effective immediately, and there is no such thing as a stop payment on an EFT.
  • Ensure that there is a time set for clearance of cheques to avoid drawing upon uncleared funds and the unintended deficiency of trust money if the deposited cheque is reversed by the authorised deposit-taking institution.
  • Ensure there is continuous virus protection and blocking on the software, with regular password changes.
  • Set up reports for entry errors in the trust accounting system that have never been resolved.
  • Nominate a person responsible for the requirement to report to Austrac all cash received in excess of $10,000. Create a register to identify Austrac reporting and implement a random audit process to verify reporting.
  • Ensure that the requirements of r42 are met before trust money is withdrawn for the payment of legal fees.
  • Ensure that computerised systems comply with the requirements of rls38-41.

Don’t

  • Withdraw money from one client’s ledger or CMA to pay another client.
  • Ignore irregularities or breaches of the Rules. Report them to the VLSB+C as required by s154 of the Uniform Law and proactively manage the rectification.
  • Ignore direct deposits into the general trust account. A process of follow up and checking with the bank is essential, with a nominated staff member providing a monthly update.
  • Ignore the requirement of s140 of the Uniform Law to bank all cash (other than controlled money) into the general trust account. This particularly applies to cash received at reception where a reconciliation of receipts to banking should be done each month.
  • Intermix trust money and non-trust money – see s146 of the Uniform Law.
  • Receive and bank into the general trust account (or a CMA) money that is not trust money as defined by s129(2) of the Uniform Law. This includes money in connection with a managed investment scheme or mortgage financing or providing a financial service.

Conclusion

The steps and tools suggested provide lawyers in practice with a method to comply with the trust record keeping requirements. More importantly, they assist lawyers in meeting the obligation to maintain records in a true position and protect the law practice from misappropriation.

 

Jolyon Dunn was a Fellow of CPA Australia. He was an LIV trust inspector from 1990 and the LIV’s Manager Investigations (Trust Account and Fidelity Fund) from 2005 until his retirement in 2016. Sadly, Jol passed away on 17 September 2017.

This special edition of the LIJ examines practice management areas covered in the LIV’s new practice management course starting this month. For more information on this practice management course, see here.


Disclaimer: Views expressed by commentators are not necessarily endorsed by the Law Institute of Victoria Ltd (LIV). No responsibility is accepted by the LIV for the accuracy of information contained in the comments and the LIV expressly disclaims any liability for, with respect to or arising from any such views.

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