Attorneys trust accounts engagements
The new South African Legal Practice Council Rules (Rules), issued by the Legal Practice Council (LPC), came into effect on 1 November 2018. However, the revised IRBA Guide for Registered Auditors (IRBA Guide) has not yet been issued, which has created uncertainty among auditors regarding implementation of the Rules. This article places the new requirements into context and explains the practical implications for legal practitioners and auditors alike.
The new requirements
The LPC issued the new Rules to incorporate the sections of the Act that will become effective, but the vast majority of these new Rules were addressed in the previous version of the Rules. Therefore, this is not a new set of requirements in its entirety, but rather an expansion that is not as extensive as the previous revision of a few years ago.
The new Rules and certain sections of the Legal Practice Act 28 of 2014 came into effect on 1 November 2018. Legal practitioners should comply with these requirements, and auditors should test compliance from 1 November 2018, while testing compliance with the old requirements up to 31 October 2018.
Reference should be made to these new sections of the Act and the Rules when auditing compliance. The changes to the directives are not significant and only require the introduction of a few additional procedures. The LPC strived to facilitate the process for legal practitioners and auditors by already including an audit report template in Schedule 8 of the new Rules. Referring to the old Rules up to 31 October 2018 and to the new Rules from 1 November 2018 will typically affect the following audit documents:
- planning documents
- communication with audit team
- communication with client
- engagement letter
- representation letter
- audit report
The IRBA Guide
The Independent Regulatory Board for Auditors (IRBA) issued a revised IRBA Guide during 2016/2017, when the previous Act and Rules came into effect, and ISAE 3000 was revised. This Guide is still valid, with a cautionary warning, since the Guide has not yet been updated with the new sections of the Act and the new Rules coming into effect.
Although the IRBA has since initiated the process of revising the Guide, the new Guide will only be finalised and become effective from March 2020. In the interim, auditors are being left to their own devices.
While waiting for the updated IRBA Guide to be issued, auditors should apply the existing Guide, while continually referencing the old and new sections of the Act and Rules to ensure that all required procedures are followed, and that reporting is done in terms of the correct set of requirements.
The conundrum: Why the dual requirement?
Since most legal practitioners run with a February, March or April year-end and the new requirements were effected on 1 November 2018, the question is: Which set of requirements would apply and be referred to in audit reports?
The LPC recently indicated that the new requirements are effective for year-ends ending on or after 1 March 2019. However, legal practitioners need to comply with the new requirements from 1 November 2018 and their auditors are required to issue an audit report, in terms of the new Rules (template provided in Schedule 8 of the Rules). As the old Rules still apply up to 31 October 2018, the auditor will also need to report in terms of the old Rules for the period up to this date.
Based on discussions held between the IRBA and the LPC, and considering the practical implications of the effective date, the following approach is recommended:
- Legal practitioners must comply with the old requirements up to 31 October 2018; therefore, auditors need to issue a report for the part of the financial year up to 31 October 2018 referring to the old requirements.
- From 1 November 2018, legal practitioners need to comply with the new requirements, with the auditor then issuing a report for the part of the financial year from 1 November 2018 up to the financial year-end referring to the new requirements.
- Until communicated otherwise by the IRBA and the LPC, the only instance where dual reporting is not required for the same financial year is when there is a very small portion of the financial year falling either within the old requirements or the new requirements, e.g. two to three months. In such a case, a concession may be made that the auditor may report only in terms of the set of requirements applicable to the majority of the financial year. However, the auditor should first confirm this with the IRBA before issuing an audit report according to this concession.
Further considerations: upcoming changes to the Rules
When comparing the audit report template included in Schedule 8 of the new Rules with the latest effective auditing requirements, it should be noted that auditors should update the reference to the IRBA Code, to the latest IRBA Code (revised November 2018). A few other matters may also need updating when using the audit report template included in Schedule 8, but, at least, it provides a basis to work from until the updated IRBA Guide has been issued.
The IRBA is already working with the LPC to make the necessary changes, but updating Schedule 8 will involve updating promulgated legislation and will, therefore, be a lengthy process. This means that there will be another transitional period from March 2020 (when the issuance of the IRBA Guide is envisaged) to the date when the revised Schedule 8 of the Rules will be promulgated into law. During this period, auditors would be best advised to use the audit report template included in the revised IRBA Guide, and not the one included in Schedule 8 of the Rules.
If you should find this information confusing, or feel uncertain and need help with fulfilling your engagements, you are welcome to contact LEAF for practical guidance through this uncertain period, until the new IRBA Guide and Schedule 8 are issued.
1. Legal Practice Council: Legal Practice Act 28 of 2014 (as amended)
2. Legal Practice Council: South African Legal Practice Council Rules made under authority of sections 95(1), 95(3) and 109(2) of the Legal Practice Act 28 of 2014 (as amended)
3. Legal Practitioners Fidelity Fund: The implementation of the remaining chapters of the Legal Practice Act No. 28 of 2014, on 1 November 2018, affects all Legal Practitioners, November 2018