Audit requirements relating to the business financial statements of legal practitioners practicing in companies have been clarified.
In October 2019, the Companies and Intellectual Property Commission (CIPC) issued a notice of the withdrawal of the non-binding opinion pertaining to Regulation 28(2)(a) of the Companies Regulations 2011 to the Companies Act 2008. This opinion applied to legal practitioners who are registered as companies, in terms of the Companies Act, and considered whether the holding of assets in the legal practitioners’ trust accounts is regarded as part of the ordinary course of the legal practitioner’s primary business.
CIPC issued a non-binding opinion in 2013 on Regulation 28(2)(a) of the Companies Regulations, specifically as it relates to the operation of trust accounts by legal practitioners in the ordinary course of the legal practitioner firm’s primary activities. CIPC concluded that, while they agree that the assets held by the legal practitioner firm are held in a fiduciary capacity, the conclusion that the operation of trust accounts by legal practitioner firms is in the ordinary course of the firm’s primary activities is far-fetched, as the primary activities of the legal practitioner’s firm are the provision of legal services.
As a result of the withdrawal of the opinion, it is now a requirement that the business accounts of legal practitioners who are subject to the Companies Act — that is, who are registered companies — and who hold assets in trust in excess of R5 million at any time during the financial year be audited.
Overview of legislative requirements
The South African Legal Practice Council Rules, issued in terms of sections 95(1), 95(3) and 109(2) of the Legal Practice Act, 2014 (Act 28 of 2014), require that an audit engagement be undertaken on the compliance of the legal practitioner’s trust accounts with the Act and the Rules. Currently, there is no requirement in the Act or the Rules for a legal practitioner’s financial statements to be audited, as they relate to the business accounts of the firm. Such requirement may, however, emanate from another Act, such as the Companies Act.
Regulation 28(2) of the Companies Regulations provides that, in addition to public companies and state-owned companies, the annual financial statements of any other company must be audited, where the audit of that company is desirable in the public interest, as indicated by prescribed criteria. One of the prescribed criteria is that an audit is required ‘if in the ordinary course of its primary activities, a profit or non-profit company holds assets in a fiduciary capacity for people who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds R5 million’.
The South Africa Institute of Chartered Accountants’ (SAICA) Guide to the Companies Act outlines SAICA’s view as follows:
Assets held in a fiduciary capacity must be held in the ordinary course of the company’s primary business, not incidental to it, on behalf of third parties not related to the company. Fiduciary capacity implies decision-making capability over the application of the assets and that the third parties have the right to reclaim the assets. These assets may be financial or non-financial.
Whether a company holds assets in the ordinary course of its primary activities depends on the nature of the company.
SAICA is of the view that the operation of the trust account is part of the core business of a legal practitioner and does, therefore, form part of the primary activities of the business. With regard to the issue of holding assets in a fiduciary capacity, SAICA is of the view that the keeping of funds in a trust account by a legal practitioner meets the definition of holding assets in a fiduciary capacity. Certain legal practitioners do not share this view, however, holding the argument that the primary business activity of a legal practitioner is to provide legal services, and not to hold assets in a fiduciary capacity.
In subsequently withdrawing this non-binding legal opinion, CIPC has made it clear that legal practitioners that are subject to the Companies Act, for example as incorporated companies, do in fact hold assets in a fiduciary capacity as part of the ordinary course of the firm’s primary business. If the aggregate value of assets held in trust exceeds R5 million, an audit of the business accounts of the legal practitioner is now required.
The view of SAICA is a compelling argument for justifying the audit of legal practitioners’ businesses, as it would be in the public interest.
Audit procedures to focus on would include evaluating the independence of the auditors, in terms of the IRBA Code of Professional Conduct, as well as identifying other sections of the Companies Act that may be applicable to legal practitioners who are subject to the Companies Act.
1. www.accountancysa.org.za: Article by Hayley Barker Hoogwerf CA(SA), Project Director: Assurance, Audit and Assurance (1 July 2020)
2. Legal Practice Act, 2014 (Act No. 28 of 2014)
3. South African Legal Practice Council Rules (20 July 2018)
4. Companies Act, 2008 (Act No. 71 of 20018)
5. Companies Regulations, 2011