When performing assurance engagements on legal practitioners’ trust accounts, auditors must ensure that they are familiar with all legal and regulatory requirements. When auditors are not fully aware of the latest requirements, misstatements and instances of non-compliance may go undetected. A common area where this may occur is interest earned on trust accounts and paid over to the Legal Practitioners Fidelity Fund (LPFF). This article explains the requirements and what to look out for
Types of trust accounts
Legal practitioners may operate three different types of trust accounts, held at a bank that has entered into a banking arrangement with the LPFF, as provided for by sections 63(1)(g) and 86(6) of the Legal Practice Act, 2014 (Act No. 28 of 2014) (LPA):
1. Section 86(2) trust accounts: This type of trust account must be used by all legal practitioners to deposit money held by the legal practice on behalf of any person.
2. Section 86(3) trust accounts: Legal practitioners may use this type of trust savings or other interest-bearing account to invest any money which is not immediately required for any particular purpose.
3. Section 86(4) trust accounts: Legal practitioners may, on the instruction of any person, open a separate trust savings account or other interest-bearing account to invest money, on behalf of that person, which was initially deposited into the main trust account.
Interest due to the LPFF
One hundred percent of trust interest accrued on section 86(2) trust accounts is due to the LPFF and should be paid over to the LPFF on or before the end of the next calendar month. This may be paid over via the bank’s automated monthly transfer system sweeping facility or manually. A reporting template provided by the LPFF should accompany manual payments.
In respect of section 86(3) trust accounts, 100% of interest accrued on money deposited relating to any period ending on the last day of February each year is due to the LPFF and should be paid over to the LPFF on or before the last day of May of that year. This may be paid over manually or via the bank’s automatic sweeping facility, although not all banks have a sweeping facility on section 86(3) accounts.
Regarding section 86(4) trust accounts, only 5% of interest accrued on money invested is due to the LPFF and should be paid over to the LPFF on or before the end of the following calendar month. Banks automatically pay this amount over to the LPFF, in accordance with the banking arrangements entered into with the LPFF.
Legal practitioners may deduct recoverable bank charges, approved by the LPFF during 2009, from interest accrued on section 86(2) and 86(3) trust accounts, and only pay over the net interest to the LPFF.
What to look out for:
Firstly, auditors should familiarise themselves with the relevant requirements of the LPA and the South African Legal Practice Council Rules (Rules), in order to test compliance. All cases of non-compliance should be reported, since all such cases should be considered material for auditing purposes. The LPFF will evaluate the severity of the non-compliance and respond accordingly.
Specific areas for consideration:
• Confirm whether the bank where the trust accounts are held has entered into a banking arrangement with the LPFF. A list of these banks is available on the LPFF’s website.
• Confirm that any interest credited is paid over to the LPFF within the required timelines, as specified in the Rules.
• Determine whether bank charges claimed against trust interest are permissible. A list of recoverable bank charges is available on the LPFF’s website.
• With regard to section 86(4) trust investment accounts, compare interest, according to the IT3B certificate, to the interest reconciliation of the legal practitioner, test whether 5% is levied on interest earned and recalculate the 5% payable to the LPFF. As it cannot be assumed that the bank calculates the interest correctly, the auditor must perform some form of recalculation.
• Consider the reasonableness (market-relatedness) of the interest rate. This may be compared to rates information available on the LPFF’s website.
• Verify that interest is paid over to the correct LPFF bank account, especially in instances where manual payments are made to the LPFF. The LPFF has indicated that some legal practitioners are still paying interest into incorrect bank accounts.
Even though many assurance engagements on trust accounts have low budgeted fees, auditors need to verify compliance with all relevant requirements of the LPA and the Rules. LEAF is always ready to assist with practical advice and the performance of thorough file reviews. Contact LEAF for peace of mind!
REMEMBER: If it is not documented, it never happened (as per the IRBA).
LEAF stands ready to assist through providing practical advice and performing thorough file reviews. Contact LEAF for peace of mind!
1. Legal Practice Council: Legal Practice Act, 2014 (Act No. 28 of 2014)1.
2. Legal Practice Council: South African Legal Practice Council Rules (20 July 2018)
3. LPFF: Notice. Payment of trust interest accrued on trust accounts held in terms of section 86 of the Legal Practice Act, No. 28 of 2014 to the Legal Practitioners’ Fidelity Fund (February 2021)
4. LPFF: Notice. Legal practitioners paying section 86(2) and (3) trust interest due to the LPFF (the Fund) to the incorrect bank accounts (February 2021)
5. LPFF: Notice. List of banks that have entered into banking arrangements with the Legal Practitioners’ Fidelity Fund in terms of Section 63(1)(g) of the Legal Practice Act, No. 28 of 2014 (February 2021)
6. IRBA: Guide for Registered Auditors: Engagements on legal practitioners’ trust accounts (Revised March 2020)