Operating a trust account obligates practitioners to comply with the applicable regulations within their State or Territory. All who deal with trust monies should be familiar with the universal requirement to reconcile a trust account within 15 working days from month-end, however there are many additional compliance requirements.
With the end of the trust accounting year approaching in many States & Territories, it is timely to review some of the key compliance provisions in order that firms are ready for the mandatory external examination. The following examples are designed to encourage practitioners to review the current state of preparation. Please remember to consult your local Law Society, Institute or Legal Practice Board for the precise applicable provision within your area:
Key Areas Commonly Identified at Audit
All of the following have been identified as key areas of concern. Practitioners should instigate a specific review of these issues well ahead of the examiner’s attendance:
. Failure to prepare monthly reconciliations
· Failure to issue trust receipts and maintain trust account cash books
· Non-provision of Trust Account Statements
· Use of non-compliant accounting software or systems
· Stale cheques remaining unpresented and other bank reconciliation adjustments not dealt with
· Unpresented cheques remaining on the bank reconciliation without follow-up
· Small and stagnant balances being held within the trust ledger
· Non-legal practitioners with sole authority to effect withdrawals
· Suspense accounts or trust ledgers with no connection to an ongoing legal matter
Notification of Opening a Trust Account
All practitioners who operate a general trust account need to notify their law society or institute of this fact within 14 days of opening the account. The Law Society of South Australia requirement is within two months. If this task was missed during the year is it preferable to submit it prior to audit with a covering letter explaining why. Firms must open a general trust account ‘as soon as practicable’ after first receiving trust monies.
Notification of Appointing or Terminating an External Examiner
In the ACT, law practices must appoint an external examiner not later than 8 April and provide notification to the Law Society within 30 days. In NSW if a previously-appointed examiner ceases to act, notification must be provided within 7 days. In SA, a firm must advise the Law Society within two months of appointing an examiner.
Notification of Trust Account Signatories
During the month of July notification must be provided of the full name and residential address of any persons authorised to sign trust cheques or otherwise effect withdrawals. In WA a law practice is not required to notify the Legal Practice Board of signatories. Note that WA is joining NSW & VIC in adoption of the Legal Profession Uniform Law as of 1 July 2020.
In NT, QLD and SA notification is required within 14 days whenever signatories change.
Queensland – additional requirement for Bank Reconciliations
Practitioners in Queensland need to be aware the Legal Professional Regulation 2017 Rule 44 (3) (c) requires that reconciliations are ‘annotated in a way that evidences the completion of the review’. Firms in Queensland should check to see that all monthly trust reconciliations have been printed and initialled by a principal of the practice. In other States and Territories it is good practice to follow the same procedure, even if not mandatory. Review by a firm principal can assist to detect and avoid a range of anomalies including holding trust funds after completion of the matter and stale cheques not being dealt with in an effective time frame.
Provision of Trust Statements to Clients
In all States and Territories the provision of trust statements to clients is required as at the end of the financial year, rather than the trust year. There is an additional requirement to furnish a client with the trust statement at the time of completion of the matter for which the money is held. If this occurs with the 12 month period prior to the end of financial year and no further trust activity occurs, there is no need to provide another statement at year-end. A similar exclusion exist where trust activity has occurred only in the prior six months.
Not all clients need to be provided with trust statements. ‘Sophisticated Clients’ are exempt from the automatic provision of statements, provided they have not overridden the exemption by specifically requesting a statement. A sophisticated client is defined as another law practice, a liquidator or receiver, a proprietary company or a Minister of the Crown.
Re-calculation of Statutory Deposit
Practitioners in New South Wales, the Australian Capital Territory and Tasmania will all need to recalculate their statutory deposit as at 31 March. In Victoria, the Legal Services Board will advise practitioners of the required amount. South Australia, the only other remaining State with a scheme, requires twice-annual recalculation in May and November.
Dormant/Unidentified Trust Money
In NT, any trust money held for two years of inactivity can be regarded as dormant and unclaimed if the practice has no knowledge of the existence or address of the owner. The Law Society provides an online submission form for acceptance of the funds.
In QLD, funds held for two years without knowledge of the owner’s whereabouts may be transferred to the Public Trustee. Similarly in NSW, paid to the Office of State Revenue.
SA permits unclaimed trust money to be paid to the Treasurer of the State after a period of one year.
Firms that keep on top of compliance issues will spend less time providing information to the external auditor and ensure there is no delay to the re-issuance of practising certificates in their State or Territory.