The business accounts of legal practitioners who are subject to the Companies Act − that is, who are registered companies − and who hold assets in the trust account in excess of R5 million at any time during the financial year are now required to be audited (Hayley Barker Hoogwerf ‘Audits of Legal Practitioners Business Account’ (www.accountancysa.org.za, accessed 26 – 02 – 2022)). The South African Legal Practice Council Rules issued in terms of sections 95(1), 95(3) and 109(2) of the Legal Practice Act 28 of 2014 require an audit engagement to 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 (SOC), where the audit of any other company is desirable in the public interest, as indicated by prescribed criteria in any particular financial year, the annual financial statements (AFS) of that company must be audited. One of the prescribed criteria (among others), 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.
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 assets.
A company that holds assets in a fiduciary capacity, and the aggregate value of such assets held at any time during the financial year exceeds R5 million must have its annual financial statements audited for that financial year. The notice specifically identifies legal practitioners as an example of such a company requiring an audit.
The funds contained in the trust account of a legal practitioner are only controlled by the legal practitioner by virtue of a fiduciary relationship with the client (New York Law Fund (January 2015) (http://www.nylawfund.org, accessed 31-05-2022)). Legal practitioners subject to the Companies Act, such 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.
Legal practitioners are now faced with complying with the requirements and must identify other sections of the Companies Act that may be applicable to the legal practitioner who is subject to the Companies Act.
|Please note that our blog posts are informal commentaries on developments in the law at the time of publication and not legal advice.