As with any specialised area of law and business, both accounting and tax require some (external) professional assistance. We recommend that when running your law practice you actively seek professional assistance especially with your accounts to ensure that you avoid unnecessary stress, business and financial risks.
Index
- Governing Laws and Rulings
- Setting Up Of Accounts
- Accounting Records
- Transfer Of Funds
- Deposit Interest Rule
- Solicitors' Client Account
- Client's Money
- Other Obligations
GOVERNING LAWS AND RULINGS
Rules have been made under Sections 78 and 79, LPA and the following are the Rules currently applicable:
1. Solicitors' Account Rules 1990 ("SAR")
2. Accountant's Report Rules 1990 ("ARR")
3. Solicitors' Accounts (Deposit Interest) Rules 1990 ("SADIR")
Herein, collectively referred to as the Rules, unless stipulated otherwise.
SETTING UP OF ACCOUNTS
The accounts must be set up properly when the practice is first set up. There are two ways in which this is done: computerised accounts or manual accounts.
Things you need to do:
- Seek assistance of an accountant when the practice is set up.
- Employ competent staff.
- Ensure that the books are entered contemporaneously; the monies received are banked in; that receipts are promptly issued; that monthly bank statements are accurate and reflect all payments in.
- Arrange with the external auditors to send their staff to check the accounts periodically, at least once in every three months.
In this way any errors may be spotted and rectified quickly.
ACCOUNTING RECORDS
It is essential that there be some knowledge of what type of records are maintained.
- Client Account Receipt Books
- Day Book (Cash Book)
- Disbursement Record
- Client Ledger
Receipt Books
Your law practice must maintain consecutively numbered receipt books.
These receipt books should identify the particulars of the client, the reference number and the particular matter for which payment was received.
The amount that was paid and the purpose of the payment. The date is also important. If the payment was by cheque, identify the drawer bank and the cheque number.
It is ideal if the receipts are in triplicate, the:
1. Original goes to the client;
2. Second copy is in the file; and
3. Third remains in the receipt book.
Though anyone who is authorised can sign a receipt, it should ideally be signed by a partner or legal assistant.
Once the payment is received, whether by cheque or by cash, and the receipt written out, the amount ought to be entered in the Day Book and the Cheques Receipt book.
If more than one client account is maintained then a separate book should be maintained for each account.
If a single book is maintained then there should be a column to identify the bank at which the payment was banked into.
The Paying-In Slip should be filled in with the particulars required by the bank. When the receipt by the bank is machine-printed and returned; these should be filed separately.
It would also be wise to write on the back of the slip the name of the client, the file reference number and the client account receipt number. These would assist in the detection of erroneous entries.
An entry is made in the Client Ledger against a client's name upon receipt of funds.
DISBURSEMENTS
Disbursements may be drawn in two ways:
1. Directly from the client account;
2. From the office account first and then recouped.
Payments would have been received from clients, say for payment of stamp duty or to pay the vendor the balance of the purchase price. In such cases the payments can come directly out of the client account provided there are funds.
Under no circumstances can a lawyer issue a client account's cheque if the particular client has no funds in the account.
A voucher is drawn up for payment out of the client account: the voucher is an authorisation for payment, it should bear the:
- Date;
- Name of the client;
- Name of the payee;
- Purpose of the payment;
- Signature of the person requisitioning;
- Person authorising; and
- Recipient
The cheque number would also be inserted. The voucher, numbered, is always drawn in duplicate: one goes into the file and the other kept together with the rest of the client account vouchers. This is an important document for purposes of audit.
A cheque is then issued to the payee. It is useful in the counterfoil or on the reverse of the counterfoil to record the client's reference number and voucher number.
Cheques drawn out of client account/s must be made payable to the payee and, unless specially requested, should be crossed "Account Payee Only with the marking "Non-Negotiable".
If it is to be paid to a person who has no bank account then, it should be made payable to him with his identity card and the “or order or bearer” should be cancelled.
This is to ensure that it is the payee who receives the payment.
A receipt from the payee should be obtained, wherever possible, for all payments. However, in the case of payment for stamp duty, a receipt is not available.
Prompt entries should be made in the Day Book as well as the Client Ledger.
TRANSFER OF FUNDS
Funds can be transferred from client accounts to the office account.
[1]
Monies can be drawn out
only by cheques. Where monies are to be drawn out, there must be proper vouchers (as explained above).
Apart from payment to third parties on a client's behalf, a transfer can occur for any one for the following purposes:
1. Reimbursement to the lawyer for expenses;
2. Payment of fees due to the lawyer.
The lawyer, being a trustee, must exercise caution and careful judgment when exercising his discretion in this area to avoid potential disputes.
Lawyers often incur minor expenditure out of the law practice's petty cash or disbursement account (if any). If the sums are small the administrative time cost may not justify an immediate transfer of, say RM10, filing fees.
Periodically the lawyer, when they require the funds, or when they think it necessary may wish to reimburse themselves.
They should deliver to the client a statement of the amount sought to be reimbursed and that it is being transferred.
This would be recorded by a voucher or an internal transfer slip. The cheque would be made payable to the office account.
Similarly, fees might have been agreed in advance and money might be paid into the client account for this purpose.
As and when the fees is incurred, a bill is raised and the sum transferred to the office account.
Where fees have not been agreed, then a bill ought to be sent to the client with the endorsement that the said sum is being transferred for work done.
If the sum transferred is insufficient the bill would show a balance that is due. Of course, this does not prevent a client from seeking an order for taxation of the bill.
DEPOSIT INTEREST RULES
Under these rules lawyers who are in receipt of more than RM5,000 only and which is expected to remain in their accounts for not less than four months should deposit the monies in fixed deposit.
RULE 2, SADIR
The interest is to be paid over to the client. |
RULE 4(b), SADIR
This does not apply to trust monies.
A lawyer who fails to do so is bound to reimburse the client with the amount of interest that was lost. |
RULE 3, SADIR
A lawyer is entitled to charge a separate fee for this service. |
Note: Remember
A client is entitled to seek a certificate from Bar Council as to whether any interest is payable by their lawyer.
The parties may enter into special arrangements in which event, it is advisable that the arrangement be reduced into writing and signed by the client. A copy of this document should then be kept on file and where possible noted on the file's cover.
STATUTORY PROVISIONS
1. To reinforce the duties of lawyers the LPA has provided that lawyers must maintain and operate client accounts and produce an accountant's certificate when applying for the Sijil Annual: Sections 78 and 79, LPA.
2. The accountant's report must relate to the previous 12 months of the practice. A breach of Section 79, LPA renders the lawyer liable to disciplinary proceedings: Section 79(8), LPA.
SOLICITORS’ CLIENT ACCOUNTS
Client accounts must be opened when the lawyer receives "client's money". Ordinarily one opens such an account when one first commences practice.
Persons practising as legal assistants and as consultants do not maintain a client account and hence need not produce an accountant's report. The obligation to maintain such accounts and to produce the report rests with the partners of the law practice.
You can also make reference to the "Recommended Practice Guide" (RPG 2) for accountants, which is produced by the Malaysian Institute of Accountants (MIA). This Guide is to assist accountants to satisfy the requirements of the provisions of the SAR, SADIR and ARR. A copy of the Guide is set out in Bar Council Circular No. 135/2010 dated 26 May 2010.
Note: Remember
- A housing development project of a particular client may justify the opening of a separate account.
- It is the responsibility of every partner to maintain the client account and to ensure that the entries are accurate.
- This duty also extends to branch offices maintained by the law practice.
- There is no limit to the number of client accounts to be set up, in general, when you start up, one should be sufficient. You should not multiply the accounts if the volume does not justify it.
CLIENT’S MONEY
This is defined in Rule 2, SAR. Basically, it means money received on account of a person for whom the lawyer is acting as
- A lawyer,
- In relation to his practice as a lawyer,
- Agent,
- Bailee,
- Stakeholder.
The list also includes solicitor trust money. This would include disbursements and monies payable to third parties by the client.
It does not include fees payable to the lawyer.
If monies are paid to account for fees but no work has been done yet, then the sum so paid can be credited into the client account.
WHAT SUMS ARE PAYABLE INTO CLIENT ACCOUNTS
This is set out in Rule 4, SAR.
- Client's money. In addition to the category of monies described under Rule 2, SAR, it also includes trust money, that is money belonging to a trust of which the lawyer is a trustee.
- Lawyer's money to open and maintain the account. Otherwise, client monies would be used.
- Money to replace any sum mistakenly or accidentally withdrawn from the account.
- Money that cannot be split e.g. where a single cheque is received for payment for disbursements and payment to the lawyer for fees or reimbursement of expenses. In this situation the payment cannot go into the office account. It is paid into the client account and then the amount due to the office account is transferred.
- Cheques Receipt/Payment.
- Paying-in Slips.
- Payment Vouchers.
No other money shall be paid into the client account. Money properly paid as fees should not be left in the client account.
Client account/s of a lawyer cannot be used as a conduit pipe for transfer of funds by clients for purposes or matters unrelated to the lawyer.
Note that Bank Negara Malaysia, as the competent authority under
Anti-Money Laundering and Anti-Terrorism Financing Act 2001 (AMLATFA) is able to conduct on-site examinations pursuant to Section 25, AMLATFA on selected law practices in Malaysia.
[2]
A lawyer's client accounts are not subject to any professional privilege and is open to inspection and production by investigating authorities and courts.
EXCEPTIONS
Rule 9, SAR: Certain payments, though client's monies, need not be paid into the client account. Briefly these are, where:
1. Money is required to be paid to third party immediately on receipt;
2. The client has requested that it need not be paid into the client account;
3. It is received for reimbursement to the lawyer or to be paid to the lawyer in discharge of a debt owing to the lawyer.
It is advisable under No. 2 to obtain written instructions from the client.
OTHER OBLIGATIONS
Rule 11(6), SAR
A lawyer cannot withdraw funds from client accounts except by cheques signed by the lawyer. |
Rule 13, SAR
The lawyer must notify Bar Council within one month of the opening or closing of a client account. |
POWERS OF BAR COUNCIL
Rule 14, SAR
Bar Council may, on a complaint by a third party, or of its own motion, call for the production and inspection of the accounting records of a lawyer's client accounts. |
The Bar Council may also take control of the funds in a client account: Sections 88(1), 88(2) read with Sections 88(3), 89, 90 and 91, LPA.
[1] See Rules 7 and 8(2), SAR.
[2] These provisions and impact on the lawyer and law practice are discussed in greater detail in Bar Council Circulars 210/2010 dated 10 August 2010, 061/2009 dated 5 March 2009 and 048/2005 dated 23 June 2005.