Guidelines for External Examiners

 

Statutory Obligation

Section 241 of the Legal Profession Act 2006 (ACT) (the Act) requires all ACT law practices that received or held trust money in the trust accounting year, to have their trust account records inspected by an external examiner.

The examinable records are those relating to the receipt or holding of trust money in the trust accounting year ended 31 March.

Section 67 of the Legal Profession Regulation 2007 (ACT) (the Regulation) provides exemption from the annual examination requirement where the only trust money received or held by a law practice in the trust accounting year was transit money.

An external examination is an example of a direct reasonable assurance engagement. (ASAE 3000 para 12)

Appointment of External Examiners

Where an examination is due, s 66 of the Regulation requires each practice to notify the Society of the practice’s appointment of its external examiner.

The appointment must be made no later than 8 April following the end of the trust accounting year to which the examination relates. Notification of the appointment of a new examiner must therefore be submitted no later than 8 May following the end of the trust accounting year.

If the examiner who submitted the report in the previous trust accounting year has also been appointed by the practice to conduct the examination for the current trust accounting year, the notification requirement will be satisfied i.e. the practice is not required to submit a separate notification for the current trust accounting year.

A practice can only appoint an individual to be its external examiner if that individual has been designated by the Society as being eligible for appointment. The list of individuals with current designation is published on the Society’s website.

Scope of the Examination

The examination must assess the practice’s compliance with the provisions of the Act and Regulation concerned with the handling of trust money and the associated record-keeping requirements. 

A non-exhaustive list of trust record types can be found in s 210(2) of the Act. 

The examination of trust records extends beyond the documents themselves, but to the affairs of the practice more broadly, as noted in s 245 of the Act: 

An external examiner appointed to examine a law practice's trust records may examine the affairs of the practice for the purposes of and in relation to an examination of the trust records. 

The affairs of the practice may, where appropriate, include consideration of related tools and frameworks such as the use of internal controls, costs agreements, office account transactions, business processes, office account transactions and information technology. 

Some external examiners provide an additional service to practices in the form of a management report that is designed to provide advice in relation to steps that could be taken to ensure more efficient and effective compliance. 

While a management report falls outside the scope of the statutory obligation in s 241 of the Act, it is nonetheless open to the examiner and the practice to arrange between themselves the provision of such a report.

 

Intended Users 

All assurance engagements have at least three parties: a responsible party, an assurance practitioner and intended users  (ASAE 3000 para A37)

The aim of an assurance engagement, generally, is:

… to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the subject matter information ...(ASAE 3000 para 12(a))

In the case of an external examination, the responsible party is the practice under examination, and the principals of that practice (per s 218 of the Act).

While the practice itself will fall among the list of intended users, examiners must bear in mind that it is through the lens of intended users other than the practice, that compliance must be assessed, specifically the following users:

• the Council of the Law Society of the ACT
• anyone appointed by the Society to inspect or otherwise intervene in the affairs of the practice as they relate to the practice’s dealings in trust money e.g. investigator, supervisor, manager, receiver.

 

Checklist 

The Society has developed a Checklist that can be used by examiners against which compliance with the specific requirements of the regulatory regime can be evaluated. 

This is designed to be a tool that is available for use by all examiners, though examiners may choose to adopt their own version of the checklist. 

Report Content 

Subsection 68(2) of the Regulation states: 

 An external examiner's report on an examination must include the information, and be given in the way, approved by the law society council. 

If, in the examiner’s professional judgement, the compliance activities or compliance framework are non-compliant, or the trust records themselves misstate the practice’s trust money dealings – and those matters are both material and pervasive - the examiner should express an adverse conclusion. (ASAE 3100 para A59(b))

If the effects or possible effects of non-compliance are not so material and pervasive as to require an adverse conclusion, the examiner should express a qualified conclusion which should be expressed as being ‘except for’ the effects, or possible effects, of the matter to which the qualification relates. (ASAE 3100 para A59(a))  

Where an adverse or qualified conclusion is drawn, the examiner should set out in the examiner’s report the findings upon which the conclusion is based. (ASAE 3100 para 60) 

Depending on the nature of the findings reported, the Society may ask the practice to take remedial action. 

 

Areas of Concern 

With regard to Item (k) of the External Examination Report Format, the Society asks examiners to pay particular attention to the following: 

• Unauthorised payments – Payments effected other than in accordance with  s 41 and s 42 of the Regulation must be reported to the Society. 

• Intermixing – The holding of trust money in the office account, or non-trust money in the trust account is an offence under s 228 of the Act. Note that trust money is defined in the Dictionary to the Act as money entrusted to a law practice in the course of or in connection with the provision of legal services by the practice. Funds should not be retained in the general trust account unless that nexus exists, that is, without the money being held in the context of dispensing a legal service. 

• Deficiencies – It is an offence to cause a deficiency in the form of an overdrawn controlled money or general trust account, or trust ledger under s 230 of the Act. Any deficiencies that remain unresolved at the end of the trust accounting year must be reported to the Society. 

• Unreported irregularities – Where an irregularity has been reported to the Society by the practice in accordance with s 231 of the Act, the examiner need not separately report the matter to the Society. 

• Written directions – Where a practice receives trust money with written directions to deal with that money other than by depositing the money into the practice’s general trust account, the practice must ensure the money is dealt with in accordance with those instructions in a timely manner. The directions must be retained for 7 years in accordance with s 40 of the Regulation. 

• Dormant balances – Trust money that remains held by a practice after a legal matter has been concluded can indicate an absence of client instructions. Trust ledger account balances that have seen no activity during the trust accounting year should be reviewed to determine whether any of the following actions are due: 

• The funds are to be disbursed to a third party in accordance with client instructions. 

• The funds are to be recovered by the practice as legal fees. 

• The funds are to be returned to the client. 

• The funds are to be transferred to the Public Trustee and Guardian as unclaimed money, per s 259 of the Act. 

Failure to take these actions as appropriate may constitute contravention of the practice’s obligations under s 232 or s 259 of the Act. 

Money must not be ‘parked’ in a trust account indefinitely. 

In determining whether the incidence of dormant balances constitutes a compliance risk, examiners should endeavour, in particular, to identify money held on trust for which either: 

• no current instructions are held or have been sought; or 

• no legal services are being or will be provided in the near-term. 

• Reconciling items – Transactions that remain on the reconciliation report prepared under s 48 of the Regulation for an extended period should be actively investigated by the practice to determine the person on whose behalf the money is held to ensure that money is dealt with in accordance with that person’s instructions. Deposits to the general trust account which cannot be linked to a live matter should be investigated by the practice, by requesting a trace from the bank with which the trust account is held. The intended recipients of stale cheques (i.e. cheques that remain unpresented 15 months after being drawn) should be contacted to instead arrange the cancellation of the cheque and a substitute payment made by EFT. 

• Systemic errors – While errors, irregularities and contraventions might be considered trivial or inconsequential in isolation, recurrent instances of such anomalies might collectively indicate the absence of effective internal controls, exacerbating compliance risk. Examiners should request a copy of the most recent routine investigation report to determine whether errors previously identified by the investigator persist. 

 

Materiality 

Examiners are required to exercise their professional judgement in determining whether detected instances of non-compliance are material in the context of the regulatory framework and the consequences of non-compliance. 

Law practices, and the principals of those practices, are expected to comply with the rules in the Act and the Regulation. Legal practitioners are also required to observe the duties in the Legal Profession (Solicitors) Conduct Rules 2025 (No 2) (ACT). 

The overriding aim of the regulatory regime is expressed in s 211(a) of the Act:

to ensure trust money is held by law practices in a way that protects the interests of people for or on whose behalf money is held, both inside and outside the ACT.

Contravention of many of the trust money rules in the Act can constitute an offence:

Offence	LPA ref	Strict Liability	Penalty
Receiving trust money as a barrister	s 220	N	50 units
Failure to keep a general trust account in the ACT	s 221	Y	50 units
Failure to deposit trust money into a GTA unless otherwise directed	s 222	Y	50 units
Failure to disburse trust money in accordance with directions	s 223	Y	50 units
Disbursing trust money other than by cheque or EFT	s 223A	Y	50 units
Mixing trust money with other money	s 228	Y	50 units
Causing a deficiency without reasonable excuse	s 230	N	50 units
Failure to report irregularity	s 231	N	50 units
Recording trust money under a false name	s 233	N	50 units
Failure to arrange annual external examination	s 241	Y	50 units
Failure to arrange external examiner for final examination or provide notification of ceasing to hold trust money	s 244	N	100 units
Failure by ADI to notify Society of deficiencies and certain other events	s 252	Y	50 units
Receiving trust money without an authorised principal	s 254	Y	50 units
Failing to notify client that money entrusted is not trust money	s 257	Y	50 units
Failure to provide notification of trust bank account opening/closing/signatories	s 258	Y	50 units

Section 389(a) of the Act provides that a contravention of the Act, and the Regulation made under the Act, can be unsatisfactory professional conduct or professional misconduct and may lead to disciplinary proceedings.

Contravention of a law about trust money or trust accounts, in Australia or a foreign country, is among the suitability matters taken into account by the Society in determining whether to issue or renew a practising certificate, under s 11 of the Act.

The materiality standards applied by external examiners apply equally to those undertaking standard routine investigations under s 235 of the Act.

Auditing standards (see below) provide the following guidance with respect to materiality:

When the assurance practitioner forms a conclusion … the assurance practitioner shall evaluate the materiality, individually and in aggregate whether due to fraud or error, of any matter(s) of non-compliance with the compliance requirements …

Materiality is considered when evaluating the effect of accumulated deficiencies in the compliance framework or matters of non-compliance with the compliance requirements.  Material deficiencies or matters of non-compliance are those which could significantly impact the compliance requirements being met and reasonably be expected to influence relevant decisions of the intended users. (ASAE 3100 paragraph A270

Materiality is considered in the context of quantitative and qualitative factors, such as relative magnitude of instances of detected or suspected matter(s) of non-compliance, the nature and extent of the effect of these factors on the evaluation of compliance with the compliance requirements and the interests of the intended users.  The assessment of materiality and the relative importance of quantitative and qualitative factors in a particular engagement are matters for the assurance practitioner’s professional judgement, taking into account specific regulatory reporting requirements. (ASAE 3100 paragraph A28)

Quantitative and qualitative factors which the assurance practitioner may consider when assessing materiality include:

• The magnitude of the instances of detected or suspected matter(s) of non-compliance with the compliance requirements.
• The financial impact of the matter(s) of non-compliance on the entity as a whole.
• The nature of the matter(s) of non-compliance – one off or systemic.
• Evidence of a robust compliance framework in place to detect, rectify and report matter(s) of non-compliance.
• Commonly accepted practices within the relevant industry.
• The nature of relevant transactions, whether they involve high volumes, large dollar values and complex transactions relative to the compliance activity as a whole.
• The extent of interest shown in particular aspects of the compliance activity by, for example, governing body, regulatory authorities and agencies or the public. (ASAE 3100 paragraph A29)

 

 

Related Documents

• External Examiner checklist
• External Examination Report format