- Chartered accountants face a high level of accountability when dealing with client monies.
- Strict regulations apply, and breaches of the rules can result in substantial penalties.
- Periodic review, as well as complaints by clients, are the key means by which non-compliance is brought to light.
Wine may taste better when someone else is buying, but it pays to be extremely careful if you’re handling client monies. Breach the rules and the penalties can be stiff.
Chartered accountants are generally moving away from holding client funds and being signatories on client bank accounts, says Rebecca Stickney, NZ Conduct Leader for Chartered Accountants ANZ in New Zealand. Nonetheless, there are still circumstances in which client monies are held. Among them are tax payments due to be passed on to revenue authorities and, conversely, tax refunds held for clients, where the CA is acting as a tax agent. Other examples include situations where the member is acting as a payroll agent on behalf of the client or as a signatory to a client bank account to make payments to creditors of a business.
Regardless of the situation, there are overarching principles that CAs need to abide by in regards to client monies, says Kate Dixon, Stickney’s counterpart in Australia. On either side of the Tasman, the fundamental requirements are encapsulated in Section 270 of the Code of Ethics. This provides that a member in public practice shall not assume custody of client monies or other assets unless permitted to do so by law and in compliance with any additional legal duties imposed on a member holding such assets. The section also notes the threat to compliance with the fundamental principles (including a self-interest threat) resulting from the holding of client assets. It also sets out the key requirements of separation from personal or firm assets, use of such assets only for the purpose for which they were intended, the need to be able to account for such assets and the requirement to comply with all relevant laws and regulations. In Australia, the specific standard is APES 310 Dealing with Client Monies. In New Zealand, PS-2 Client Monies plays much the same role.
There is a strong expectation of compliance, and disciplinary bodies can come down firmly on departures from acceptable standards.
Members should also be aware that the anti-money laundering requirements being implemented on both sides of the Tasman are likely to impact how client funds are handled.
“It comes down to public interest and the high level of expectation and accountability that is placed on members when they're dealing with client monies,” Stickney explains. “There is a strong expectation of compliance, and disciplinary bodies can come down firmly on departures from acceptable standards.”
Client complaints bring problems to light
Members must not only keep their own funds separate from client monies, they also cannot profit from holding those funds by, for instance, earning interest on the money. Dixon points out that any interest earned on client monies must be credited to the relevant client.
In Australia, CAs are required to have their client trust account audited annually. This is not the only means by which irregularities can be discovered. Bending of the rules or failure to have an audit may be picked up through quality and practice review. In New Zealand, compliance with client monies requirements is monitored via Practice Review, which may require an audit or inspection of the trust account. Discrepancies with client monies can also be brought to light through client complaints.
A common problem area occurs when tax refunds are held on behalf of clients and members deduct their fee before handing the balance over to the respective client. “We often encounter client complaints that the member has ‘deducted fees from a tax refund without authority’, or ‘hasn’t accounted for all the money received on behalf’ of the client”, says Dixon. Stickney adds: “The problem is the means by which fees have been deducted. It's not dishonesty; it's just that the member hasn’t followed the correct process.”
Members need to be careful about deducting fees from client monies, in particular tax refunds, without following the requirements. That means having a specific written authority, before making the transaction.
In other instances, members may be unaware of the rules. One such example, according to Stickney, is not having a trust account at all and allowing client monies to be paid into either a personal or practice bank account. “There is no way that a client’s money (other than payment for fees) should ever go into your practice bank account. It has to be in a trust account,” she confirms.
Other examples are a failure to follow detailed requirements for documentation, reconciliation and accounting for client monies, which are set out in the standards.
Timing matters too. Any payments from the trust account should not be paid unless funds are held to the credit of the particular client. Stickney explains that sometimes members will make a tax payment from the trust account in anticipation of receipt of a client payment in the trust account. This is a breach of the standards.
Consequences can be serious
Stickney is quick to point out that matters involving dishonesty account for a minority of breaches: “The majority of complaints reflect ignorance of the rules and a failure to be aware of how strict the requirements are when dealing with client monies.” That said, cases that reach disciplinary tribunals can be subject to strong sanctions, including the possibility of losing membership or suspension of a member’s certificate of public practice. The disciplinary bodies take very seriously any suggestions of members failing to act in the public interest. Matters involving defalcation or an outright failure to keep client funds separate are at the more serious end of not acting in the public interest.
Dixon warns: “There can be serious consequences, even for matters that members may see as administrative non-compliance.” Breaches of the requirements can result in a disciplinary record (even if the disciplinary outcome is not loss of membership), the requirement to pay costs of the Disciplinary Tribunal process and the publication of the Tribunal decision. This can have a lasting impact on a member.
Investigations and tribunal hearings following complaints by clients for seemingly minor problems can also reveal more serious breaches. “In one case,” explains Stickney, “the problem appeared to be limited to the member not having a trust account and not following the standard.” That turned out to be the tip of the iceberg. “The disciplinary tribunal ordered an inspector to investigate,” Stickney says. “And at that point we discovered a more significant breach – defalcation.”
Stickney stresses that complaints about management of client monies “have a good chance of being referred to the disciplinary tribunal”. This reflects the high level of compliance that is expected when dealing with client funds, and members in breach of the standards can face a major financial hit from fines, costs as well as reputational damage. The bottom line is that non-compliance simply isn’t worth the money.
New standard APES 310
For Australian members:
* The standard has been renamed “Client Monies” and is effective for engagements commencing on or after 1 October 2018.
* Whilst the general principles of the standard remain unchanged, there are now two separate sections for trust accounts (Section 5) and client bank accounts (Section 6).
* Some members gain audit relief. “Limited assurance engagements” are allowed to be performed in respect of client bank accounts where a member does not operate a trust account and can only co-authorise transactions in a client bank account in conjunction with the client.
* There is a revised process for changing an auditor of client monies.
* A new example Reasonable Assurance Engagement report in Appendix 1 aligns with the revisions to ASAE 3100 Compliance Engagements.
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