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JURISDICTION OF SOLICITOR’S ACCOUNT IN HONG KONG. Basically, a Solicitor’s Account in Hong Kong is governed by the Solicitors’ Account Rules (Chapter 159F) and also the Accountant's’ Report Rules (Chapter 159A). These two Rules are guided by the Practice Note which will be discussed separately as follows. 1. SOLICITORS’ ACCOUNT RULES (CHAPTER 159F) Practice Note 840 has been revised for The Solicitors' Accounts (Amendment) Rules 2012 and The Accountant's Report (Amendment) Rules 2012 (collectively, the Amendment Rules) which were passed by the Legislative Council on 5 December 20121 .The President of The Law Society of Hong Kong (the "Law Society") has appointed 1 July 2016 as the commencement date of the Amendment Rules. The Amendment Rules come into effect on 1 July 2016. This Practice Note is effective for engagement with reporting date ending on or after 1 July 2016. The Rules are relatively short and simple containing 15 sections. The Solicitors’ Accounts Rules govern how solicitors should handle client money. The Rules, which are given statutory force by the Legal Practitioners Ordinance, are designed to prevent the improper handling or misappropriation of clients’ monies entrusted to a solicitor. Broadly speaking, this is achieved by requiring such monies to be kept separate from the solicitor firm’s own monies. In addition, bank accounts have to be set up and transactions arranged in such a way that monies belonging to one client may not be used for the benefit of another2. Rule 1A3 laid down the duties of a solicitor in order to comply with the SAR 4. Solicitors need to comply with the requirements of rule 2 of the Solicitors’ Practice Rules (Cap 159 sub. leg. H).They also have to keep other people’s money separate from money belonging to the solicitor. If any rules specifically provide that the money need not to be separated, the solicitor 1

Hong Kong Institute of Certified Public Accountants, ‘Invitation to Comment on Exposure Draft Practice Note’ < http://www.hkicpa.org.hk/file/media/section6_standards/standards/Audit-n-assurance/ed-2016/i2c_p n840.pdf > accessed 23 September 2016 2 GAA Accounting, ‘The Audit of Solicitor’s Accounts under the Solicitors’ Account Rules and the Accountant Report’s Rules - Client Money’ < http://www.gaaaccounting.com/the-audit-of-solicitors-accounts-under-the-solicit ors-accounts-rules-and-the-accountants-report-rules-client-money/ > accessed 23 September 2016. 3 Solicitor’s Account Rules Chapter 159F, r 1A. 4 Department of Justice Bilingual Laws Information System, ‘The Solicitor’s Account Rules (Chapter 159F)’ < http://www.legislation.gov.hk/blis_pdf.nsf/4f0db701c6c25d4a4825755c00352e35/2C92A929AB67F039482575EE0 0473453/$FILE/CAP_159F_e_b5.pdf > accessed 23 September 2016.

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has to keep other people’s money in a bank account known as a client account which must include the words “client account” in its title, bank statements and cheques. However, Malaysia Solicitors’ Account Rules does not provide the duties of solicitor. Solicitors can only use a client’s money for that client’s matters. If they failed to comply with this rule, they will be held liable. Solicitor can use trust money which the solicitor is a trustee for the purposes of that trust only. Solicitors also must establish and maintain proper accounting systems and proper internal controls over those systems and keep proper accounting records. Solicitors can also account for interest on other people’s money in accordance with these rules and must co-operate with the Society in checking compliance with these rules by deliver annual accountant’s reports as required by the Ordinance. Rule 25 laid down all the interpretation of the words used in the Solicitors’ Account Rule such as client, client account, client’s money and etc. To compared with Solicitors’ Account Rule in Malaysia, SAR in Hong Kong provides the meaning of disbursements, firm, office money, principle and also include the meaning of working days which is any day other than (a) a general holiday; or (b) a gale warning day or black rainstorm warning day as defined in section 71(2) of the Interpretation and General Clauses Ordinance (Cap 1). Rule 36 provides that all client's money and trust money, on receipt, must be paid without delay into a client account, except in the cases specified in Rule 9 (see paragraph 22 below). More than one client account may be maintained and the bank accounts of individual trusts are counted for this purpose as client account (but do not require to be included in the scope of the accountant's report). There is no provision in this Rule allowing for client’s money to be withdrawn from client account and to be retained as petty cash. Cash disbursements must be made from an office account, for subsequent reimbursement (in bulk) by cheque on the appropriate client account7.

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Note 4 at 1-2. Note 4 at 2. 7 Note 1.

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In relation to client account, Rule 48 listed down all the payment that may be paid into client account which are the trust money, money belonging to the solicitor as may be necessary for the purpose of opening or maintaining the account. Money to replace any sum which may by mistake or accident have been drawn from the account in contravention of rule 8(2) and lastly a cheque or draft received by the solicitor, which under rule 5 he is entitled to split but which he does not split. Splitting under Rule 59 refers to solicitor who holds or receives a cheque or draft which includes client's money or trust money of one or more trusts. The solicitor may split such cheque or draft and, and he shall deal with each part thereof as if he had received a separate cheque or draft in respect of that part. If he does not split the cheque or draft that consists of client money, he shall pay the cheque or draft into a client account provided that he must transfer all office money out of the client account within 14 days of receipt. Malaysia’s SAR do have this rule but it does not provide any duration for the solicitor to transfer all office money out of the client account. Rule 610 of the Hong Kong’s SAR stated the restriction on payment into client account. According to Rule 6, no money other than money which under rules 3, 4 and 5 a solicitor is required or permitted to pay into a client account shall be paid into a client account. Rule 6 has been amended in 2012 by adding Rule 6A. Rule 6A11 provides the interest on client account which Malaysia does not have this rule. Under this rule, when a solicitor holds client’s money, the solicitor must without delay deposit the money in a client account and must account the client for any interest earned. If he failed to do so, the solicitor must pay to the client equivalent to the interest if the money had been deposited in a Hong Kong dollar savings account of the Hong Kong and Shanghai Banking Corporation Limited. A solicitor is only required to account to a client for any interest earned where the amount specified in column 1 of the Schedule for a period which equals to or exceeds the period specified in column 2 of the Schedule opposite to that amount and the amount of

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Note 4 at 2. Note 4 at 2. 10 Ibid. 11 Ibid at 2-3. 9

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interest accrued exceeds $500. For the protection of the client, a client who feels aggrieved that interest has not been paid, the client is entitled to require the solicitor to obtain a certificate from the Council as to whether or not interest ought to have been earned for the client. Upon receiving a request of a certificate, the Council then must conduct an investigation and if it determines that interest should have been earned for the client, issue a certificate to that effect setting out the amount of interest which should have been earned. On the issue of the certificate, the sum certified on that certificate to be due is payable by the solicitor to the client. It has to be noted that, these rules shall not affect any agreement in writing made between a solicitors, money received by a solicitor, being money subject to a trust of which the solicitor is a trustee or affect any agreement in writing for payment of interest on money held by the solicitor as a stakeholder. However, any arrangement made to the effect that no interest is payable in respect of money deposited with a solicitor is void. A solicitor who deposits client’s money is entitled to charge the client and be paid a sum that is fair and reasonable by way of an administration charge in respect of the work undertaken in the deposit and withdrawal of money and accounting to the client for the interest earned on the money. However, the Council have the power as whether to suspend or waive the operation of this rule taking into consideration the prevailing interest rate and the costs associated with the administration of this rule on prior written application. Based on Solicitor’s Account Rules Chapter 159F and also Practise Note 840, Rule 712 stated that a solicitor could make a withdrawal from the client’s account subjected to one of these grounds. The first ground that allows a withdrawal to be made is when the payment is to be made to or on behalf of the client. Secondly, a withdrawal is allowed when the payment is needed because of the debt due from the client to the solicitor or to reimburse the firm for expenditures on the client’s behalf. Third is when the client has given his or her authority to for the withdrawals to be made by the solicitor. Fourthly is when the withdrawals is for any settlement of bill of cost subjected to that the client has been notified in writing that the money held by him will be settled for that bill of cost. Then, a withdrawal is also permitted with regard to money held by trust on the solicitor which the money is to be expended for the purpose of the trust or to

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Note 4 at 3.

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make any transfer to other separate bank account for that particular trust. Lastly, a withdrawal from the client’s account is permitted in the situation when there is office money that has been made into the client’s account under Rule 4(b) or (d) or there is any transfer of money by mistake or accident into the client’s account. However, the withdrawals based on the above grounds could only be made when there is authorisation in writing for the solicitor.13 Then, Rule 814 further laid down restrictions on the withdrawals to be made under Rule 7(a)(ii) or (iv) or 7(c) or 7(d) that those withdrawals must be done in a form of cheque or transfer to a bank account in the name of the solicitor not being a client account. Rule 915 further states that a solicitor is not under an obligation to make a payment into the client’s account if the client himself has requested the firm not to do so. Then, the solicitor is also not under an obligation to make a payment into the client’s account if there is debt due or any reimbursement expenses towards the solicitor. Upon receipt of any payment for the disbursement or client’s money described in Rule 9(2), a solicitor must determine the composition of the payment made by the client without delay. A solicitor must also make payment into the client account if part of the payment is for disbursements anticipated but not yet incurred. Somehow, for any part of the payment that is made for disbursements incurred but not yet paid, then the solicitor must either pay part of the payment into the client account or office account and to settle the disbursements not later that the 4th working day following the receipt from the client. Rule 9A16 provided that if there is any breach of the rules committed by the solicitor, the breach must be remedied immediately upon discovery. For the principal of the firm, he will be jointly and severally liable to remedy the breach of any rules committed by the solicitor involved. The duty remedy should extend to replacing the missing client’s money or trust money by using the principal’s own money resources.

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Note 4 at 4. Ibid. 15 Note 4 at 4-5. 16 Note 4 at 5. 14

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Rule 1017 of this rule states on the obligation of the solicitor to keep accounts. Under subsection 1, every solicitor shall keep properly written up such books and accounts to show all his dealings with- clients' money held, received or paid by him; and any other money dealt with by him through a client account. It is also to distinguish such money held, received or paid by him on account of each separate client and to distinguish such money from other money held, received or paid by him on any other account. Subsection 2 further states that all dealings mentioned under subsection 1 shall be recorder in a clients’ cash book or a clients’ ledger. In this rule each of the expressions "book", "ledger" and "record" shall be deemed to include a loose-leaf book and any cards or other permanent documents or the information stored in a computer and retrievable in a permanent and visible form, that are necessary for the operation of a mechanical or computerized system of bookkeeping. In the case of A Solicitor v The Law Society of Hong Kong,18 there was a complaint against the solicitor related to Rules 10 of the Solicitor Account Rule. He breaches of Rules 10(1) and (2) of the SAR, as a result of the solicitor failing to keep properly written up books and accounts during the period from 1 April 2007 to 31 December 2009. The incomplete books and accounts kept by him failed to show all dealings with clients' money held, received or paid by him and any other money dealt with by him through a client account, and failed to distinguish such money held, received or paid by him on any other account. He also breached the rule that all dealings with clients' money held, received or paid by him should have been recorded in the books and accounts within three working days after the date of such dealings. The Tribunal ordered the solicitor be fined $25,000. Next, under Rule 10A19, a solicitor must compare the balance shown on clients’ cash book with the balance shown on the statements and passbooks of all client accounts and any account which solicitor holds clients money under, at least once a month. The solicitor must prepare a reconciliation statement to show the cause of difference, if any. In A Solicitor v The Law Society of Hong Kong,20 the solicitor's failed to provide monthly reconciliation statements of client accounts and listing of client ledger balances during the same period of 1 April 2007 to 17

Note 4 at 5-6. [2015] HKCA 2015 19 Note 4 at 6. 20 [2015] HKCA 302 18

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31 December 2009, in breach of Rule 10A of the SAR. And because of that, the solicitor was fined $15,000. Rule 1121 provides on the power of Council. The Council, acting either- (a) on its own motion; or (b) on a written complaint lodged with it by a third party, may require any solicitor to produce his books of account, any other necessary documents for the inspection of any person appointed by the Council, and such person shall be directed to prepare for the information of the Council a report on the result of such inspection and any such report may be used as a basis for proceedings under the Ordinance. Before instituting an inspection on a written complaint lodged with it by a third party, the Council shall require prima facie evidence that a ground of complaint exists, and may require the payment by such party to the Council of a reasonable sum. In A Solicitor case,

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the third complaint concerned breaches of Rules 11(1) and (2) of

the SAR. The Investigation Committee of the Law Society had passed a resolution in January 2008 (“the 2008 Resolution”) requiring the solicitor to forward to the monitoring accountants every three months between January 2008 and December 2009 for scrutiny copies of various accounting documents to ensure his compliance with the SAR. Despite repeated reminders, the solicitor had either failed to comply fully with the 2008 Resolution and to the limited extent that he supplied some of the documents, it was only after undue delay. For the third complaint, the solicitor was censured, fined $40,000 and suspended from practice as a solicitor for one year, and after the said period of one year, he was to be allowed to practice only as an assistant solicitor but not as a sole proprietor or partner, for a period of three years, under the supervision of a solicitor of not less than ten years' good standing (“the Practice Condition”). Rule 1223 concerns about the delivery of written intimation etc. A written intimation of the amount of a solicitor's costs incurred and a notification to a client that money held for him will be applied as mentioned in rule 7(a)(iv) may be delivered to a client in the same manner as a bill of costs is required to be delivered under section 66(2) of the Ordinance.

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Note 4 at 6. [2015] HKCA 302 23 Note 4 at 6.

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Rule 1324 provides that every requirement to be made by the Council of a solicitor under these rules shall be made in writing under the hand of the Secretary and sent by registered post to the last address of the solicitor notified to the Society and, when so made and sent, shall be deemed to have been received by the solicitor within 48 hours of the time of posting. In Rule 14,25 states on the right of the solicitor where nothing in these rules shall deprive a solicitor of any recourse or right, whether by way of lien, set-off, counterclaim, charge or otherwise, against moneys standing to the credit of a client account. And lastly, under Rule 15, 26 the Council may, on prior written application, waive in writing the provision relating to the location of a client account subject to the conditions that it may impose. In the case of Re A Solicitor,27 it involved a hearing in the Solicitors Disciplinary Tribunal into allegations of professional misconduct against a Hong Kong solicitor. A solicitor had breached Rule 3(1), Rule 7(1) and Rule 10 of Solicitor’s Account Rules. In relation to complaint (1), it was said that the money in question was paid for legal services rendered to the client by the Appellant's previous firm and therefore it could not be client's money as he (the Appellant) was entitled to it. In relation to complaint (2), it was said that the money was in reimbursement of disbursements made by the firm on behalf of the client, not payment of solicitors’ costs and therefore the client’s approval or prior notification was not required. In relation to complaint (3), it was said that in relation to (a) the money was not client’s money and therefore the Appellant was not required to enter it in the client account record or ledger; in relation to (b), the bill of costs need not in any event be entered in the client account record or ledger and the payments were received, not for payment of solicitors’ costs but in repayment of personal debts. The Solicitors Discplinary Tribunal held that the Appellant should be suspended from practise for 6 months, 9 months and 9 months respectively in relation to three complaints. The period of suspension is to be concurred.

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Note 4 at 7. Ibid. 26 Ibid. 27 [2002] HKCA 267

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2. ACCOUNTANT'S’ REPORT RULES (CHAPTER 159A) The Hong Kong Institute of Certified Public Accountants or better known as the HKICPA has issued a Practice Note28 to help the auditors in applying the Statements of Auditing Standards (SASs) and Standard on Assurance Engagements (SAEs) of general application to a particular circumstances and industries. This is done in order to assist the application of the Accountant's’ Report Rules in Hong Kong. However, it must be noted that these Practice Notes are only persuasive and not directive. They are treated as prescriptive in nature. These Practice Notes are regarded as an indicative of good practice and have similar status to the explanatory material in SASs and SAEs mentioned before, even though they may be developed without the full process of consultation and exposure used for SASs and SAEs.29 The objective of the Practice Notes is to give guidance to members on the audit of firm’s ac...