New trust accounting rules are now in effect, and a new Trust Report will be phased in to replace the Form 47 Accountant's Report in 2004
Benchers take steps toward more effective trust reporting regime
In December the Benchers adopted reforms to modernize and streamline the trust account reporting requirements of BC lawyers — through new trust accounting rules and a new form of Trust Report. The new Trust Report, which is designed to collect more relevant information, will be phased in as a replacement for the current Accountant's Report (Form 47) and Statutory Declaration (Form 48), beginning in 2004.
These reforms were recommended by the Society's Trust Assurance Reform Task Force as necessary first steps to improving trust assurance standards, while also streamlining administrative requirements and minimizing the cost of compliance for law firms.
From a regulatory perspective, the current Form 47 Accountant's Report, filed annually by law firms, presents several problems. First, the form is not designed to detect theft or fraud. It is primarily a report by a public accountant to help confirm that a law firm has properly maintained its books and records and has performed monthly reconciliations. Second, these reports seldom provide the Law Society with sufficient information to pursue an audit of a firm. Third, accountants are not necessarily trained or sufficiently instructed to detect activities that may be harmful to clients or the general public.
The new form of Trust Report will contain sections that a law firm will complete and a section that an accountant retained by the firm will complete. The Trust Report is designed to provide better information to the Law Society, as detailed in A look at the new Trust Report on page 5.
In the view of the Trust Assurance Task Force, the Law Society should be able to use this information to better assess what other steps, if any, need to be pursued with a particular firm.
In addition, the Trust Report should yield data on the profession as a whole to help the Society determine whether certain lawyers or firms are likely to present a greater risk of trust account irregularities. Such risk analysis could show whether greater risk attaches to such factors as the number of trust transactions a firm conducts, the size of those transactions, the size of a firm, the nature or volume of practice or the experience of lawyers.
If supported by risk analysis, the Society could consider other reforms in the future, such as instituting different trust reporting requirements for different firms based on various risk factors. If firms represent a low risk of trust irregularities, for example, it may well be justifiable to consider allowing those firms to self-report on trust activity and retain an accountant to prepare a trust report less frequently than once a year. Firms that are very high risk, on the other hand, may require more frequent reports or periodic audits by independent Law Society auditors.
While striving to ensure that the Society's trust reporting scheme is as effective as possible, the Task Force has also been sensitive to the cost to the profession.
Any increase in Law Society costs to administer the new form of Trust Report is expected to be covered by the new trust administration fee (see page 8). As for a law firm's cost of retaining an accountant to conduct the trust review, recent estimates show the Trust Report should cost about the same as the current Accountant's Report (Form 47).
Although the Task Force has reviewed many trust review systems, its recommendations for reform are fairly modest. In its report to the Benchers, the Task Force recommended leaving open the possibility that more Law Society audits may be needed in the future.
The Law Society will advise law firms individually as to when they should begin completing and filing the new Trust Report instead of the Form 47 or 48. The Report will be phased in gradually over 2004 to allow the Society to make system changes and to prepare lawyer and accountant education. The Report should be in use for all law firms by the end of 2005.
The Trust Report is available for reference in the "Resource Library/Forms" section of the Law Society website at www.lawsociety.bc.ca.
The principles behind trust reform
Four objectives have guided the recent reforms to financial and trust assurance standards for the legal profession:
- Compliance - ensuring that lawyers and their firms comply with standards and rules set by the Law Society concerning the handling of client property;
- Detection - ensuring that the Law Society has the ability to investigate, detect and objectively determine any losses occasioned to client property by lawyers in order to meet the regulatory mandate of the Law Society;
- Deterrence - ensuring through the enforcement of the standards and rules set by the Law Society that the few lawyers who need it are deterred from mishandling client property;
- Credibility - ensuring that the methods used by the Law Society to ensure compliance with rules and standards are appropriate to the mandate of the Law Society, and that they meet the needs of lawyers, clients and the community at large.
The Trust Assurance Task Force identified two governing considerations when meeting these objectives:
- Keeping the regulatory mandate of the Law Society front and centre in considering the alternatives - to ensure that the Society has the ability to detect and prevent fraud or misappropriations of client property by members; and
- Ensuring that the alternatives considered address the cost to members of trust assurance compliance and doing what can be done to reduce that overall cost or at least ensuring that the overall cost is kept as low as possible.