Consultation paper sent to all firms — and available online

Lawyers asked for their views of trust assurance reform

The Benchers are giving serious consideration to replacing the current Accountant's Report (Form 47) with a trust assurance program that would require law firms to 1) file their own report on trust accounting activities without the need to hire an outside accountant and 2) undergo Law Society audits at least every four years. The Law Society has issued a consultation paper, Proposal for a New Model of Trust Assurance, recently mailed to all B.C. law firms (care of the managing partner) to initiate discussion and comment. The deadline for comments is September 15, 2000.

Accompanying the consultation paper is Trust Assurance Standards: Forecasting the Self-Reporting & Audit Inspection Model, prepared for the Special Compensation Fund Committee and presented to the Benchers at their June meeting. The Benchers have asked that this material be provided to the profession to provide further background on costs.

Both papers are also posted on the Law Society website at www.lawsociety.bc.ca (see the "Resource Library (Reports)" or "What's New?" section).

What are key considerations behind the proposal

As the regulatory body for the legal profession, the Law Society must maintain an effective trust assurance program to ensure the integrity and security of trust funds in the care of lawyers.

The Form 47 ensures that, at least annually, the books and records of a law firm have been reviewed by a third party and are brought up to date, but it is not designed to detect theft or fraud. Forms 47 occasionally do reveal serious accounting rule violations that lead to an order by the Discipline Committee for an audit investigation, but most audit orders actually arise from complaints.

The primary advantage of the proposed self-reporting/audit model is that it would appear to be more effective in detecting and deterring trust losses, which should consequently provide better protection for the public and greater stability for the Special Compensation Fund in the long term. Another important advantage is that this proposal would appear to cost the profession less overall than the current Form 47. The average cost of a Form 47 is $1,700 for each firm annually ($1,034 for sole practitioners).

What are the main features of the new model?

The proposal for reform features several components:

  • Annual self-reports: B.C. law firms would directly report to the Law Society on their compliance with Law Society accounting rules and would no longer need to retain an accountant to complete a Form 47.
  • Audits at least every four years: Each law firm, regardless of size, would also undergo an audit inspection by Law Society auditors, on average once every four years. New firms would be inspected within six months of start-up to ensure they have adequate accounting systems and controls.
  • Trust accounting courses: A trust accounting course would be designed for lawyers to reinforce their obligations under the Law Society Rules, and another course would be offered to law firm accounting staff to develop a standard of generally accepted trust accounting practices.

Under the proposed audit program, it is expected that firms with certain risk factors, such as a history of inadequate accounting systems, would be given higher priority for auditing or would be audited more frequently. They also might be required to file biannual, quarterly or monthly certificates to authenticate their accounting compliance. Firms whose lawyers practise in areas that have historically resulted in claims against the Special Compensation Fund would also be audited more frequently.

For the majority of law firms, the Law Society audits would be directed at ensuring compliance with the Law Society Rules, educating lawyers on their responsibility to account to clients and helping firms with the efficiency and effectiveness of their accounting systems and staff.

How would the proposed program be funded?

The proposed self-report/audit program would be funded through the Special Compensation Fund, as is now the case for the review of Forms 47 and for Law Society investigative audits.

A formula is proposed that ensures that lawyers in private practice who maintain trust accounts fund the majority of program costs. A portion of the cost would be shared by all lawyers, however, through a modest increase in the Special Compensation Fund and General Fund fees. Lawyers outside of private practice do not maintain trust accounts and are not subject to trust reviews, but would nevertheless benefit from an improved program. Not only does such a program help limit losses to the Special Compensation Fund and other Law Society regulatory programs, but maintains the integrity of the legal profession as a whole.

Under the proposed funding formula there would be:

1. annual law firm trust account fees, paid by all firms with one or more trust accounts, consisting of:

  • a basic law firm trust account fee; and
  • a fee based on the number of lawyers in the firm;

2. a modest increase to the Special Compensation Fund fee, paid by all lawyers; and

3. a modest increase to the General Fund fee, paid by all lawyers.

For more information

A copy of the consultation paper Proposal for a New Model of Trust Assurance was recently sent to each law firm (care of the managing partner) for discussion and comment, along with the report of the Special Compensation Fund to the Benchers.

Both documents are also posted on the Law Society website at www.lawsociety.bc.ca (see the "Resource Library (Reports)" or "What's New?" section). If you do not have Internet access and require a hard copy, the Law Society would be pleased to send you one: see contact information that follows.

The next steps

The Special Compensation Fund Committee, the Benchers and staff welcome questions and comments from law firms, individual lawyers and interested law firm staff by September 15, 2000 by contacting:

Law Society of British Columbia
c/o Jerome Malysh, Senior Auditor
845 Cambie Street
Vancouver, B.C. V6B 4Z9
Fax: (604) 605-5399
Email: TrustReview@lsbc.org

As part of this consultation, and if there is interest expressed within the profession, the Law Society would be pleased to hold information sessions on the proposal early in the Fall, possibly in conjunction with local bar association meetings. The schedule for any information sessions will be posted in the Events Calendar section of the Law Society website.