Trust Assurance Standards

Special Compensation Fund Committee

Forecasting the Self-Reporting & Audit Inspection Model

May 29, 2000

Prepared for Robert W. Gourlay, Q.C.
Chair of the Special Compensation Fund Committee

Summary

As a result of the May 5, 2000 Bencher's Meeting, a resolution was passed to direct the Special Compensation Fund Committee to develop the Self-report/Audit Inspection Program and report back "to the Benchers with a report on costs, required rule changes and other details."

This report will present the financial implications of delivering a service model based upon:

  • An annual self-reporting by the member/firms of their compliance and accountability to trust property rules, and
  • An Audit Program, delivered by the Law Society of British Columbia (LSBC), to ensure a reasonable standard of compliance with trust property rules

Implementation of this initiative will occur over a one-year period. The expectation is to rollout the program commencing July 1, 2001.

Audit Program Goal & Focus

The goal is to audit every firm once every 4 years (1/4). Some firms,* may be audited more frequently depending upon their lack of accounting standards or type of business activities that historically have resulted in claims to the Special Compensation Fund. (SCF)

The audit focus will be to assist firms in maintaining a high standard of integrity in accounting for client trust funds & property, deter members from misusing trust funds, attempt to provide early detection when theft or fraud has occurred and demonstrate the commitment of lawyer's to maintain public confidence in the handling of trust funds & property.

Data

Basic Statistics

For the purposes of this discussion, data used to forecast budgets is as follows:

Description

Data

LSBC membership

9800

Insured members

6750

Members assessed SCF dues

8700

# of firms practicing law

2976

# of firms that are sole practices

2166

% of firms expected to be in serious default of LSBC rules *

5 %

Law firms based on regions

Regions

# of
Counties

Sole

Entity Size

 

 

 

 

Total
Firms

 

 

 

2-4

5-9

10-19

20-49

50+

 

Vancouver Island

2

338

103

31

9

0

0

481

Lower Mainland

2

1472

361

121

26

21

10

2011

Okanagan - Kootenay

2

149

46

11

6

0

0

212

Kamloops - Caribou

2

130

34

8

7

0

0

179

North

2

77

15

1

0

0

0

93

 

Totals  

10

2166

559

172

48

21

10

2976

Audit Workload Development

Forecasting the annual workload is based upon two criteria:

  • high-risk firms requiring annual audit, and

  • All other firms requiring audits 1/4.

High Risk Audits

In other jurisdictions that conduct a law society audit program, they experience that 5% of all firms require intensive audit work on a regular basis to enforce rule compliance. (Further disciplinary action may be required for some of these firms.)

Low Risk Audits

For the other 95%, they will be provided remedial corrections to bring them into compliance with the rules with some follow-up procedures for the firms that have extremely weak accounting systems.

Projections

To meet the criteria, approximately 850 audits per year will be conducted. The audit time varies between 2.5 to 5.0 days per audit. (Factoring in travel time and follow-up reporting.)

The projected assessment is that 135 firms will require an annual audit and 715 firms will be audited cyclically.

High Risk Audits

135

Low Risk Audits

715

Total

850

Audit Department Requirements

Based upon the audit workload, 15 additional full-time equivalent positions will be required. The annual estimate to deliver the audit program is $1.7 million. This estimate includes office, administration, travel and labour costs.

Other Cost Concerns

Summary

In the initial 4 years, LSBC should expect to see a rise in SCF claims as auditors discover mis-use of client trust funds by their lawyer that had previously been prevented from discovery.

SCF claims are more likely to occur amongst the high-risk firms.

Further, professional conduct investigations and discipline hearings may result from audit findings that will financially impact the Law Society.

Managers of SCF and Professional Conduct Departments reviewed their resources to estimate what pressures may be expected. Cost predictions are dependent on quantity and complexity of complaints & claims.

Estimates are based upon 30 new member complaint files. It is difficult to predict the number of actual victims and /or witnesses that will be associated to each file.

Professional Conduct

Their estimation is that 8 of these presently surface through the normal complaints process, therefore, they project an increase of 22 new matters which will require additional staff resources.

The file increase will require the assistance of additional investigators to interview witnesses and other duties as directed by staff lawyers. (Investigators will also be needed to assist the SCF application process. These costs will be discussed under SCF requirements.)

The effect will filter to Discipline Counsel who predict that they will require additional staff counsel as citations increase. Citation Hearings and Bencher time needed to hear cases would also increase.

The General Fund funds Professional Conduct Department; so, any increased workload will be assessed in General Fund.

Projected estimates for additional staff resources is $165,000.

Projected estimates for increased Hearing costs is $100,000.

Special Compensation Fund

The estimate of 22 new files resulting in claim applications against the SCF will require an increase in 4 additional full-time equivalent staff resources at $300,000.

Custodianships will result for some of these matters. The average cost of a custodianship is $20,000. Difficult/complex custodianships are in excess of $100,000. Cost predictions are dependent on quantity & complexity. A $100,000 annual estimate for custodianships is reasonable.

Annual Reporting Administration

The costs to administrate annual reporting will not differ significantly from what is now being done with annual reporting. The report administration process is in need of upgrading to make use of technology and has been held in abeyance until the issues surrounding financial assurance standards have been settled.

Projected Estimates

To summarize all budget aspects: 

Audit Department

1,700,000

SCF Department

300,000

Custodianships

100,000

Professional Conduct

165,000

Hearing Costs

100,000

Total Annual Estimate

2,365,000

 

Funding Models

The funding of the program will be through a combination of SCF & General Fund assessments, plus, a trust-licensing fee aimed at those in the practice of law.

SCF Assessment

A general increase of $50 for all members that are assessed under this fund is proposed.

General Fund Assessment

A general increase of $25 for all members that are assessed under this fund is proposed.

Trust License Fees

Every firm that operates a trust account (whether one or many) will be assessed a firm fee of $300 and an assessment for every lawyer that is part of that firm of $75.

These fees will be payable on the trust account report fiscal year end rather than at the Law Society dues date of December 31.

Summary

Funds may be derived from:

 

Fund

# of members/firms

Fees

Total

Trust License Firm

2,976

300

892,000

Practicing Members

6,750

75

506,250

SCF Increase

8,700

50

435,000

General Fund Increase

8,700

25

217,500

Total

   

2,050,750

 

Each year, the legal profession pays to have a public accountant complete the Form 47. The collective costs associated to this total approximately $5,000,000.

(Based upon a 1998 survey of firm costs for their Form 47 accountant)

Implementation Issues

Communication Strategy

The recommendation is that a consultation process be started with the membership at large. The consultation will be in the form of a consultation paper that will be posted on the LSBC web-site, articles in the Bencher Bulletin, and a series of information sessions to be conducted in each county around the province.

This should provide a forum for discussion and feedback directly with the members to receive comments, suggestions and concerns and explain the changes that will occur, program components etc.

Changes to LSBC Rules

Some rule changes will be needed to give the program its mandate. There does not appear to be any amendments required under the Legal Professions Act.

Education Program

Probably in concert with CLE, two courses will be developed aimed at increasing the knowledge of members and their accounting staff on the requirements of trust accounting compliance.

LSBC Policy Development

Consensus building to help develop program policy is paramount to its success.

From time to time, various committees may need to be involved in developing policy. An example may be having the Ethics Committee giving guidelines on when members should be formally disciplined for non-compliance.

LSBC Administration
Annual Reporting

The development, approval, administration and processing of reporting forms will need to be conducted.

Accommodations

Suitable space needs to be found within the LSBC building to accommodate additional staff.

Staff Working Group

A staff-working group has been established to assist in the implementation of this program. The group consists of representatives from Professional Conduct, Special Compensation Fund, Finance, Policy & Rules, Communications and Information Technology. The Senior Auditor of the Law Society chairs the group.

Progress Reporting

Progress reporting will be made as directed to the SCF Committee.