A new trust assurance program — more effective, and less costly for firms

The Law Society is responsible for setting and upholding standards of financial integrity in the legal profession — which includes standards for trust accounting. A rigorous trust assurance program is important for the protection of clients and others who rely on lawyers to handle trust money, and to help prevent claims against the trust protection coverage.

BC law firms fulfil their obligations by meeting accounting requirements of the Law Society Rules. Currently, firms file with the Law Society an annual trust report, which includes both a self-report component signed by a lawyer and an accountant’s report prepared by an outside accountant retained to conduct a specific review of books and records. The Society follows up with firms on notable exceptions in the reports. Significant problems or exceptions in a report can result in an audit of the firm’s books and records.

Most recently, the Society has studied trust compliance schemes from across Canada and internationally and reviewed its own program with an eye to making reforms.

What is clear is that regular law firm audits are a primary feature of the trust assurance programs in several other jurisdictions. In December, the BC Benchers approved a three-year plan to restructure the Law Society’s own program to make it more effective and less costly for law firms.

What has changed?

A new model of trust assurance, to begin in 2006 and be phased in over three years, will consist of these key components:

1. Law firms will now file their trust reports directly – By late 2006, BC law firms will be asked to file a revised form of trust report. In most cases, firms will simply self-report on their trust activities and will no longer need to retain an outside accountant to review their records or complete a portion of the trust report.

2. Law Society will conduct site visits / audits – The Law Society will begin conducting rotational audits in law firms. The intention is to make each BC firm subject to an audit every six years, or more frequently if there is reason to do so.

How will audits be prioritized?

Law Society Rule 3-79 authorizes the Society to conduct an examination of a lawyer’s books, records and accounts to ensure they are properly maintained. Rule 4-43 provides for a Bencher to order the investigation of the books, records and accounts of the lawyer or former lawyer who may have committed a discipline violation.

To date, most Law Society audits have been in response to situations of identified risk. It is important to note that law firms in which serious problems have been identified will continue to receive highest priority as part of the Law Society’s program of forensic audits and investigations. In deciding whether other firms will receive priority for an audit, the Law Society will weigh various factors, such as whether a firm has had significant exceptions on previous trust reports or whether the firm has open files on financial difficulty or complaints.

As the Law Society collects more information through its trust report filings and audits, it will be better able to identify additional risk factors.

Because the Law Society is introducing a universal audit program, however, each BC law firm will be required to participate in an audit at some point. For most firms, this will be a straightforward review and will provide an opportunity for the firms to raise any questions they have on trust systems and procedures.

In that respect, the Law Society wants to give some priority to new law firms so as to help them set up accounting systems that work well and do not lead to problems down the road.

What are the advantages of the new program?

There are multiple benefits of the new trust assurance program:

  • Assistance to law firms, and new firms in particular – The Law Society’s trust assurance team will assist lawyers and their staff, in particular lawyers setting up in practice on their own or in small firms, to adopt proper accounting systems and procedures from the start.
  • A cost saving for firms – The new program will be funded entirely through the trust administration fee (TAF), which law firms now collect and remit in the course of their trust administration for clients. A primary purpose of the TAF has been to fund trust reforms. As noted, law firms will continue to file reports on their own trust activities and be subject to periodic Law Society audits. But by early 2007, it is expected that 95% of firms will be relieved of the requirement to engage an outside accountant to prepare a trust report.
  • Earlier detection of serious problems – By introducing improved risk analysis as a basis for deciding priority audits, the Law Society will be better prepared to detect serious trust breaches in the few firms where these exist, and to do so earlier. Taking proactive steps is intended to prevent thefts and claims against the Society’s Part B (trust protection) insurance coverage.
  • Greater confidence in the profession and the public – The Law Society intends its trust compliance program to enhance the confidence of lawyers, clients and the public as a whole. By being at the forefront of trust assurance reform, the profession can take pride in its standards and in the prevention of substandard or improper trust handling by a few lawyers that may tarnish the reputation of many.
More information

More information will be available in the “Regulation & Insurance / Trust Assurance & Reporting” section of the Law Society website at www.lawsociety.bc.ca later this year. Law firms can also expect to be advised directly of any changes in advance of their 2006 trust report filing.