I. INTRODUCTION
6.1 In the course of previous chapters, we have considered some issues relating to recording and accounting for the manner in which trust money has been handled. In particular, we have recommended that, where trust money is not paid into a trust account- details of it and of the manner in which it is handled should have to be recorded in a Direct Payments Register constituting part of the solicitor’s trust account records.1
6.2 In this chapter we consider a number of other issues relating to recording and accounting for trust money. They concern the following areas:
- opening files and retaining records;
- computerised trust accounts;
- statements of account to clients;
- trial balances and bank reconciliations.
II. OPENING FILES AND RETAINING RECORDS
A. The Present Position
6.3 Solicitors in New South Wales are under no statutory obligation to open files in relation to work which involves the handling of trust money. Nor are they under an obligation to retain any such files for a specified period. Trust account records, however, must be retained for five years.2 It is relevant to note also that Commonwealth income tax legislation requires every person carrying on a business to keep and retain for seven years sufficient records of income and expenditure to enable his or her tax liabilities to be readily ascertained.3
B. Discussion
Opening Files
6.4 It is obviously desirable that sufficient records be maintained to enable the nature of a trust money transaction to be ascertained, including the nature of any instructions allegedly given by the client. The likelihood of such records being made would be increased if a file had to be opened, rather than reliance being placed solely on brief entries in the trust account records. Adequate records are of importance not only to the solicitor and client but also to any accountant or inspector who may be charged with responsibility for examining solicitors’ trust account records. In chapter 9 we recommend that, as in many other Jurisdictions, such accountants and inspectors should have access to the solicitor s office files to assist their understanding of particular entries in the trust account records.4
6.5 The principal argument against requiring a file to be opened for every matter Involving trust money is the work and expense which might be involved. On the other hand, most solicitors now open a file in every such matter anyway. Where files are not opened, it is usually because the matter is very short-lived. In such situations the requirement to record adequate details of the trust money transaction in a file is not likely to be burdensome, yet may be of considerable value in the event of subsequent uncertainty or dispute.
6.6 In Victoria, solicitors are required not only to keep “accounting records” of trust moneys but also to “keep such files or other records as will explain” their trust money transactions.5 In our Discussion Paper we suggested the adoption of a similar requirement in New South Wales.6 The Law Society, however, responded that it was “not at present persuaded that the additional work and cost to the client ... would be warranted by any substantial increase in information which would be forthcoming.”7
Retaining Records
6.7 Some important types of legal action which may be taken against solicitor trustees can be brought as long as twelve years after the events in question, without being barred by statute for lapse of time.8 Indeed, there are circumstances in which such actions could be brought more than twelve years after the solicitor closed his or her file on the matter. This may apply, for example, where the beneficiary was a minor at the relevant time, or did not suffer damage until a later date.
6.8 In South Australia, trust ledger accounts are required to be kept for 15 years, while other trust account records and “files relating to trust transactions” must be kept for seven years.9 Similar rules apply in Victoria, save that trust ledger accounts must be kept “indefinite”.10 In New Zealand, trust ledgers must be kept for 20 years, “files relating to matters for which trust accounts have been held” for 10 years, and other trust account records for 7 years.11 In our Discussion Paper we suggested that files relating to trust transactions should have to be kept for at least 12 years after the date on which the file ceased to be active.12 The Joint Legislation Review Committee of the two principal associations of accountants in New South Wales agreed,13 but the Law Society said that while the suggestion
“may be justifiable in theory ... its substantial costs, and therefore the substantial cost to the public, should be assessed and weighed against the results which can be expected to be achieved over a period of twelve years in the way of discovery of frauds, defalcations, illegalities and irregularities.”14
The Society has indicated, however, that trust account records should have to be retained for six years, rather than as at present, for five years.
6.9 There is no doubt that the cost of storing records can be substantial. On the other hand, modern technology is rapidly reducing many of the problems which might otherwise arise from a requirement to retain records for substantial periods. Moreover, as we have described in an earlier chapter,15 the cost occasioned to the public and the profession by trust account defalcations is extremely high. A number of these defalcations have not been discovered for some years (in at least one instance, some decades) after they occurred.
C. Recommendations
6.10 We recommend that solicitors should be required to open a file for every matter which involves the handling of trust money, and to record in that file such information as, in conjunction with the trust account records, will explain all trust money transactions involved in the matter in question.
6.11 We recommend also that solicitors should be required to retain
- all trust ledger accounts, cash books and journals for at least 12 years, and all other trust account records for at least seven years, after the last entry appearing in them;
- all Direct Payments Registers (and the Securities and Investments Register, the establishment of which we recommend in chapter 11), for at least 12 years; and
- all files relating to trust money transactions for at least 12 years after the date of the last transaction.
III. COMPUTERISED TRUST ACCOUNTS
A. The Present Position
6.12 There is at present, a highly detailed set of statutory regulations in New South Wales specifying the forms of trust account records which must be kept by solicitors, the types of information which must be entered in those records, and the procedures by which those entries must be made.16 The regulations were drawn up before the advent of computerised accounting and many of the requirements, particularly those concerning the different types of books which must be maintained, cannot be satisfied readily, if at all, by computer-based accounting systems.
6.13 A number of solicitors’ practices now rely entirely or partly on computerised systems for their trust account records. The Law Society, although it has no specific statutory power to do so, has given approval to some eleven software packages for the operation of solicitors trust accounts, even though they do not comply with the current statutory regulations.17 We understand that these approvals have been given on an ad hoc basis after examination of the particular package in question.
6.14 Several years ago the Law Society drafted new regulations18 which were intended to suit computerised systems as well as manual or mechanical ones. This draft included a number of specific requirements about the type of information which must be recorded but, in addition, it required that all trust account records must be in a form which has the “written or published approval, of the Society. The intention we understand, was that the Society would thus be able to assess technological innovations as they occur and to make decisions from time to time about the suitability of particular systems, whether generally or in relation to an individual solicitors practice.
6.15 These draft regulations were submitted by the Society to the Attorney General for the approval of the Governor, which it was necessary for them to obtain in order to become law. However, the Attorney General took the view that any amendments to the regulations should await our Report on trust accounts. Accordingly, the draft regulations have not come into effect. The Society has amended its draft from time to time, and its current draft is printed in Appendix III of this Report.
6.16 In 1983, the Law Society resolved to adopt a somewhat different approach to regulation of computerised systems. It commissioned from a prominent firm of accountants, Deloitte Haskins and Sells, a set of specifications for computerised trust accounting systems, and worked closely with that firm in identifying the features which such systems should have in order to provide sufficient records and protections. The specifications were then made available to a number of computer software companies with an invitation to develop programmes which complied with the specifications and to submit them for the Society’s approval. The Society’s intention we understand, is that solicitors wishing to use computerised systems will be required to use one or other of these approved programmes, save that there will be exemptions for solicitors who obtained approvals prior to the introduction of this new regime. We have been informed by the Society that seven programmes have been submitted and are currently under consideration.
B. Discussion
6.17 There can be little doubt that the existing regulations should be amended in order to allow computerised accounting systems. It has been amply demonstrated that computers can make accounting systems much more efficient, with consequential benefits for both solicitors and clients. On the other hand, there is a clear need for caution. In some ways computer systems can be more vulnerable to fraudulent misuse, and less capable of being subjected to effective independent scrutiny, than some other systems. This applies especially if, for example, the system does not retain a full history of entries in the records or allows such history to be readily falsified. Difficult problems arise also in relation to preventing unauthorised access to the system, and in producing records in readily comprehensible form.
6.18 A further consideration is the general desirability of the regulations comprising a specific and comprehensive collection of the rules with which trust account systems must comply, rather than leaving most of the requirements to be determined by the Law Society when considering applications for approval. However, the complexity of the requisite rules in relation to computerised systems, and the rapid pace of technological innovation make this goal exceedingly difficult to achieve. Undue rigidity, and unfairness to the manufacturers and potential users of certain systems, might result from over-emphasis on the importance of expressing all necessary principles in the form of regulations. The use of computerised systems is still relatively new within the legal profession especially in small or medium-sized firms, as well as in other professions. A few more years of experience may make it easier to develop specific and reasonably comprehensive regulations, notwithstanding the unlikelihood of a slackening in the pace of innovation.
6.19 We know of no jurisdiction in which substantial and detailed rules for computerised trust account systems have been developed, whether in statutory form or otherwise. In our Discussion Paper we suggested that the Law Society’s draft regulations were too vague in many respects.19 We published in the Paper a set of draft regulations which sought to be more specific and to provide a virtually complete list of requirements with which trust account systems must comply.20
C. Recommendations
6.20 We have referred to the difficulties currently involved in drafting suitable regulations for computerised systems. It is, nevertheless, essential that detailed rules be developed and published, and that before too much longer they should be expressed, as far as possible, in statutory regulations. This task will need the continuing and close attention of a special committee drawn from the ranks of solicitors, accountants, computer experts and legislative drafters. It is a goal towards which the Law Society has already made valuable progress but which in our view, the Government should now clearly endorse and take an active role in pursuing. After all, any regulations proposed by the Law Society cannot become law without the Government’s approval21 and, indeed, the Government has power to make regulations of its own volition22 or to effect changes by amendments to the Legal Practitioners Act.
6.21 Pending completion of this task, it is necessary to provide a means by which new systems can be approved. This can be achieved by allowing the Law Society to grant approvals, as would be the case under its draft regulations, especially regulation 2.23 It is also desirable that some of the improvements to the current regulation which the Law Society has proposed should be introduced without further delay. We refer here to the basic “book-keeping” aspects of the Society’s draft regulations (that is, regulations 3-9, and 11).24 Other aspects, such as the draft regulations relating to accountants’ examinations, solicitors’ nominee companies and statements of account to clients are considered later in this Report.
6.22 Accordingly, we recommend that the Solicitors Trust Account Regulations should be amended to give the Law Society of New South Wales power to approve trust accounts recording systems, and that other amendments to the basic “ book-keeping” aspects of those regulations should be made along the general lines of regulations 3-9 and 11 of the Law Society’s draft reproduced in Appendix III of this Report.
6.23 We recommend also, however, that within the next three years the regulations should be further amended to provide more specific and comprehensive rules relating to the keeping of trust account records, including those which are in computerised form, and to reduce substantially the need for the Law Society to be involved in an extensive “approval” or exemption” role. We recommend that the Attorney-General should establish a special committee to monitor the operation of the interim regulations which we have recommended in the previous paragraph, and to develop proposed new regulations (and such non- statutory rules, guidelines or other material as it may consider necessary) for submission to the Government in not more than three years time.
6.24 An appropriate composition for the special committee which we have recommended would be the Auditor General (as chairperson), two representatives of the Law Society, one representative each of the Institute of Chartered Accountants and the Australian Society of Accountants, one or two experts in computers, and the Parliamentary Counsel or his or her nominee.
IV. STATEMENTS OF ACCOUNT TO CLIENTS
A. The Present Position
6.25 Solicitors in New South Wales are under no general statutory duty to provide clients with statements of account concerning trust moneys which they have received for or on behalf of those clients. The only specific duty in this regard relates to
“any moneys... received by any solicitor from any person other than his client ... in or towards satisfaction of any claim or demand arising from death or personal injury, being moneys received for damages, compensation, expenses, costs or disbursements”,25
provided that the total received exceeds $100. The duty is to render to the client a statement of account showing
“(a) all moneys so received;
(b) all moneys paid to the solicitor by the client in connection with the same manner;
(c) the disbursement of any such moneys; and
(d) the balance remaining undisbursed.”26
These statements must be in sufficient detail to enable them to be “conveniently and properly audited”,27 and they must be rendered no more than three weeks after the end of the quarter in which the money was received. The duty must be complied with notwithstanding any waiver or direction to the contrary by the client.”28
B. Discussion
6.26 Statements of account can be of substantial benefit to clients by enabling them to keep track of trust money held on their behalf by solicitors, and to raise questions, if necessary, about the way in which the money is being handled. This applies especially if the clients receive statements on a regular basis rather than only after completion of the matter in question. Their affairs may be conducted more carefully, and yet more expeditiously, if the solicitor is having to account to them regularly.
6.27 Statements of account can also have benefits for solicitors. The requirement to render them, especially if regular rendering is required, can be a valuable incentive for the development of more efficient accounting systems, regular review of matters, and expeditious completion of matters where possible. Clients are likely to be favourably impressed by solicitors who keep them adequately informed on a regular basis about the way in which their affairs are being conducted. They are less likely in such a situation to burden their solicitor personally with continual inquiries, often at times when the solicitor is immersed in other matters.
6.28 Concernhasbeenexpressedbysomesolicitorsaboutthecostwhichmightbelnvolved if regular statements had to be provided at, say, quarterly intervals. Several points need to be considered in response to this concern. First, the cost would not be substantial if solicitors designed their accounting systems with the requirement to provide quarterly statements in mind. Secondly, many solicitors already provide regular statements or have systems which would enable them to do so without substantial expense. Thirdly, a very substantial number of matters are completed by solicitors within a few months, so that few, if any, quarterly statements would be necessary. Thus, the cost of providing quarterly statements may not be very much higher than the cost of providing a statement upon completion. Fourthly, the need to provide quarterly statements might encourage solicitors to deal more expeditiously with some matters and to ensure that trust ledger accounts are closed as soon as possible. Finally, it will often be possible to send statements at the same time as other material’s being forwarded to the client, or to hand them to clients when seeing them for other purposes.
6.29 In Queensland, there is a statutory duty to provide statements of account within 14 days of a request by the client.30 There is also a specific duty, as in several other States, to provide statements of account in relation to investment of clients’ money.31 In New Zealand, a statement “detailing the application of a client’s [trust] funds” must be sent
(a) in respect of ongoing investment transactions at intervals of not more than 12 months;
(b) in respect of all transactions which are not completed within 12 months at intervals of not more than 12 months; and
(c) in respect of all other transactions promptly upon or prior to the completion of the transaction”.32
A survey of accountants in New South Wales undertaken in 1979 by the Accounting Research Centre found that more than 80 per cent of respondents considered that solicitors should be required to “submit to clients, from time to time, a statement of the client’s trust account”.33
6.30 In our Discussion Paper we suggested that there should be a duty to provide a statement “not only after the completion of any matter but also at intervals of, say, three months during the matter.”34 The Law Society responded that “on a cost/benefit analysis, [this suggestion] cannot be justified.35 We understand, however, that the suggestion has some Support within the ranks of the Society. Moreover, although the Society does not favour regular statements, it has proposed a statutory duty to provide statements “as soon as practicable alter completion of the matter... and at any time upon request of the client”.36 It has also proposed a duty, where a solicitor has “acted for a client in the investment upon loan of any trust moneys”, to provide a statement of prescribed particulars of the transaction “as soon as practicable after payment... to the borrower.”37 The Joint Legislation Review Committee of the two principal associations of accountants in New South Wales agreed with our suggestion that regular statements should be required, but it favoured six-monthly rather than quarterly statements.38
C. Recommendation
6.31 We consider that the provision of statements of account especially on a regular basis, can be of great benefit to clients and can also have advantages for solicitors. A requirement to provide such statements can reasonably be expected to reduce the incidence of deliberate or unintentional mishandling of trust moneys. In our view, these advantages outweigh the resources required to provide the statements, especially since the development of efficient office systems can reduce substantially the additional resources required for this purpose.
6.32 Accordingly, we recommend that where solicitors receive trust money for a client they should be required to provide the client with a statement of account in relation to that money
- where the matter is not completed within six months - not more than six months after its commencement and at intervals of not more than three months thereafter;
- within one month of completion of the matter in question; and
- at any other time upon request by the client.
We recommend also that this duty should not be capable of being waived by the client.39 Where quarterly statements are required, it may be convenient for solicitors to make them in relation to the financial quarters ending March, June, September and December.40 The question of a specific duty to provide statements of account upon investing trust money is considered in chapter 11 of this Report when we look at a number of issues concerning investment.41
6.33 The statements of account should be required to provide particulars of all receipts and payments of trust money, and the total amount of any such money remaining. Each statement should be deemed part of the solicitor’s trust account records and accordingly be subject to independent scrutiny.
V. TRIAL BALANCES AND BANK RECONCILIATIONS
6.34 Solicitors in New South Wales are required to prepare trial balances of their trust ledgers at the end of each quarter, and an end-of-year reconciliation between their trust account records and their bank statements.42 The Law Society of New South Wales has proposed that the preparation of trial balances and bank reconciliations should have to be carried out as at the end of each month and within twenty days of that date.43 We agree with this proposal which is similar to existing requirements in several other Australian jurisdictions, and we recommend accordingly.
FOOTNOTES
1. See paras.4.35-4.39 above.
2. Solicitors Trust Account Regulations, reg.3(2).
3. Income Tax Assessment Act 1936, s.262A.
4. See para.9.77 below.
5. Legal Profession Practice Act 1958, s.41(1)(b).
6. Discussion Paper, para.6.79.
7. Law Society’s Response, para.5.15.
8. Limitations Act, 1969 (N.S.W.), s.47.
9. Legal Practitioners Regulations 1982, reg.25.
10. Solicitors (Audit and Practising Certificate Rules) 1965, r.40.
11. Solicitors Trust Account Rules 1969, r.13.
12. Discussion Paper, para.6.84.
13. N.S.W. Joint Legislation Review Committee of the Australian Society of Accountants and the Institute of Chartered Accountants of Australia “Preliminary Reply to Discussion Paper No.6 of N.S.W. Law Reform Commission and Submission by N.S.W. Law Society: Auditing of Solicitors’ Trust Accounts (1983), para.20 (hereafter referred to as the “Joint Committee Reply”).
14. Law Society’s Response, para.5.17.
15. See Chapter 2 above.
16. See Solicitors Trust Account Regulations.
17. Information supplied by the Law Society of New South Wales at the request of the Commission.
18. For the draft as it stood in late 1981, see Appendix I to our Discussion Paper. For the current draft-see Appendix III of this Report.
19. Discussion Paper, paras.5.19-5.21.
20. Id., Appendix II.
21. Legal Practitioners Act, 1898, s.86(1) and (3).
22. Id., s.87.
23. See Appendix III.
24. Ibid.
25. Solicitors (General) Regulations, reg.28(l).
26. Ibid.
27. Ibid.
28. Ibid.
29. Id., at reg.28(2).
30. Trust Accounts Act 1973, s.13.
31. See para. 11.20 below.
32. Solicitors Trust Account Rules 1969, r.6(6).
33. University of Sydney Accounting Research Centre, “A Report of Fiji Enquiry into the Certification of Accountants of Solicitors’ Trust Accounts” (1980), p.15.
34. Discussion Paper, para.6.45.
35. Law Society’s Response, para.4.5
36. See the Society’s draft Solicitors Trust Account Regulations, reg.10 in Appendix III of this Report.
37. Ibid.
38. Joint Committee Reply, para.5.
39. As mentioned earlier, a provision of this nature already applies in relation to moneys received in the course of conducting claims for death or personal injury (see para.6.25 above).
40. Ibid.
41. See paras. 11.18-11.26 below.
42. See para.7.18 below.
43. See the Society’s draft Solicitors Trust Account Regulations (Appendix III of this Report), reg. 11.
