I. INTRODUCTION
7.1 This is the first of four chapters concerned with independent scrutiny of trust accounts. In this chapter we outline the present position in New South Wales in relation to the two principal forms of independent scrutiny, namely
- Law Society inspections and investigations; and
- accountants examinations
We then discuss and make recommendations about certain central issues relating to, respectively, Law Society inspections and investigations (chapter 8) and accountants’ examinations (chapter 9). In chapter 10 we consider a number of other issues relating to these two forms of scrutiny, and also consider a third form, namely the imposition of duties on solicitors and others to disclose suspicions they may form that certain solicitors trust moneys have not been correctly handled or recorded.
II. LAW SOCIETY INSPECTIONS AND INVESTIGATIONS
A. Inspections
7.2 The Law Society of New South Wales has been vested by statute with the power to appoint persons as “inspectors” in order to “examine, either generally or in a particular case, the [trust] accounts kept ... by any solicitor.”1 There is no need for the Society to suspect irregularities before appointing an inspector. Any such inspector
“may require any person to produce to him... the accounts concerned and any books, papers, securities or other documents in the possession of the person or under his control relating to those accounts, and to give all information in relation thereto, and to furnish all authorities and orders to bankers and other persons that may be reasonably required of him.”2
7.3 An inspector is empowered to provide the Law Society with “a confidential report as to the state of any accounts he is appointed to examine”, and must provide such a report if the Society so requires.3 A copy of any such report must be provided to the solicitor in question and if the report states that in the inspectors opinion “there are reasonable grounds to suspect that there has been an irregularity or professional misconduct” in relation to the accounts in question, it must also be sent to the Attorney General.4 The Society is entitled to call upon the solicitor to provide a written explanation of any matter in the report relating to his or her accounts.5 There are also certain statutory provisions aimed at preserving due confidentiality of information obtained by inspectors, and of their reports, but the Society has powers to make disclosure in certain circumstances to the police or for the purposes of disciplinary action.6
7.4 The Law Society currently employs twelve qualified accountants as Trust Account Inspectors7 and has exercised the powers referred to above by appointing each of them as an inspector in relation to solicitors’ trust accounts generally. The Society s Inspectors undertake two types of inspection which we shall refer to as routine8 and special inspections respectively. These inspections are made without cost to the solicitor concerned.
7.5 The Society has adopted the objective of ensuring that the trust accounts of every solicitor in the State are subjected to a routine inspection at least once each year. These routine inspections are scheduled on a cyclical basis, although adjustments are made in order to suit the Inspectors convenience. Each new practice is inspected approximately six months after its establishment Routine inspections involve a pre-arranged visit by one of the Trust Account Inspectors, in the course of which he or she conducts an inspection in accordance with a check-list issued by the society. The check-list is concerned primarily with the statutory requirements relating to the handling and recording of trust moneys, especially those relating to the types of accounting records which must be kept, the form in which they must be kept, and the need for them to be kept accurately. For these purposes it requires inspectors to make physical examinations of the records and to conduct certain sample checks of procedures and arithmetical calculations. It also, however, requires inspectors to enquire about certain procedures (for example, relating to the signing of cheques) which are not required by statute but are considered desirable by the Society, and to do sample checks for particular types of entries (such as trust journal entries) “towards the end of [the] month that are subsequently] reversed”, or transactions (such as financial transactions between solicitor and client), which the Society considers worthy of special attention In these instances, the inspectors are expected to make certain investigations into the propriety of any such entries or transactions as occur in the chosen sample. The great majority of routine inspections are completed within one day. We understand that the Law Society is currently revising its check- list for inspectors with a view to making routine inspections more rigorous.
7.6 Special inspections are conducted where the Law Society has information causing it to suspect that a particular solicitor may not be handling or recording trust moneys in the correct manner. The information may come from routine inspections, complaints by clients, or other sources. There are no specific rules or guidelines for special inspections, but they are usually considerably more rigorous than routine inspections.
7.7 The Society is now conducting routine inspections at a rate of approximately 2000 per year, which is almost sufficient to cover each of the 2300 or so practices in the State.9 The number of special inspections fluctuates somewhat, but in recent years it has exceeded 200 per annum. During the year ending 30th June 1984, there was a total of 636 reports by Inspectors disclosing alleged breaches of statutory requirements. Five of these reports led subsequently to the institution of disciplinary action or criminal proceedings against the solicitor concerned, and in a further 150 cases the Law Society sent letters to the solicitors solicitors demanding an explanation of certain matters.
7.8 The following table lists the means by which defalcations during the four years to 30th June 1984 were discovered by the Law Society.10
Initial Source of Information | Number of Instances |
| | |
| Law Society | |
| - routine | 42 |
| - special | Nil |
| Client | 22 |
| The defaulting lawyer | 4 |
| Partner or former partner | 3 |
| Employer | 2 |
| Employee | 1 |
| Other | 5 |
| Total | 79 |
It is clear that routine inspections are now the most common means by which defalcations are detected. On the other hand, a number of defalcations have remained undetected by one or more routine inspections of the accounts in question but have been discovered subsequently by other means.
7.9 In conclusion, mention should be made of the substantial changes which have occurred in the Law Society’s inspection activities since we began our Legal Profession Inquiry. In 1976 the society had four Trust Account Inspectors who conducted 330 routine inspections, and estimated the cost of its inspection activities as $25,000.11 In 1984 it had 12 Inspectors who conducted 2000 routine inspections, and spent $380,000 on inspection activities.
B. Investigations
7.10 The Law Society has statutory power to appoint a solicitor or accountant or one of its own employees, “to investigate any accounts, transactions and affairs” of a specified solicitor and to provide it with a “confidential report as to any irregularity or professional misconduct” that may be disclosed or should be further investigated.12 The appointment is subject, however, to approval by the Prothonotary, a senior officer of the Supreme Court.13 The statutory provisions about forwarding copies of reports to the Law Society and the Attorney General, and the preservation of due confidentiality in relation to an investigatior’s work, are similar to those concerning Inspectors.14
7.11 Investigators appointed in this way have the same powers of investigation as Inspectors, save that they may require information in relation to the “accounts, transactions and affairs” of the solicitor in question rather than only in relation to the trust accounts.15 There is a specific provision which makes it an offence, and professional misconduct to fail to provide information required by an Investigator or to hinder or delay an Investigator in the performance of his or her duties.16
7.12 A further difference between the statutory provisions relating to Investigators and Inspectors respectively is that the former provide that, unless the Investigator reports no irregularity or professional misconduct, the Law Society can require the solicitor in question to meet the costs of the investigation.17
7.13 During the three years to 30th June 1984 the Society appointed an Investigator on 54 occasions.18 Appointments have been made from a number of different firms of accountants. It is rare for an investigation to be conducted other than where there is already compelling evidence of serious irregularities (usually involving defalcations) concerning trust moneys. The purpose of investigations, therefore, is usually to determine the precise nature and extent of irregularities and defalcations rather than to be a means of primary detection.
7.14 There are no rules or guidelines about the way in which these investigations are to be conducted, other than those to which we have referred already. They usually involve a very thorough examination of the solicitors’ trust accounts and sometimes take months to complete. During the year to 30th June 1984, a total of twelve reports were made by Investigators, nine of which have led to disciplinary action and/or criminal proceedings and two others remain under consideration.19
7.15 In the three years to 30th June 1984, the total cost of investigations conducted at the request of the Law Society was approximately $314,000.20 About $72,000 of this amount was recovered from the solicitors under investigation.
III. ACCOUNTANTS’ EXAMINATIONS
7.16 Solicitors in New South Wales must keep their trust account records “In such a manner as to disclose the true position in regard [to trust moneys received by them] and to enable the accounts to be conveniently and properly audited”.21 They are not, however, required to have the accounts audited. Instead, their trust accounts must be subjected each year to an examination less rigorous than an audit, conducted by a registered public accountant of their choice.22 There is an exemption for solicitors who certify to the Law Society that they have not received, held or disbursed” any trust moneys during the year in question.23
7.17 The accountant must provide the solicitor with a report on his or her examination and the solicitor must then submit that report when applying to the Law Society for an annual practising certificate.24 If no such report is submitted, the solicitor will not be granted a certificate and accordingly will not be entitled to practise as a solicitor.
7.18 The only statutory requirements about the type of examination that the accountant must undertake are contained in the prescribed form of report which he or she must submit.25 The current form is reproduced in full in Appendix II of this Report, but its principal features are that the accountant must state that he or she
- has inspected the trust account records produced by the solicitor as those relating to transactions during the preceding year to 31st March;
- is of opinion that these records “are of the nature and in the form” prescribed by the Solicitors Trust Account Regulations and “appear to have been regularly written up and properly kept”;
- has seen cash books containing what “purports to be [an end-of-year] reconciliation” of the balance in those books with the balance in the bank pass books or sheets, and has ascertained that the balance in the latter books or sheets agrees with that shown in the reconciliation statement;
- has seen what “purport to be trial balance statements” at the end of each quarter and are in the prescribed form, and has ascertained that the trial balance statement for the last quarter agrees with the end-of-year reconciliation statement referred to above;
- has ascertained that there are no debit balances in any of the quarterly trial balance statements “other than those which have been satisfactorily explained” to him or her and
- has examined “the additions of not less than ten accounts in the trust ledger’ and ascertained that the end-of-year balance in each of them agrees with that shown in the end-of-year trial balance statement.
The report must also deal with the solicitor s obligation to make the “statutory deposit” to which we referred earlier.26 If the accountant is “unable to report” in the terms outlined above “except with qualifications”, the qualifications must be stated in the report.27
7.19 Accountants conducting these examinations have no statutory powers to require information or to examine records other than the trust account records, such as the general account or the office files. On the other hand, if an accountant considers that he or she has insufficient information to make the required report without qualifications, that opinion can be expressed in the report.
7.20 UponreceivingthereportofanaccountanfsexaminatiomtheLawSocietyhaspowerto require the solicitor to provide a report by a second accountant, whom the Society may nominate.28 The Society must pay the cost of the report unless it discloses that the solicitor has failed to comply with the relevant statutory requirements.
7.21 During the three years to 30th June 1984, more than 12,000 reports were submitted by accountants to the Law Society. Some 562 of these were qualified in some way (excluding those qualified only in relation to the “statutory deposit” requirements).29 In none of the cases where qualified reports were received did the Society require a further report or a report by another accountant None of the qualified reports led to the Law Society refusing to grant a practising certificate, or gave rise to other disciplinary action.
7.22 We listed earlier in this chapter the means by which the Law Society became aware of the 79 defalcations discovered by it during the four years to 30th June 1984.30 As indicated there, none of these were discovered as a result of accountants’ examinations.
FOOTNOTES
1. Legal Practitioners Act 1898, s.42(3).
2. Id., s.42(8).
3. Id., s.42(5).
4. Id., s.42(5A) and (9).
5. Id., s.42(10).
6. Id., s.42(11)-(15).
7. Eleven are full-time, and one is part-time.
8. This category has often been referred to in the past as random inspections. and is now referred to by the Law Society as” normal” inspections.
9. Statistical information in this paragraph and succeeding paragraphs has been provided by the Law Society at the request of the Commission.
10. See note 7.7.1 above.
11. See note 7.7.1 above.
12. Legal Practitioners Act, 1898, s.82A(1).
13. Id., s.82A(4).
14. Id., s.82A (2), (2A), (7)-(11).
15. Id., s.82A(5).
16. Id., s.82A(6).
17. Id., s.82A(3).
18. Statistical information in this and succeeding paragraphs has been supplied by the Law Society at the request of the Commission.
19. See note 7.13.1. The remaining report related to a solicitor who subsequently died before consideration of disciplinary action had been finalised.
20. See note 7.13.1.
21. Legal Practitioners Act 1898, s.42(2).
22. Solicitors Trust Account Regulations, reg.8.
23. Id., reg.8(4).
24. Id., reg.8(3).
25. Id., Form No.l.
26. See para.2.5 above.
27. Solicitors Trust Account Regulations, Form 1, para.2.
28. Id., reg.8(5).
29. Statistical information in this and the next paragraph has been supplied by the Law Society at the request of the Commission.
30. See para.7.8 above.
