By Ben Potaka
A fundamental role of the Law Society’s Inspectorate is to protect clients’ monies held in solicitors’ trust accounts and to ensure that any practice operating a trust account meet the requirements of the Lawyers and Conveyancers Act 2006 (LCA) and associated rules and regulations. In order to fulfil this role, the inspectorate operate a risk management framework. The framework:
- is based on an international risk management standard (ISO31000:2009);
- reflects current risk management practice;
- establishes the criteria for risk assessment; and
- provides a methodology for developing risk-based assurance trust account review processes.
Factors which are considered
In determining risk and the nature (degree and extent) of the review the inspectorate will take several factors into account. These include:
- integrity of the accounting software;
- clientele/work types;
- findings of past reviews;
- complaints/disciplinary history;
- internal controls/procedures.
Historically, these reviews have been conducted onsite at the practitioner’s place of business. While inspectors do all they can to work with staff during these reviews, it is acknowledged that their presence can impact the normal day-to-day operation of the practice. The advancement of technology and the improvement of trust accounting systems now means that parts of the Inspectorate’s work can be completed remotely.
The introduction of desktop reviews is another way the inspectorate can continue to discharge their role in reviewing risks associated with solicitors’ trust accounts. The desktop review will not replace onsite visits and its use will not preclude the inspector from requesting further information or visiting the practice.
If your practice is selected for a desktop review you will be contacted by the inspectorate in a fashion similar to how other reviews are conducted. For the review to be carried out effectively, it is important that you respond and provide all relevant information.
A typical request for information will include:
- An induction questionnaire, where the firm outlines their arrangements and personnel;
- Reports from the trust accounting system for the period (usually the most recent three months):
- transaction report listing all payments;
- transaction report listing all receipts;
- transaction report listing all journals;
- ledger report of the ‘firm’s interest in trust’ ledger.
- Bank statements for the firm`s trust bank account for the review period;
- Bank statements for the firm’s practice bank account for the review period;
- Copies of the end of month reconciliations for the trust account and IBD account for the review period;
- Details of the firm’s PI cover;
- Examples of the firm’s engagement letter, standard terms of engagement and client care information.
Most of the trust account software providers should readily be able to export the reports highlighted above into a csv or Excel format (the format preferred by the inspectorate). Similarly, the bank statements are all available in those formats from the major banks.
When the inspectorate refer to “end of month reconciliations” it is important to understand that this can mean more than the bare reconciliation report, as is highlighted in Guideline 9.3 of the Trust Accounting Guidelines:
The minimum* expected to be produced and retained for each month-end is:
- bank reconciliation;
- copy of month-end trust account bank statement;
- unpresented cheques list detailing for each cheque number the date drawn, payee and value;
- details of other reconciling items, eg, unbanked receipts, deposits not receipted etc;
- list of client balances;
- control account/cash book summary (opening balance, plus receipts, less payments = closing balance).
*If other accounts are operated (eg, IBD, foreign currency, controlled client bank account), details of these must also be secured and checked by the TAS.
The inspectorate is very conscious about cyber security and the threats that exist over email transmissions. If a practitioner has any concerns over these processes or the validity of an information request, please contact the writer. If you ever wish to establish the bona fides of an emailed request this can be done by phoning any branch office of the Law Society.
For any other trust accounting enquiries please contact the inspectorate on 0800 542 119.
Ben Potaka firstname.lastname@example.org is the New Zealand Law Society’s Inspectorate Manager.