The term ‘trust accounting software’ is very much an anachronism now. For some time, software providers have been designing their offerings as practice management systems – including wider functionality such as time recording, debtor management, GST accrual and file management.
Part of the pitch of these systems is that they enable authors and staff to optimise their productivity and enable them to complete their complex tasks with less likelihood of missing anything. If these systems were the equivalent of motor vehicles, they would be safer, smoother, more reliable and more fuel-efficient than the old clunkers we drove around in 20 or 30 years ago. Does anyone have any fond memories of Hillman Hunters, or Morris Marinas?
In the same manner that cars have become improved and made cheaper, in recent decades practice management systems have become steadily more cost-efficient whilst providing increasing functionality and usually becoming easier to use. Fewer key strokes are required and operation is more intuitive.
Prior to COVID-19, the Law Society Inspectorate (the Inspectorate) had introduced a ‘desktop’ review that enabled our supervision of trust accounts without the need for on-site visits. This desktop approach has been used to good effect as a means of accommodating lockdowns and related COVID-19 disruptions and yet still securing some assurance of the handling of client monies by the profession.
Many practitioners will have experienced the ‘desktop’ approach and a number have given us positive feedback that the review was relatively easy to accommodate; bearing in mind the profession has been exceedingly busy across the board in the last two years.
Many lawyers have learned the hard won lessons of the Christchurch bar of working from home, the value of having good backups and enjoying remote access – often largely thanks to their investment in capable software.
Not all firms operate software that meets the needs of remote inspection. In the past there was a generous degree of tolerance and latitude for firms that operated older systems or manual arrangements especially if that system was not overburdened. As Trust Account Guideline 1.3 states:
“Most practices operate computerised trust accounting systems. A manual system is appropriate only for a low volume user”.
One indicator an inspector looks for to demark a high from a low volume user is whether the firm holds an e-dealing licence. Property law, as a general rule, is transactional.
“In recent decades practice management systems have become steadily more cost-efficient whilst providing increasing functionality and usually becoming easier to use”
In the past the Inspectorate has been able to work with firms that operate more rudimentary systems and tease out the numbers, in some instances even adding things up manually. The major part of the Inspectorate’s activities are met by the practising certificate fees paid by all solicitors who operate trust accounts. It is fair to say that whilst all these lawyers contribute, some lawyers have enjoyed or consumed more than their share of the Inspectorate’s attention. The Inspectorate has always had the ability to recover costs from practices, but this has rarely been invoked in the past. Where cost recovery might be sought (usually due to poor record keeping) there is often also a referral to the Complaints Service and a fine is often imposed by a Standards Committee so there is potential for double jeopardy.
It has been recognised by the Inspectorate that the light-handed and accommodating approach of the past which extended to firms that operate inappropriate systems cannot continue. Part of this recognition is the value and relative scarcity of Inspector resource, part is the need to continue to do at least some of our work remotely and we are also cognisant that the cost of modern software has relatively speaking, reduced considerably.
There is statutory authority for this revision of policy: Regulation 11:
Trust account records
(1)It is the duty of every practice required by section 112(1) of the Act to keep records in respect of trust accounts to do so in such a manner as to enable them to be conveniently and properly reviewed by the inspectorate.
(2)Trust account records must be up to date, clearly show the amount of the trust money held for each client, and as far as practicable be secure against retrospective alteration or deletion.
Older (usually) and more rudimentary systems fail one or both legs of this regulation i.e i) capable of convenient and proper review by the Inspectorate and ii) as far as practicable be secure against retrospective alteration or deletion.
The purpose of this article is to declare to those practices operating aged and/or unduly rudimentary systems that the Inspectorate is likely to impose cost recovery and/or refer Reg 11 non-compliance in future. A related objective is to prompt such firms to investigate transitioning to more ‘fit for purpose’ accounting systems sooner rather than later.
Examples of what the Inspectorate expects are:
- End of month reconciliation collations that evidence all the salients (ref LTAG 9.3)*
- Evidence of authority and payee bank details for payments made readily retrievable
- Evidence of authority for inter-entity journals again readily retrievable
- Evidence of authority for fees deducted – readily retrievable
- Evidence of client care being sent to clients – readily retrievable
- Evidence of reporting on balances over 12 months old – readily retrievable
- Transaction reports capable of being exported to .xls or .csv format.
The Inspectorate is not funded or resourced to wade through disorganised hard copy files in some firms, when most firms can readily retrieve what is sought usually electronically.
LTAG 9.3 amplifies the regulation’s references to ‘reconciliations’ and inexhaustively include:
- bank reconciliation
- control account summary (aka cashbook)
- list of client balances (trial balance).
And if relevant, for the IBD account:
- bank reconciliation / Control account summary
- copy of month-end firm’s software listing
- copy of month-end bank detailed listing.
- a stale balance report – credits only older than 6 months
- a journal transaction report (if you have staff administering the trust account)
- a printout of the firm’s interest in trust ledger (if applicable).
“Firms that have not had feedback or attention from the Inspectorate in recent years are urged to consider their systems... lawyers may well be unaware of the various features to be enjoyed with modern systems and the false economies they may have been labouring under without such tools”
This policy is unlikely to affect the majority of practices who operate contemporary software and have had no difficulty furnishing the reports and retrieving evidence required by the Inspectorate in the recent past. Firms that have not had feedback or attention from the Inspectorate in recent years are urged to consider their systems. As well as questioning whether they will meet the requirement of convenient and proper review by the Inspectorate, lawyers may well be unaware of the various features to be enjoyed with modern systems and the false economies they may have been labouring under without such tools. Lawyers are encouraged to discuss modern software with their colleagues, and many may be pleasantly surprised at how much easier practice can be when availing themselves of these aids.
The Inspectorate intends to apply this policy with greater force as this year progresses i.e. allowing firms a window to review whether their software is ‘fit for purpose’.