Tighter law firm rules wanted to protect public

Press, 22 July 1989, Page 8

Tighter law firm rules wanted to protect public

PA Wellington A New Zealand Law Society working party report calls for a thorough shake-up of rules governing the legal profession to better protect the public and its money. The long-awaited Joint Audit Board report comes after public and political pressure was applied for tighter controls on legal firms and crooked lawyers because of prosecutions resulting from the misappropriation of public funds. Since 1980, twenty-five lawyers have appeared before the New Zealand Law Practitioners’ Disciplinary Tribunal charged with misappropriation. All were involved in lending without authority and 21 cases involved property transactions.

The report lists instances of estate funds being invested when they should have been distributed to beneficiaries, the power of attorney being used without authority and lawyers involved in business activities outside their practices. It notes that 88 per cent of lawyers struck off between 1980 and 1987 had been involved in personal property transactions funded with clients’ money. The management expertise and methods adopted by many lawyers and legal practices also take a hammering in the working party’s report, which says that they were inefficient, ill-advised and unsupervised. It says it is apparent many practitioners endeavoured to acquire assets and a lifestyle they could not afford from their practice income. “Inadequate income levels are considered to be a factor leading to defalcation (misappropriation). Many practitioners have little

understanding of the costs of practice and effective budgeting methods.”

The report says the present audit system does not authorise independent verification by clients of loans and other transactions from their trust accounts.

It says independent verification is standard practice in modern commercial audits.

The level of lawyer education in some fields also comes under attack in the report, which is critical that there is no legal requirement for lawyers to undertake accounting or management studies. It also notes that while ethics are taught as part of lawyers’ training, there is no suitable way of policing ethics or enforcing ethical behaviour.

In a long list of recommendations the working party says the audit system should be changed to a three-part audit and practice review.

This would involve a trust account audit at least once a year by a certified chartered accountant, a practice review at least once a year by a certified management consultant and a full audit on each mortgage advance, when a practice is involved in lending money on behalf of clients.

The report says the auditor should be allowed to examine bank accounts outside a trust account run by a solicitor attorney. It also recommends that the auditor and consultant report direct to the law. society and the lawyer or firm within 10 working days. They would also be certified by the Joint Audit Board.

Also recommended is an inspector to carry out random checks on the quality of audits and inspect any premises as a result of a complaint

against a lawyer or firm. The inspectorate should be responsible for gathering information and evidence against a lawyer for prosecution. The working party says no practitioner should be allowed to act for himself, child or spouse in any legal entity in which he or his family have any financial interest. This should also apply to partners in legal firms. “This would remove a significant vehicle for hiding defalcation, prevent conflicts of interest and remove the temptation to fund personal transactions from the trust account.” A practitioner should be prohibited from borrowing from a client without the client first having had independent advice and legal representation. The party is less willing to tackle the issue of lending head on and recommends that it be looked at further. "As an immediate step, solicitors’ trust accounts should be audited in respect of every mortgage advance.” It says, however, it is aware of small practices conducting mortgage practices worth millions of dollars and in at least one case outside regulations laid down in the 1975 Nominee Company Rules. “The conclusion of the working party is that the Audit Scheme in its present form is neither effective nor adequate to meet its purposes. “However, it is unrealistic to believe the profession can have an Audit Scheme which will guarantee there will be no more defalcations. It is impossible to have controls which will ensure those with dishonest intent will not succeed. The profession has no immunity from dishonesty in its membership."