SOLICITORS' TRUST ACCOUNTING HANDBOOK

With effect from 1 April 1998
(These Rules were adopted by the New Zealand Law Society on 8 November 1996)

3rd Edition published January 2004

This Edition includes all amendments up to and including 31 October 2003

1. INTRODUCTION
   
2. THE NZLS FINANCIAL ASSURANCE SCHEME - OBJECTIVES
   
3. RESPONSIBILITIES OF SOLICITORS
   
4. SOLICITOR EDUCATION IN TRUST ACCOUNTING
   
5. NZLS INSPECTORATE
   
6. FEES AND COSTS - (SOLICITORS TRUST ACCOUNT REGULATIONS REG 21)
   
7. NZLS DATABASE
   
8. COMPLAINTS AND INFORMATION
   

SOLICITORS TRUST ACCOUNTING HANDBOOK

1 INTRODUCTION
This Solicitors Trust Accounting Handbook is a ready-use compilation of:

The Solicitors Trust Accounting Regulations 1998, made by the Government with effect 1.4.98;

The Solicitors Trust Account Rules 1996 made by the NZLS Council, on 8.11.96 with effect 1.4.98 and amended on 1.10.99, 14.4.00, 6.4.01, 1.11.02, 8.4.04 and 22.10.04 with effect respectively from 15.12.99, 1.6.00, 1.5.01, 1.3.03, 1.6.04 and 1.1.05;

The NZLS Solicitors Trust Accounting Guidelines written in 1996 and revised in 1999, 2002 and 2003; and

a description of the Society's "Financial Assurance Scheme" of which, along with the Solicitors Fidelity Guarantee Fund, they form part.

These measures were introduced in replacement of the Solicitors Audit Scheme operated under the now-revoked Solicitors Audit Regulations 1987 and the NZLS's Solicitors Trust Account Rules 1969.

Compliance with the Regulations and the Rules is mandatory whereas compliance with the system and procedures contained only in the Guidelines is not. Trust accounting systems other than that described in the Guidelines will be regarded as satisfactory so long as they comply with the Regulations and Rules.

Practitioners are warned that non-compliance with the Regulations may constitute the commission of an offence punishable in the ordinary courts pursuant to Regulation 24 as well as professional misconduct under the Law Practitioners Act.

The Society recommends that for the protection of partners of law firms and of the Fidelity Fund firms should carry partner as well as employee dishonesty cover as part of their Professional Indemnity Insurance.

2 THE NZLS FINANCIAL ASSURANCE SCHEME - OBJECTIVES
The NZLS is conscious of the need to protect clients' money held in solicitors trust accounts and also to minimise the exposure of solicitors to contributing to the Solicitors Fidelity Guarantee Fund. No scheme can prevent all theft or fraud by solicitors or employees or eliminate all contributions to the Fidelity Fund. The overall objective is to provide cost efficient procedures to assist in reducing the incidence of theft and for those thefts that do occur to detect them early so that the magnitude of the losses is limited. The sole purpose of an inspection, review, or any other type of examination of solicitors trust account records by the NZLS inspectorate or its delegates pursuant to the regulations is to report to the authorities specified in the regulations. Inspectorate activity does not constitute audit of solicitors trust accounts or provide any assurance as to the way in which any solicitors trust account is operated. The activities of the inspectorate do not relieve solicitors from responsibility for the proper conduct of their trust account.

The four functional objectives of the Scheme are:

• Compliance - to ensure that solicitors meet stated requirements (the rules and regulations) in their handling of client funds.
  
  
• Detection - to detect cases in which solicitors are not complying with the requirements and, in particular, are stealing client monies or are behaving in a way that creates the likelihood that client monies will be lost.
  
  
• Deterrence - to discourage solicitors from handling client funds improperly
  
  
• Demonstration - to make it evident both within the legal profession and to clients, the public and their representatives, that there is an effective scheme in place."

3 RESPONSIBILITIES OF SOLICITORS
The solicitor's responsibility for client money is:

• to deal with clients' assets which are under the solicitor's control, only in accordance with the instructions of the client, unless otherwise required by law.
  
  
• to hold the money in a trust bank account until so paid;
  
  
• to ensure that the client's money earns interest where it is reasonable to do so;
  
  
• to keep trust account records which are up to date and secure and clearly show the amount of trust account money held for each client;
  
  
• to provide to each client a complete and understandable statement of all trust money held for the client, all transactions in the client's account and the balance of the client's account

Practitioners are ultimately responsible for the actions of all of their partners and staff in respect of clients' money, and accordingly should ensure that proper controls and procedures are applied in the practice.

The concept of the Trust Account Partner is new to the Regulations and Rules although it was already is common practice for one partner of a firm to have such responsibilities. The Trust Account Partner is responsible for the administration of the trust accounting of the firm; and for ensuring that the provisions of the Act relating to trust accounts, the regulations and rules are complied with by the firm.; He or she and must take appropriate measures to verify the correctness of, and sign, all reports required under the rules. There is provision for another partner to act as substitute where the Trust Account Partner is unavailable.

The monthly trust account certificate is to be sent to NZLS by the 10th working day of each month (or in January, the 15th working day). It certifies that the Trust Account Partner is satisfied, as to the correctness of the trust account records and reconciliations, that all trust account transactions during the month have been made in accordance with client instructions and that the firm has complied with the trust account regulations, and rules and, where applicable, the Solicitors Nominee Company Rules 1996.

A quarterly report on matters relating to the administration of loans arranged by the firm on behalf of clients is also required by the 10th working day after the end of each of the March, June and September quarters, and by the 15th working day after the end of the December quarters.

4 SOLICITOR EDUCATION IN TRUST ACCOUNTING

Practice as a solicitor on own account, whether sole or in partnership
The Law Practitioners Act 1982 s55(2) requires that a solicitor wishing to practise on own account must satisfy the relevant district council as to knowledge of the rules relating to the handling of clients' money.
Similarly Rule 19(1) of the Solicitors Trust Account Rules provides that such solicitors are required to meet standards set by the NZLS Board to demonstrate their knowledge of trust accounting. The NZLS has declared that for the purposes of this rule the Flying Start instruction and examination provided by Auckland, Waikato Bay of Plenty, Wellington and Canterbury District Law Societies satisfies this requirement. Candidates from other districts need to attend Flying Start courses in one of these four centres in addition to any requirement of their own district imposed under s55(2).

Trust Account Partners
Before appointment Trust Account Partners are required to complete a separate course of training and be examined. This is aimed at developing a high level of competence in each law practice on administration of trust accounting, lending from client funds, and compliance with the relevant regulations and rules.
The rules provide time dispensations for sudden losses of Trust Account Partners and exemptions to cover the transition from the old scheme to the new one.
The Trust Account Partner course is available in Auckland, Hamilton, Wellington and Christchurch and covers:

• accounting procedures, including record keeping procedures for trust accounts, use of interest bearing deposit accounts, nominee and contributory mortgage records, accounting to clients and billing.
  
  
• accounting controls, and controls in a solicitor's office, including computer system security and desk top banking.
  
  
• lending controls, including investor authorities, valuations, reporting to investors of mortgagor defaults, practitioner independence, risks associated with borrowers or types of borrowers and administration of Resident Withholding Tax.
  
  
• other topics, including client complaints, conflicts of interest, duty to report suspicious conduct under Rules of Professional Conduct for Barristers and Solicitors Rule 6.03 and suspicious transactions under the Financial Transactions Reporting Act 1996.

Inquiries as to dates and venues of courses and how to enrol, may be made to NZLS CLE Registrations, DX SP20202/PO Box 5041, Wellington, telephone (04) 472 7837 or 0800 333 111 or email registrations@lawyers.org.nz.

5 NZLS REGULATORY SERVICES division
The Inspectorate forms part of the NZLS Regulatory Services division. The inspectors will generally be from an accounting and/or legal background with knowledge of or experience in the operation of law practices, with a length of professional experience generally matching that of partners in law firms.
A function of the Inspectorate is to review the trust accounts of solicitors. That function comprises:

• investigation into suspected fraud or deficiencies in trust money
  
  
• cause driven and random inspections of practices
  
  
• systematic compliance reviews
  
  
• cause driven compliance reviews
  
  
• compliance checks of new practices.

The Inspectorate also provides:

• assistance with the Education of solicitors eg. in Flying Start courses; and
  
  
• advice to law firms on difficult situations.

The powers of inspectors include entry to the solicitor's business premises at any reasonable times, inspecting records and taking copies, obtaining information on the trust bank account direct from the bank and communicating, where appropriate, direct with the clients of the solicitor.

Investigations
Investigations into suspected fraud or deficiencies in trust money are carried out by inspectors or their delegates either at the Inspectorate's own instigation or in association with a district law society exercising its powers of intervention under Part V, or its disciplinary functions under Part VII, of the Law Practitioners Act.

Inspections
Cause driven inspections will generally be triggered by concerns about the way in which client funds appear to be handled,; by an accumulation of minor concerns about trust account administration; or by a perception of risk about the size and type of law practice or the field in which it operates. There will also be a number of random inspections, not driven by any particular concern.

Compliance checks on new practices
Inspectors will visit new solicitor practices within 3 to 6 months of commencement, to confirm that the new practice is meeting NZLS trust accounting standards.
Where the result of a compliance check of a new practice is unsatisfactory a revisit will usually be scheduled for a few months later to confirm that the solicitor has taken all the necessary remedial measures. Continuing non-compliance would lead to the appropriate investigative and/or disciplinary action.

Compliance Reviews
These are reviews of the accounting systems of all law firms for compliance with the systems requirements of the trust accounting regime. They are not audits and are not directed to detecting theft but to whether suitable systems and procedures are in place and are being used properly. A suitable system is one which, if properly operated, will comply with the rules and regulations for solicitors' trust account. For compliance reviews law firms are put into risk categories. Risk factors include size of the firm, problems found in previous reviews, whether the firm administers loans, manual versus computer-based trust accounting records, whether the firm has an internal dedicated trust account manager, whether there has been a change in the trust account manager, and any other risk-indicative information. The factors used are those which past experience shows have more commonly existed in actual cases of trouble in trust accounting occurring over a long period. The frequency of reviews then varies according to this categorisation.
Compliance reviews are carried out by financially experienced people, knowledgeable in trust accounting and law firm practice, under contract to the NZLS. They are usually Chartered Accountants.

Reports
Inspectors report on the above activities to the Inspectorate Manager NZLS, the Secretary of the relevant district law society, and the law firm or sole practitioner inspected.

6 FEES AND COSTS - (SOLICITORS TRUST ACCOUNT REGULATIONS REG 21)
Compliance Reviews
The cost of a compliance review will be invoiced by the NZLS to the law firm. The cost of any re-reviews, to follow up an unsatisfactory report, will also be chargeable to the law firm.
Reviews other than Compliance Reviews
The policy of the Inspectorate in respect of recovering fees and costs is that it does not make a charge on the law firm unless :

• an investigation, inspection or compliance review has revealed a failure on the solicitor's behalf to keep proper trust accounting records, or there is other breach of the Rules or Regulations, and a re-inspection has been necessary to confirm that earlier breaches have been remedied;
  
  
• the time required for any inspection is unduly prolonged by the poor standard of the solicitor's records or failure to make records available; or
  
  
• an investigation is made in connection with a defalcation, or in association with a district law society exercising its powers of intervention under Part V.
  

The NZLS Board has approved a specified hourly rate for Inspectorate fees.
A solicitor may appeal to the Joint Audit Board on the grounds that any fees or costs are unreasonable.

7 NZLS DATABASE
The NZLS maintains in its database records of all individual NZ Law Society members and their practices, for its administrative purposes. These include:

• results of compliance reviews and inspections
  
  
• complaints that are significant to the operation of the trust account. These are deleted from the database after the expiry of specified trouble-free periods
  
  
• other information, such as tax offences as published by the Inland Revenue Department.

The database software is designed so as to ensure the security of information stored in it, with particular emphasis on preventing unauthorised access to information about practitioners or their firms. This will includes all proper procedures for access, restriction of information to those authorised to use it, password procedures and the like.

All the requirements of the Privacy Act are complied with.

8 COMPLAINTS AND INFORMATION
Where complaints or other information are received from other solicitors, clients or others, it will be appropriate to protect such sources as generally the information has usually been received in confidence and the same safeguards will apply to their identities as to other information in the database.
The NZLS maintains a confidential channel for such information in the form of an 0800 telephone line. It will enable solicitors better to comply with their duty to report suspicions of defalcations by other practitioners, and the public similarly to report. However the system design will also protect solicitors from the effects of malicious, frivolous or vexatious calls, and will comply with the Privacy Act.