Spot Audit supports and promotes high quality law firm record keeping by answering questions and providing guidance regarding private mortgages, trust and general record keeping requirements, and By-Law 9 and providing onsite support and ensuring compliance with LSUC requirements by conducting audits.
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Spot Audits and You: Setting Standards ... Meeting Expectations
The Spot Audit Program
Designed as a pro-active compliance measurement and problem detection tool, Spot Audits measure the integrity of law firm financial filing (By-Law 8), assess ongoing compliance with financial record-keeping requirements (By-Law 9) and the Rules of Professional Conduct, and identify serious misconduct related to financial matters. A primary goal, which reflects a remedial approach, is to provide on-site guidance aimed at helping your law firm correct minor deficiencies with your record-keeping practices before they lead to serious non-compliance or misconduct issues.
In addition to examining law firm financial records, spot audits also provide an in-depth review of client files, in cases where the firm acts for private lenders or a lawyer of the firm exercises control over a client's estate. Research has shown that the areas of practice that account for the largest number of Compensation Fund claims are private mortgage investments and control of estate funds.
Section 49.2 of the Law Society Act authorizes the spot audit process.
Confidentiality and Solicitor/Client Privilege
In addition to reviewing financial records, the auditor will request production of client files including mortgage and estate files. In the course of the audit, the auditor may photocopy documents from the financial records and/or client files (as authorized by section 49.9 of the Law Society Act).
Information obtained during the audit is kept confidential within the Law Society (section 49.12) and except for the admissibility of these documents in proceedings under the Law Society Act, solicitor/client privilege is maintained (section 49.8).
Application of PIPEDA to an Audit under the Law Society Act
The Personal Information Protection and Electronic Documents Act (Canada) ("PIPEDA") applies to personal information which an organization collects, uses or discloses in the course of commercial activities (subsection 4 (1)). The Law Society conducts audits of lawyers' financial records pursuant to section 49.2 of the Law Society Act. An audit conducted by the Law Society is not a commercial activity. It is a regulatory activity. The collection and use of personal information by the Law Society in the course of conducting an audit is not subject to the requirements or restrictions imposed by PIPEDA.
PIPEDA may apply to certain personal information that lawyers collect in the course of their practice, requiring them to obtain consent prior to collecting, using or disclosing the personal information. However, under clause (i) of subsection 7 (3) of PIPEDA, an organization may disclose personal information without knowledge or consent if required by law. Lawyers whose financial records are being audited by the Law Society are required by law to provide the Law Society with personal information. Under subsection 49.2 (2) of the Law Society Act, such lawyers are required to produce documents in their possession or control and to provide information for the purpose of understanding or substantiating the financial records. The requirements of subsection 49.2 (2) are sufficient to bring lawyers within clause (i) of subsection 7 (3) of PIPEDA, permitting them to disclose personal information to the Law Society without knowledge or consent.
Although a significant number of spot audits are selected at random, there are other circumstances which may also trigger an audit, including:
- failure to file the Lawyer Annual Report (LAR) with the Law Society
- newly formed law firms to ensure appropriate record-keeping practices and money handling procedures are established and maintained
- identification of inadequacies during a previous spot audit, which suggest a follow-up audit is prudent to ensure continued compliance
- information on the LAR, which suggests non-compliance with the Law Society's record-keeping provisions or Rules of Professional Conduct
- referral of lawyers/law firms from another Law Society department
What to Expect if Selected
In general, auditors employed by the Law Society will conduct audits, however, some audits will be contracted to local public accounting firms.
If your firm is selected,
an auditor will telephone you to set up a mutually convenient time to review
your records -- within two to three weeks of the call. The auditor will fax or
e-mail to you a list of books and records, and client files to be
available at the audit. Pre-arranged appointments offer a number of advantages.
Not only are they less intrusive than unscheduled visits, but they provide you
the opportunity to rectify any minor errors in your record-keeping practices
prior to the auditor's visit. While the two to three week advance notice is
designed to accommodate your schedule, the Law Society must balance your needs
and preferences with its public protection mandate. For this reason, if you
seek to defer the initial spot audit appointments, or subsequently cancel your
initial spot audit appointment, you may be required to fax or e-mail a copy of
your most recent trust reconciliation (trust bank statement(s), detailed trust
reconciliation(s) and client trust listing) to the auditor. Failure to do so
may result in an immediate unannounced visit or a referral to Professional
Letter of Introduction/Law Society identification
If the audit is being conducted by a member of a public accounting firm retained by the Law Society to conduct spot audits, the auditor will provide a letter of introduction prepared by the Law Society. As the letters of introduction are provided to the auditors at the same time as their caseload, your letter may be dated several months before the date of the auditor visit.
Law Society employees conducting spot audits will produce Law Society identification confirming that they are employees of the Law Society when they arrive to conduct the audit.
Audit Report to Members
To ensure quality control, we have developed a standard spot audit software program, which the auditor can complete on-site at your office. Following the completion of your audit, the auditor will provide you with the Audit Report to Members. The auditor will meet with you and/or your accounting staff to discuss areas where your record-keeping practices are not in compliance with Law Society requirements. The auditor will then ask you to initial each area of concern to verify that any deficiencies and their remedies were discussed with you.
The auditor may require you to provide additional information directly to the Law Society to ensure correction of the deficiencies identified.
Review of Reports
After reviewing the spot audit program and Audit Report completed by the auditor, a spot audit supervisor will do one of the following:
- close your file, if there are no deficiencies noted or if the deficiencies are minor and have been addressed in the Audit Report;
- send a follow-up letter requiring you to submit documentation, or proof that the inadequacies identified in the Audit Report - such as trust comparisons or discharges of mortgages - have been completed to the Law Society's satisfaction.
- refer your file for a re-audit, if the inadequacies are serious enough to warrant further review to ensure they are remedied;
- require you to provide an undertaking setting out the obligations and time-lines you must honour to remedy inadequacies identified during the audit and avoid more formal proceedings;
- refer you to the Practice Review Program of the Law Society for remedial assistance with your practice;
- refer you for a formal investigation, if the audit discovers possible professional misconduct (i.e., a serious breach of the Rules of Professional Conduct/By-Laws or failure to correct inadequacies identified on a previous audit.)
In certain situations, the Law Society may make an application pursuant to By-Law 11 made under the Law Society Act for an order requiring you to pay the cost or a portion of the cost of the audit or re-audit. The following list identifies situations that may warrant an application for cost recovery:
- the audit was required because of your failure to submit your Lawyer Annual Report;
- the auditor could not gain entry to your business premises on the scheduled date;
- you fail to provide to the auditor the financial records and other documents within the time frame arranged between you and the Law Society;
- your failure to produce current financial records increased significantly the amount of time required to complete the audit; or
- you produce financial records that are not in compliance with the requirements of By-Law 9 which increased the amount of time required to complete the audit
You may wish to review sections 38 to 42 of By-Law 11 in its entirety in order to obtain a better understanding of the application process associated with the payment of costs of a spot audit or re-audit.
Your input is important - please help us improve the audit process by evaluating the spot audit and the conduct of the auditor on a post audit survey which the auditor will leave with you at the completion of the audit. The survey should be completed and faxed or e-mailed directly to the Law Society.
Phone: 416-947-3315 or 1-800-668-7380 ext. 3315
Mail: Spot Audit, The Law Society Of Upper Canada, 130 Queen Street West, Toronto ON M5H 2N6