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Regulating Incorporated Legal Practices: Compliance Audits

The Act requires a legal practitioner director of an incorporated legal practice (an ILP) to ensure that the ILP implements and keeps appropriate management systems. It gives the Legal Services Commission (the LSC) the power to audit an ILP to test whether the ILP and its directors and employees are complying with their obligations and whether its management systems, including supervision systems, are appropriate.

The Act doesn’t define what it means by ‘appropriate management systems’ except to say that they are management systems including supervision systems that ‘enable the provision of legal services by the practice:

under the professional obligations of Australian legal practitioners and other obligations under [the] Act; and

so that the obligations of the Australian legal practitioners who are officers or employees of the practice are not affected by other officers or employees of the practice.’

The LSC has agreed with its counterparts in NSW and Victoria, and with the Queensland Law Society (the QLS), that an appropriate management system must include, as a minium standard, policies, procedures and practices which are designed to ensure:

competent work practices to avoid negligence;

effective, timely and courteous communication;

the timely delivery, review and follow up of legal services to avoid delay;

acceptable processes for liens and file transfers;

a shared understanding and appropriate documentation from commencement through to termination of retainer covering costs disclosure, billing practices and termination of retainer;

timely identification and resolution of conflicts of interest;

safe and secure records management;

timely compliance with undertakings, orders and rulings;

the effective supervision of the practice and its staff; and

avoidance of any failure to account for trust monies.

These ten requirements have become known as the ’10 commandments’.

Compliance audits

The LSC will test whether an ILP keeps and implements appropriate management systems by conducting, or by overseeing the conduct of audits, as follows:

Self assessment audits

The LSC will require every corporation that notifies the QLS of its intention to commence legal practice in Queensland to undertake an internal audit of its management systems within a reasonable period of time following its commencement as an ILP and to report its findings to the LSC for further action as appropriate.

The process will be as follows:

the corporation gives the QLS notice of its intention to start providing legal services – a section 114 notice - and the QLS enters the required information on its data base of law firms in Queensland;

the QLS data base automatically generates an email advising the LSC of the corporation’s intention and populates the relevant fields on the LSC’s case management system;

the LSC sends the ILP a self assessment form and requests that the ILP completes and returns the form within three months. The form asks ILPs to assess their systems for compliance and to rate them against each of the ten objectives. We hope and expect that the forms will be available and capable of completion on-line during 2008.

The form sets out the key concepts that legal practitioner directors should take into account in rating their management systems and suggests some approaches that might assist them bring their systems into compliance. The suggestions are neither prescriptive nor exhaustive. It will be up to each ILP to determine the most effective systems for its particular practice.

It is crucial that ILPs approach the self assessment audit (download word or PDF form) not simply as an administrative hurdle to be completed as quickly as possible but as a positive opportunity to review and where possible improve their management systems.

The ‘education towards compliance’ strategy will work effectively only if ILPs engage positively in the self assessment process and candidly identify any areas of non-compliance and seek advice about how to best bring their systems into compliance or otherwise take remedial action – and only if the LSC and the QLS support and encourage them in so doing. That is exactly what we intend to do – there will be no ‘big stick’ unless the LSC subsequently has reason to believe that an ILP completed the self assessment form and rated its systems in a way that was recklessly or worse, deliberately misleading. In those circumstances, the LSC will either initiate an external audit or commence an ILP investigation with a view to deciding whether to initiate disciplinary proceedings against the legal practitioner director or directors, or both (see Review audits, below, and REGULATING ILPS: ILP INVESTIGATIONS).

the LSC will review the form when it is returned and will decide what further action, if any, is required. No further action will be required and the self assessment process will come to an end whenever an ILP satisfies the Commissioner that its self assessment of its systems shows them to be appropriate.

In the event that an ILP rates one or more of its systems to be non-compliant or only partially compliant, the ‘education towards compliance process’ will continue, and the LSC and/or the QLS, by arrangement between them and the ILP, will work collaboratively with the ILP to assist it to become fully compliant.

There are two possible outcomes in the event that the Commissioner believes, after an ILP has been given reasonable time and assistance to bring its systems into compliance, that it remains non-complaint. The Commissioner might decide to initiate a review audit (see Review audits, below) in order to better understand the problem and identify a remedial strategy. Alternatively, the Commissioner might decide to commence an ILP investigation with a view to deciding whether to initiate disciplinary proceedings against the legal practitioner director or directors for unsatisfactory professional conduct, professional misconduct or an offence against the Act REGULATING ILPS: ILP INVESTIGATIONS.

The LSC might also decide to initiate a review audit or alternatively to commence an ILP investigation if an ILP fails to return a completed self assessment form within the three month period or after an agreed and reasonable extension of time.

Review audits

A review audit is an external audit of an ILP that assesses its management systems against the same ten criteria as a self assessment audit but is undertaken either by the LSC or by the QLS on behalf of the LSC - in which case the QLS reports its findings and recommendations to the LSC for its consideration as to what further action, if any, is appropriate.

The LSC might decide to initiate a review audit on a random basis or on the basis of the ILP’s risk profile, to test the validity of a self-assessment audit completed by the ILP or, if an ILP fails to complete a self assessment within the three month period or negotiated extension of time, by way of initial assessment.

The Commissioner might decide, after a review audit is completed, that no further action is necessary. Alternatively, the Commissioner might decide to commence an ILP investigation with a view to deciding whether to initiate disciplinary proceedings against the legal practitioner director or directors for unsatisfactory professional conduct, professional misconduct or an offence against the Act or to make an application to the Supreme Court to ban the ILP REGULATING ILPS: ILP INVESTIGATIONS.

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Last updated 7/04/2008 2:47:04 PM