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.
Ontario Lawyers Gazette articles on Spot Audit:
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 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 Society conducts audits of its licensees' financial records pursuant to section 49.2 of the Law Society Act. An audit conducted by the Society is not a commercial activity. It is a regulatory activity. The collection and use of personal information by the 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 licensees 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. Licensees whose financial records are being audited by the Society are required by law to provide the Society with personal information. Under subsection 49.2 (2) of the Law Society Act, such licensees 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 licensees within clause (i) of subsection 7 (3) of PIPEDA, permitting them to disclose personal information to the 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's Annual Report (LAR) with the 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 Society's record-keeping provisions or Rules of Professional Conduct
- referral of Lawyers/law firms from another Law Society department
Each law firm will be audited approximately once every five years.
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 weeks of the call. The auditor will fax 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-week advance notice is designed to accommodate your schedule, the Society must balance your needs and preferences with its public protection mandate. For this reason, if you try to defer initial spot audit appointments, or subsequently cancel your initial spot audit appointment, you will be required to fax a copy of your most recent trust reconciliation to the auditor. Failure to do so may result in an immediate unannounced visit.
Letter of Introduction/Law Society identification
If the audit is being conducted by a member of a public accounting firm retained by the 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 report completed by the auditor, the Society 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 to Members;
- send a follow-up letter requiring you to submit documentation, or proof that the deficiencies identified in the Audit Report to Members - such as trust reconciliations or discharges of mortgages - have been completed to the Society's satisfaction.
- schedule a re-audit, if the deficiencies 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 deficiencies identified during the audit and avoid more formal proceedings;
- refer you to the Practice Review Program of the Society for remedial assistance with your practice;
- refer you for a formal investigation, if the audit discloses professional misconduct (i.e., a serious breach of the Rules of Professional Conduct/By-Laws.)
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's 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 Society;
- your failure to produce current financial records increased significantly the amount of time required to complete the audit;
- 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 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 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