High potential price to pay if you procrastinate over legal administration

Putting administrative tasks on the backburner is commonplace for lawyers as they focus on fee-earning work, but such complacency can be dangerous for firms in a regulatory and reputational sense, writes Peppy Mitchell.

Procrastinating and under-resourcing when it comes to back-office operations and non-chargeable tasks is a risky move.

While performing administrative work may not bring immediate financial rewards, you need to consider the real regulatory and reputational risks of non-performance. To stay ahead of the game, invest in projects or procedures that harness technology to help you do the work more efficiently.

Look no further than the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry to find examples of banks and other financial service providers who have failed to appreciate the importance of back-office and seemingly non-critical administration and compliance work. Although prioritising back-office operations and risk-remediation projects would not have grown the bottom line for these organisations, it may have helped them avoid some of the recent scandals – for example, by reconciling databases to identify dead customers; by promptly addressing ATM compliance issues previously flagged by Austrac; or by better analysing customer complaints so as to identify patterns and resolve root causes. Yet, according to the final report of the Prudential Inquiry into the Commonwealth Bank, released in April 2018, when it came to ownership of non-financial risk, there was a lack of accountability. In addition, with deadlines for non-financial risk projects, there was a “light hand on the tiller”, the “voice of risk” was “muted” and the mindset was one of “chronic ease”.

Warning bells

For those in the legal services sector, the recent banking and finance scandals are a wake-up call. Everyone should now be actively considering the way their firms make decisions, whether their focus has skewed too much to financial performance, and how they can reboot to improve and better manage non-financial risks.

For many legal professionals, the daily grind revolves around generating new business, performing legal work and accounting for it (usually in six-minute units) and then billing clients at the end of the month. People are measured against their (mostly financial) KPIs. Principals focus largely on the financial aspects of their business – fee-earner efficiency, pricing, profit per equity partner and cash-flow projections.

It is only after the budget has been fulfilled and financial objectives met that the average legal practitioner attends to ‘general administration’. This non-chargeable work includes simple administrative tasks such as sending costs agreements, filing emails, reviewing monthly trust account statements, and archiving and consolidating databases.

In our time-poor world, it can be all too easy to procrastinate for days, weeks and months, until a backlog of these tasks builds up in a legal practice. Yet we avoid non-financial tasks and projects at our peril. This is because much of this non-chargeable, deceptively simple administration work actually amounts to minimum compliance with regulation. Not doing this work exposes us to regulatory breach and reputational damage.

Protect yourself

However, there are some easy ways for firms to safeguard their businesses.

 1. Sending costs agreements to all clients is a good way to avoid expectation gaps and make sure that both you and your client know what you will be doing, what you will not be doing and what costs and disbursements you will charge.

Solicitors must make these kinds of disclosures under the Uniform Laws or equivalent professional regulation (unless the client is exempt; for example, listed corporations, foreign corporations and government clients). A failure to do so leaves a solicitor unable to enforce payment and exposed to complaints and claims.

2. Filing emails and client documents promptly on to the client file is a good risk-control measure to ensure all those working on a matter know what is happening and can perform the legal services in the manner required by our regulators – competently, diligently and as promptly as reasonably possible, as required by Australian Solicitor Conduct Rule 4.1.3. It also ensures that all client documents are together, ready for prompt response to a potential client file-transfer request, a professional indemnity insurer request, a third-party subpoena or even a ‘dawn raid’ by a regulator.

Leaving emails in a user’s email account or documents on virtual desktops may result in significant work, embarrassing delays and a possible regulatory breach. If the user has left the organisation and there is no process for collection and storage of emails outside that account before closure, important electronic documents and evidence may even have been inadvertently deleted.

3. Reviewing monthly trust account statements and reconciliations is something regulators require a principal of a practice to do at least monthly. This ensures that those accountable for holding money on trust are keeping abreast of whose funds are held by their practice, for what purpose and for how long. Although another practitioner within the organisation may have the daily conduct of a particular client matter and have authorised receipts and payments, it may well be the monthly oversight of trust-account activity that alerts a firm to compliance problems by individuals, dormant trust ledgers and more serious issues, including tardy breach reporting or even internal fraud.

4. Closing and archiving matters regularly can minimise false positives in a conflicts-of-interest check. It can also free-up valuable storage space (physical and electronic) for the practice. Having a process for regular closing and archiving also serves as an important risk-management control so that, as is required under Australian Solicitor Conduct Rule 13.1, the solicitor with designated responsibility for the client’s matter checks that the legal services for that matter have been completed, billed and all client documents returned or accessible/stored in accordance with regulation.

If a backlog of archiving builds up, it may become increasingly difficult for the practitioner (or their firm and its professional indemnity insurers) to recall what happened on a matter. This leaves the firm exposed.

5. Consolidating databases with new technology and after mergers is another administrative task that is easy to push to the bottom of the to-do list. With continual improvements in IT systems and increasing merger activity, a growing number of legal practices now hold a significant amount of client data and documents in legacy databases (both physical and electronic). To comply with professional and privacy legislation, the data in these legacy databases needs to continue to be properly held and maintained until it can be amalgamated with current systems and databases.

Yet ownership of the old database decreases over time as the data in them is increasingly that of inactive or former clients. Although the firm has ongoing compliance obligations for seven years after a client matter has ended, if no current practitioner of the firm has active matters for a client, there can be gaps in accountability for data protection and maintenance. This lack of accountability is exacerbated by the trend within law firms to decrease funding for administrative and support staff.

Avoid complacency

According to Altman Weil’s Law Firms in Transition Survey, released in May 2017, 63 per cent of large US law firms believe their firm’s performance has or will most improve with the creation of low-cost service centres for back-office functions, and 57 per cent think reduced leverage is a permanent trend.

While the technology is available to make many of our administrative tasks more efficient, it requires significant upfront time and investment. Such investment can be a challenge, particularly in law firm partnerships, which may not attract the same tax incentives for investment as other business structures.

Whatever the challenges to your legal business, as a professional you cannot be complacent about the non-financial administration work in your practice. Sending costs agreements, filing emails, reviewing monthly trust account statements, archiving files and consolidating databases are just a few of the tasks and projects that need to be done more and more efficiently.

Procrastinating over a backlog or under-resourcing admin work can leave your practice exposed to regulatory risk and future claims.

Peppy Mitchell is a senior lawyer and risk manager with 25 years’ experience in commercial law firms, both as a practitioner and in practice management. She drives strong risk management cultures, solid corporate governance and robust compliance programs. She can be emailed at peppy.mitchell@gmail.com.