Performing a Law Firm Ethics Audit: Practical Tips From Those Who Do It

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By Helen W. Gunnarsson

June 1 — Whether termed an “audit,” a “review” or “proactive management-based regulation,” the process of gathering, sorting through and discussing a law firm's policies, procedures, claims, complaints and results is a time-consuming but valuable exercise that can help a firm improve not only its practice but even its lawyers' lives, speakers said May 29 at the 41st ABA National Conference on Professional Responsibility in Denver.

Moderator Susan Saab Fortney asked the panelists, who hailed from diverse backgrounds, to describe their respective roles in helping law firms implement and improve their procedures and reduce their exposure to claims and complaints.

Fortney is a professor of law and directs the Institute for the Study of Legal Ethics at the Maurice Deane School of Law at Hofstra University.

The Insurer

Panelist Robert L. Denby, a senior vice president for loss prevention at Attorneys' Liability Assurance Society Inc., said his company performs reviews of its insured law firms—more than 200 of them—about every five years, with the goal of reducing malpractice claims. Each review, he said, is a “huge undertaking, both for us and the firms.”

Data collection and review, Denby said, are the first steps in a law firm review. Before meeting with members of an insured law firm, he said, his team at ALAS assembles and reviews in detail all of the firm's policies and procedures. For some firms, he said, it's a “small stack” but for others it fills “several large binders.” The team also collects the firm's claim history for the last five years or so with the aim of identifying recurrent issues and problems to discuss.

Denby emphasized that his goal is “to look for identifiable trends, not to rehash old wounds.” For example, he said, a review might reveal that a firm has a problem with its procedures for checking conflicts, “or the Miami group has a disproportionate number of claims filed against it, or the IP group has a docketing problem.”

After performing this preliminary review at ALAS offices, Denby's team travels to the law firm to spend about a day and a half meeting with firm personnel.

First on the meetings list, he said, are the firm general counsel, staff in charge of the new business intake system, the head of data security and those responsible for managing firm records. “We go through a lot of minutiae with them. We talk about how they handle their systems and problems,” he stated.

Finally, he said, the ALAS team meets with the firm's practice group leaders or management committee to review the insurer's findings and recommendations for improvement.

Denby said ALAS has “only limited power” to impose its recommendations, but the insurer will follow up its review by contacting its insured law firms “to see how they're doing.”

The General Counsel

Martin I. Kaminsky, general counsel of Greenberg Traurig in New York, described what he does as his firm's general counsel to help it implement and maintain good practices.

“We do a tremendous amount of internal auditing,” Kaminsky said. “When I started, Greenberg was having a lot of claims. We wanted to turn that around.”

To do so, Kaminsky said, “First we reviewed all the claims we had” to determine what sort of matters were causing problems. Then, he said, he and other members of firm management met with Greenberg's practice group heads and asked them what they were happy or unhappy with.

Kaminsky emphasized the need for firm management to have personal contact “with the people who are doing the work for the firm.” He said he visits at least one of the firm's offices every month to meet confidentially with the practice group heads and managing shareholders.

Additionally, Kaminsky said he conducts education and training sessions for the firm and invites other lawyers to do so.

Kaminsky also described systems of checks and balances within his firm to ensure adherence to firm policies and good practices.

“We have a group of full-time internal auditors” that include staff with experience at large accounting firms who perform forensic audits, he said. “They look to see whether people are signing engagement letters” and examine firm lawyers' billing practices.

In addition, he said, each of Greenberg's offices has designated members responsible for reporting “issues of cultural conduct” that may or may not constitute ethics breaches.

“When we see people handling things in a way that we don't want the firm to be acting, we address it,” Kaminsky said. He said his firm is continually reviewing its own internal practices and activities. “It just doesn't stop and has shown great success for us,” he told the audience.

The Disciplinary Official

Lisa Villarreal-Rios, special programs coordinator in the Office of the Chief Disciplinary Counsel for the Texas State Bar, said her office offers ethics audit programs as a diversion from formal discipline for lawyers who have engaged in minor misconduct.

Likening such audits to the need for regular physical exercise to maintain good health, she asked “Do you want to review your practice, or do you want it to fail?”

She said the ethics audits she conducts for lawyers are a series of opportunities both for her office and for the lawyers diverted to her program.

For lawyers, she said, they are an opportunity “to stop and think about what's working and what's not working” in their law practices and “what's working but could be improved.”

For the state bar, she said, the audits are an opportunity to educate lawyers about law practice and management issues that they may never have learned about, as well as an opportunity “to normalize mental health and impairment issues” and intervene, if necessary, before they have an adverse impact on a lawyer's practice.

Because “everything impacts and relates” to everything else, she said, the profession is best served by a “holistic approach.”

Villarreal-Rios said most lawyers get to her program because of misconduct involving communication or neglect, either of which may have been anomalous or may pervade their practices.

Through telephone and e-mail Villarreal-Rios consults with the lawyers, beginning by discussing why they're in the diversion program.

After discussing those circumstances, she said, “I run down a list of law practice management topics with the attorney” and discuss solutions to their problems. “I inundate them with resources” on practice management topics including business plans and contingency planning, she said.

Ethics lapses and substance abuse may be “deeply intertwined,” Villarreal-Rios noted. She said she works closely with Texas's lawyer assistance program to make referrals, sometimes anonymously “for those who are super-resistant” so that the LAP program initiates the contact.

Villarreal-Rios said back-and-forth communication with the lawyer being audited “solidifies” the program. Lawyers participate in the program for six months, and 62 lawyers completed the program in the most recent year for which statistics are available, she said.

Pointing to a lawyer self-audit checklist prepared by the Washington State Bar Association in the program materials (see http://www.wsba.org/~/media/Files/Resources_Services/LOMAP/Self-Audit%20Checklist.ashx), Villarreal-Rios said she anticipates requiring or encouraging a similar written submission from the lawyers in her program in the near future. An ethics audit, she said, benefits lawyers as an effective means to “get an honest, thorough, global picture of your practice.”

Guidance From Down Under

Fortney commented that law firm ethics audits may be viewed as a step toward “proactive management-based regulation of lawyers,” which the Australian state New South Wales embraced when it recently revamped its system of lawyer regulation.

Fortney told the audience that when the NSW government approved legislation permitting unrestricted nonlawyer ownership of law firms, it included a provision requiring law firms to put into place “appropriate management systems” as a way to address ethics concerns.

Because the legislation did not define that term, Fortney said stakeholders including bar regulators, insurers and law society leaders in New South Wales worked together to provide guidance to practitioners and developed 10 objectives of good law firm management practices.

Those objectives, Fortney said, now assist lawyers in developing good firm management systems. (Fortney's article, Promoting Public Protection Through an “Attorney Integrity” System: Lessons From the Australian Experience With Proactive Regulation of Lawyers, 2015 Prof. Law., no. 1 (2015), was included in the conference materials.)

The NSW regulatory regime now requires a solo lawyer or designated law firm member to complete a form that requires the lawyer to rate the firm's compliance with each of 10 objectives on a scale ranging from “noncompliant” to “compliant plus.”

If a rating is less than compliant, Fortney said, a regulator will work with the firm to help it achieve compliance. Lawyers who may not have realized what was expected of them now “get guidance from the regulator to get [their] house in order,” she said.

Fortney said study results of proactive regulation have been “very impressive.” Law firms that conducted self-assessments, she said, saw complaints against them reduced by two-thirds.

Fortney said she herself conducted a study to examine the reasons for the diminished complaint numbers and learned that the process resulted in firms' not only reviewing their current practices but also making improvements in their management. See Fortney & Gordon, Adopting Law Firm Management System to Survive and Thrive: A Study of the Australian Approach to Management-Based Regulation, 10 U. St. Thomas L.J., no. 1 (2013), available at http://ir.stthomas.edu/ustlj/vol10/iss1/4.

For example, she said, 50 percent of law firms ranging from large firms to “two-solicitor firms” stated they had adopted new procedures as a result of going through the self-assessment process and said they believed their new systems had an impact on both their firm management and on their malpractice exposure. “Even the ones who went through it kicking and screaming indicated it was worthwhile,” she stated.

Fortney said the proactive regulatory system of New South Wales gives meaning to “ethical infrastructure” for large and small and solo firms alike. As a result of NSW's positive experience, she said, the model has caught on in other states within Australia and is being closely examined in other world jurisdictions, including Canadian provinces such as Nova Scotia and some jurisdictions in the U.S.

Universal Approach?

An audience member asked whether adoption of a regulatory model similar to New South Wales's would be welcomed in the United States.

Denby said he's “agnostic” on whether U.S. jurisdictions should do so. “I would worry that we would run into a situation where Nebraska says you have to do X and Ohio says you can't do X.”

He opined that the model “might have a lot of value” for small or solo law firms but would impose “a layer of complexity that would not add much value” for large firms.

Kaminsky said he believes regulators should recognize “the problems of small and solo practitioners are very different” from those of large firms. “We don't need somebody to tell us” what policies should be changed, he said.

But Fortney commented “The standards in New South Wales are very general” and are minimum standards. “They recognize that one size does not fit all.” The NSW system is “not a matter of micromanaging how you handle particular matters,” she said.

Proving Value

Are ethics audits worth it? Fortney asked. “How do you measure it?”

Gauging the success of a review is “tricky,” Denby said, “because you're measuring the claims that didn't come.”

But he noted that over ALAS's 35-year history, most claims filed were based on conflicts of interest and “unworthy” clients. After helping insured law firms revise their conflicts checking and new business intake procedures, he said, ALAS has seen a decline in the percentages of claims arising from those problems. “We still have them, but we are seeing that they arise later, after the representation is in progress.”

Kaminsky said his audits at Greenberg Traurig have helped the firm bring in excellent clients as well as excellent lateral hires. And, he said, audits have “helped our lawyers feel good about their firm because they don't get problems.”

Furthermore, he said, investing the time and money necessary to develop and maintain good ethical systems “does turn into money, because if you're facing lots of difficulties you're going to have to spend money to defend them and make changes.”

“Our recidivism rate appears very low,” Villarreal-Rios said of the lawyers who go through her office's ethics audits.

When a lawyer who has engaged in the diversion program does backslide, she said, the result has generally been “low-level discipline,” including private reprimands.

“Enforcement is essential,” Kaminsky added. “Sometimes we have to ask big producers to leave.” Support from firm top management is also critical to success, he said.

“There's an interesting tension between education and helping people improve and enforcement,” Fortney remarked. “Lawyers want to be able to be candid and share their concerns without fear that the regulator will then pounce on them.” She asked the panelists to comment on that issue.

“We don't keep highly detailed records summarizing what was said to whom and when,” Denby said. “Our general view is the risk of discovering the ethics audit and having the lawyer cross-examined about not implementing a recommendation is worth taking.”

Kaminsky said “We encourage associates not to be afraid to come to me. We don't reveal who associates are when they come to us.”

Villarreal-Rios said she tells lawyers up front that in spite of her dual credentials (she's also a licensed social worker) she isn't their therapist and that they should “be mindful about what you tell me.”

She said that her agency's records are subject to public information statutes if they are requested in discovery but that they would defend them as confidential under HIPAA and other statutes.

Good Night

Fortney asked the panelists for their parting thoughts.

“There is real value to having an outsider involved” in an ethics audit, Denby said. Law firms need to know what their problem trends are and what to do to address and arrest them.

By going through ethics audits, Kaminsky said, “You will help your clients. You will act appropriately with them.”

Villarreal-Rios urged that ethics audits include mental health and impairment issues, which are “so often intertwined with law office management issues.” She said she would like to see regulators “become even more proactive in our approach” so that issues can be addressed before problems arise.

Fortney said proactive ethical regulation “can also help with quality of life for lawyers. It helps you sleep at night.”

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