The Role of Ethics Audits in Improving Management Systems and Practices: An Empirical Examination of Management-Based Regulation of Law Firms

Abstract

For decades, legal malpractice experts have urged lawyers to implement risk management measures. To assist law firms in doing so, legal malpractice insurers have provided audit services and self-audit materials. The ABA Model Rules of Professional Conduct also recognize the importance of policies and procedures as an aspect of a firm’s ethical infrastructure. Specifically, Model Rule 5.1 and state versions of Model Rule 5.1 require that firm principals make reasonable efforts to ensure that the firm has in effect measures to ensure that firm lawyers conform to the rules of professional conduct.

In Australia, legislation requires that incorporated law firms appoint a director to be responsible for management of legal services and that the director ensure that “appropriate management systems” be implemented and maintained to enable the provision of legal services in accordance with obligations imposed by law. Under this regulatory regime, incorporated legal practices are required to complete a self-assessment process and to report on the firm’s compliance with ten objectives of sound law practice.

Early studies in Australia revealed that management-based regulation of law firms dramatically reduced the number of complaints involving incorporated law firms that completed the self- assessment process. To obtain data on the reasons for the reduction in complaints, as well as other effects of the self-assessment process, I conducted an empirical study, surveying and interviewing practitioners in law firms that completed the self-assessment process. Study results revealed that the self-assessment process first raised lawyers’ “ethics awareness” and then contributed to their firms implementing and improving their management systems.

This article discusses study findings and recommendations related to the effects of the self-assessment process. The article examines how features of management-based regulation may be integrated into lawyer regulation in the U.S. and how regulators, insurers, and bar leaders can create incentives encouraging lawyers and firms to examine and improve their management systems and practice controls.

Keywords: management-bsed regulation, ethical infrastructure, ethics audits, lawyer regulation, law firm governance, self-assessment

JEL Classification: K10, K20, L20, L22