California State Auditor Report Number: 2015-047

The State Bar of California
Its Lack of Transparency Has Undermined Its Communications With Decision Makers and Stakeholders

Introduction

Background

The State Bar of California (State Bar) is a public corporation within the judicial branch of the State of California. State law requires that every person admitted and licensed to practice law in California belong to the State Bar, unless the individual holds office as a judge in a court of record. State law establishes public protection as the highest priority of the State Bar and its board of trustees (board) in exercising their licensing, regulatory, and disciplinary functions. The State Bar’s primary responsibilities are listed in the text box.

The State Bar’s Governance and Oversight Structure

States may use one of two models to establish their bars: the unified bar model or the voluntary bar model. Characteristics of a unified bar model, which California’s bar follows, include mandatory membership and the payment of an annual fee by each attorney licensed to practice law in the State.¹ The bar’s functions under this model include discipline, admissions, and education. A unified bar also provides member services, such as annual meetings and social functions; political lobbying related to the administration of justice; and member discounts on insurance and other goods and services. Like California, Texas and Florida operate under the unified bar structure.

Under the voluntary bar model, a state supreme court creates boards, commissions, or agencies that are responsible for overseeing the state’s legal disciplinary systems; thus, the state bar performs only member‑service functions. States that operate under the voluntary bar structure include New York and Illinois. Boards govern the bars in both unified and voluntary models. However, the voluntary bars in New York and Illinois also have assemblies—large authoritative bodies—that set the policies that the boards administer.

Typically a 19‑member board that meets formally six to eight times per year governs the State Bar. As Figure 1 shows, 13 of its trustees are lawyers: members of the State Bar elect six of these 13, and the California Supreme Court (Supreme Court) and the Legislature appoint the other seven. Six members are public members who are not attorneys: the governor appoints four, and the Legislature appoints two members. Each of these six public members is subject to confirmation by the Senate and must never have been a member of the State Bar or admitted to practice in any court in the United States. California’s State Bar board members serve three‑year terms and may be reelected. As of March 2016, the longest‑serving trustee had been on the board since 2009, and another had served since 2010.

The State Bar has experienced significant turnover and a restructuring of its executive management since 2014. All of the state bars we reviewed employ executive directors to execute the policies and directives of their boards. In California, the executive director serves at the pleasure of the board. On November 7, 2014, after procuring an independent investigation of wide‑ranging allegations that several of the State Bar’s high‑level employees had raised, the State Bar’s board voted to end the former executive director’s employment. Additionally, five other executives left the State Bar between November 2014 and November 2015. The former executive director subsequently filed a lawsuit. In January 2016, a Los Angeles County Superior Court judge appointed an arbitrator to assist the State Bar and the former executive director in resolving the litigation. The arbitrator dismissed all claims in the lawsuit in April 2016. According to a State Bar press release, should the former executive director amend his complaint, the State Bar will again challenge it.

The State Bar hired a new executive director and a new chief operations officer (operations officer), who assumed their responsibilities in September 2015, and a new general counsel, who began her employment in October 2015. Under the new leadership, the State Bar restructured its executive management team by eliminating the positions of deputy executive director, chief financial officer, and chief communications officer, among others. As of March 2016, the State Bar employed 534 people, and it had offices in San Francisco and Los Angeles.

Figure 1
The State Bar of California’s Governance Structure

The State Bar’s Accounting Processes for Revenue and Expenses In 2015 the State Bar accounted for its various revenue and expenses by recording individual transactions across 22 program funds and its general fund. As shown in Table 1, these funds are designed for specific purposes, such as accounting for mandatory fee revenue and expenses related to administering the bar exam or for voluntary donations to provide grants to nonprofit legal aid organizations. Some of the State Bar’s funds are restricted; therefore, the money within those funds can only be used in accordance with special regulations, restrictions, or limitations. In 2015 the State Bar consolidated eight of its funds into its general fund for financial reporting and budgeting purposes. However, the State Bar still tracks revenue and expenses of these eight funds separately in its accounting system.

Table 1
The State Bar of California’s Fund Structure as of October 2015

Consolidated Gerneral Fund*	Main operating fund	General Fund–Used to account for membership fees and resources of the State Bar of California (State Bar) not related to other fund activities; these fees include those assessed on law corporations and continuing education providers. Also used to account for voluntary and nonfee operating revenue of the State Bar not related to other fund activities, including revenue from continuing education fees and investment income. The general fund supports various State Bar programs, including Discipline and Adjudication, Administration of the Profession, and Program Development.
	Capital asset funds	Building Fund–Used to account for revenue from rental income the State Bar generates from leasing space to third parties at its facility in San Francisco. The Building Fund also accounts for capital asset purchases, including construction, equipment, furnishings, land, and buildings not accounted for in the Fixed Assets Fund or in the Los Angeles Facilities Fund.
		Fixed Assets Fund–Used to account for capital assets not accounted for in the Building Fund and in the Los Angeles Facilities Fund. This fund does not receive revenue.
		Los Angeles Facilities Fund–Used to account for rental income the State Bar generates from leasing space to third parties at its facility in Los Angeles. This Fund also accounts for all expenses, such as capital asset purchases, loan payments, and building maintenance activities related to the State Bar’s Los Angeles facility.
	Reserve funds	Benefits Reserve Fund–Used to account for resources set aside by the State Bar to fund the future costs of postemployment benefits other than pensions. Resources in this fund are provided by other State Bar funds in proportion to their salary expenses.
		Public Protection Fund–Used to account for reserve funding set aside to ensure the continuity of the State Bar’s disciplinary system and its other essential public protection programs.
	Other program and administrative funds	Legal and Education Development Fund–Used to account for revenue from royalties, marketing contributions, investment income, and programs it offers to members, such as life insurance and discounts on products. The Legal and Education Development Fund supports competency‑based education programs for attorneys that are aimed at reducing the severity and frequency of professional liability claims.
		Technology Improvement Fund–Used to account for expenses related to technology projects. This fund receives resources from the State Bar’s other funds—such as the Information Technology Assessment Fund, the Admissions Fund, and the general fund—to finance its technology projects.
		Support and Administration Fund–Used to account for the State Bar’s indirect costs that are not accounted for by the program areas in the State Bar’s other funds. The Support and Administration Fund does not receive revenue.
	Restricted funds	Admissions Fund–Used to account for mandatory fee revenue and expenses related to administering the bar examination and other requirements for admission to the practice of law in the State of California. This fund is also used to account for voluntary and nonfee operating revenue of the State Bar not related to other fund activities, including penalties and various continuing legal education fees.
		Client Security Fund–Used to account for mandatory membership fees and expenses of the Client Security Fund program. The State Bar is required by law to administer the Client Security Fund program to reimburse individuals who incur losses resulting from dishonest conduct by attorneys.
		Elimination of Bias and Bar Relations Fund–Used to account for annual voluntary membership fees and expenses that support activities with voluntary bar associations and programs that address concerns of access and bias in the legal profession. The State Bar includes a voluntary fee in its annual membership fee bill; however, members who do not wish to fund these activities have the option to reduce their annual fee payment by $5. This fund is also used to account for various voluntary fees related to the State Bar’s sponsored events and programs, as well as grant revenue.
		Equal Access Fund–Used to account for funding from the Judicial Council of California that the State Bar uses to provide grants to approximately 100 nonprofit legal aid organizations to provide free legal services to indigent Californians.
		Information Technology Special Assessment Fund–Used to account for a $10 mandatory fee the State Bar collected from its members from 2011 through 2013 for the purpose of upgrading the State Bar’s information technology systems, including the purchase and maintenance of computer hardware and software.
		Justice Gap Fund–Used to account for voluntary donations the State Bar uses to provide grants to nonprofit legal aid organizations offering free legal services to low‑income Californians. The State Bar includes an option on its annual membership fee bill for members to make donations to this program.
		Lawyer’s Assistance Fund–Used to account for mandatory member fees the State Bar uses to fund education, remedial, and rehabilitative programs for those members who need assistance as a result of disabilities related to substance abuse or mental illness.
		Legal Services Trust Fund–Used to account for revenue primarily from interest earned on certain client trust accounts held by California attorneys to fund free legal services for indigent people. State law requires attorneys who hold client funds in trust to remit interest earned on those accounts to the State Bar. After the State Bar deducts its administrative costs, it distributes the remaining funds as grants to nonprofit legal aid organizations. In addition, this fund receives voluntary membership fees that the State Bar also uses to fund these grants. The State Bar includes a voluntary fee for this fund in its annual membership fee bill; however, members who do not wish to fund these activities have the option to reduce their annual fee payment by $40. This fund is also used to account for tax refund revenue intercepted from resigned or disbarred members who have outstanding debts with the State Bar.
		Legal Specialization Fund–Used to account for voluntary application fees, certification fees, recertification fees, and annual membership fees and expenses of the State Bar’s Legal Specialization Program.
		Legislative Activities Fund–Used to account for voluntary member fees the State Bar uses for lobbying and other related activities deemed outside of the parameters established in Keller vs. the State Bar. The State Bar includes a voluntary fee for this fund in its annual membership fee bill; however, members who do not wish to fund these activities have the option to reduce their annual fee payment by $5.
		Sections Fund–Used to account for voluntary membership fees and expenses restricted by law related to the activities of 16 sections, which consist of specific practice areas or areas of professional interest. The Sections Fund also receives revenue from seminars and workshops, advertising, sales of various pamphlets and publications, and grants.
	Other funds	Annual Meeting Fund–Used to account for voluntary registration fees and expenses of the State Bar’s annual meeting. The Annual Meeting Fund allocates its revenue and expenses among itself, the Sections Fund, and the Conference of Delegates of California Bar Associations, which operates as an independent entity. This fund is also used to account for advertising revenue and other miscellaneous revenue generated from hosting the annual meeting.
		Grants Fund–Used to account for corporate sponsorships and grant revenue the State Bar uses to support various program expenses and special projects.
		State Bar Access and Education Foundation Fund–Used to account for the activities of the State Bar’s nonprofit organization, the State Bar Access and Education Foundation.

The State Bar’s budget serves as its primary fiscal control and contains its anticipated income and expenses. The State Bar uses its budget to present its plans for its programs, the cost of those plans, and the estimated income sources it intends to use to finance the costs. The State Bar’s Office of Finance prepares and submits the annual budget to the board for approval. State law requires the board to complete and implement five‑year strategic plans, which provide the framework for its annual budget process. In its most recent update of its strategic plan in 2014, the State Bar included such initiatives as modernizing its information technology, improving its physical facilities, and streamlining its programs and processes.

The State Bar’s fiscal year ends on December 31, and its expense cycle begins when the board uses the annual budget process to approve expense amounts for its programs. State Bar policy requires various levels of management approval to authorize all expenses based on board‑approved budget or agenda items. For example, certain employees may approve amounts up to $1,000, managers may approve amounts up to $5,000, and senior executive staff members may approve amounts up to $50,000. Only the State Bar’s executive director or operations officer may approve amounts more than $50,000. State Bar policy further emphasizes that each department’s procurement of goods and services must be based on its approved budget regardless of the amount of the purchase.

The State Bar also has formal processes in place to ensure that its staff record revenue and expenses in the appropriate funds and accounts. For example, its policies and procedures for cash receipts describe the steps necessary to prepare, review, and approve transactions and to record them in its accounting system.

The State Bar’s Revenue Sources

The State Bar maintains, operates, and supports its discipline system and general operations primarily through mandatory fees that it charges its members. Nearly 49 percent of the revenue the State Bar received from 2013 through 2015 was restricted either by statute or by its board. As shown in Table 2, the State Bar’s largest types of revenue were mandatory member fees, admissions fees, and revenue from the Judicial Council of California (Judicial Council) used for grants. In 2015 mandatory member and admissions fees totaled $91.7 million, or 61 percent of the State Bar’s overall revenue. Judicial Council revenue totaled about $14.2 million, or 9 percent of its overall revenue.

Table 2
The State Bar of California’s Revenue by Type and Restriction Level From 2013 Through 2015 (Dollars in Thousands)

		2013			2014			2015
	Revenue Type	Restricted	Unrestricted	Total	Restricted	Unrestricted	Total	Restricted	Unrestricted	Total
Category 1: Mandatory fees and other charges
	Mandatory member fees	$11,357	$59,236	$70,593	$7,597	$64,811	$72,408	$7,709	$65,784	$73,493
	Admissions fees	17,939		17,939	17,487		17,487	18,253		18,253
	Legal specialization fees	2,388		2,388	2,019		2,019	2,538		2,538
	Law corporation fees		1,338	1,338		1,355	1,355		1,410	1,410
	Continuing education fees	293	136	429	311	137	448	280	156	436
	Law school fees	139		139	126		126	125		125
	Other mandatory charges	173	723	896	194	848	1,042	227	869	1,096
	Category 1 total	32,289	61,433	93,722	27,734	67,151	94,885	29,132	68,219	97,351
Category 2: Voluntary fees and charges, and donations
	Donations	5,893		5,893	7,395		7,395	8,912		8,912
	Sections fees	4,951		4,951	5,428		5,428	5,891		5,891
	Continuing education fees	1,025	226	1,251	1,029	170	1,199	810	278	1,088
	Other voluntary fees and charges	3,216	628	3,844	3,388	795	4,183	3,653	682	4,335
	Category 2 total	15,085	854	15,939	17,240	965	18,205	19,266	960	20,226
Category 3: Nonfee operating revenue
	Judicial Council of California revenue	16,145	23	16,168	14,512	5	14,517	14,200	25	14,225
	Settlement grants							6,085		6,085
	Mandatory collection of interest on lawyer trust accounts	4,989		4,989	5,226		5,226	5,532		5,532
	Penalties, late fees, and miscellaneous charges	509	2,562	3,071	460	2,374	2,834	476	2,530	3,006
	Insurance program revenue		1,867	1,867		1,650	1,650		2,143	2,143
	Advertising income	17	126	143	35	140	175	57	159	216
	Royalties and sales of member information		136	136		115	115		188	188
	Collections from tax intercepts				178		178	99		99
	Sales of publications	77	38	115	65	45	110	57	24	81
	Other revenue		4	4		4	4		4	4
	Category 3 total	21,737	4,756	26,493	20,476	4,333	24,809	26,506	5,073	31,579
Category 4: Other nonoperating revenue
	Rental income		1,034	1,034		1,879	1,879		1,814	1,814
	Investment income	134	128	262	102	127	229	109	76	185
	Category 4 total	134	1,162	1,296	102	2,006	2,108	109	1,890	1,999
	Grand total	$69,245	$68,205	$137,450	$65,552	$74,455	$140,007	$75,013	$76,142	$151,155

Member Fees, Admissions Fees, and Donations

In recent years, the State Bar’s mandatory member fees revenue ranged from $70.6 million in 2013 to $73.5 million in 2015 because of a 4.3 percent increase in membership. Historically, annual legislation has authorized the State Bar to impose a membership fee; however, in 1997 the governor vetoed the annual fee bill because he had concerns that the State Bar had become overly political, unresponsive to its members, and inefficient. As a result, the State Bar was unable to impose annual membership fees for 1998 and 1999. The Supreme Court adopted an emergency interim measure in 1998 and imposed a mandatory fee on all active members for a special attorney discipline fund.

In past years, state law also authorized the State Bar to charge members additional mandatory fees for specific purposes. For example, from 2008 through 2013, state law authorized the State Bar to collect an additional $10 from each active member to pay for upgrades to its information technology (IT) systems. State law also authorized the State Bar to collect an additional $10 from each member from 2009 through 2013 to pay for the cost of financing, constructing, purchasing, or leasing facilities to house State Bar staff in Southern California. Additionally, admission fees support the State Bar’s admission program. State law requires applicants to pay these fees if they wish to take the bar exam and register to practice law in the State. The State Bar received between $17.5 and $18.3 million annually in admissions fees from 2013 to 2015.

On the other hand, some of the membership fees the State Bar collects are voluntary. For example, members may choose not to pay the State Bar’s $5 fee for lobbying and related activities. As shown in Table 3, State Bar members each could pay a maximum of $50 in voluntary membership fees for 2015 and 2016. State law restricted to specific purposes the State Bar’s use of $45 of each $50 voluntary fee payment, while the board restricted the other $5. For example, members can pay a voluntary $40 fee to the Legal Services Trust Fund, which specifically supports nonprofit organizations that provide free legal services to people of limited means. The State Bar collected more than $20.2 million in total voluntary fees, donations, and charges in 2015. Of this amount, the State Bar received nearly $5.9 million in voluntary sections fees—revenue dedicated to voluntary organizations of attorneys and associates who share an area of interest. The Sections help their members maintain knowledge in various fields of law, expand their professional contacts, and serve the profession, the public, and the legal system. The State Bar received the remaining $14.3 million of the $20.2 million in donations and other voluntary fees and charges to provide legal aid to low‑income Californians, to address concerns of bias in the legal profession, to offer support services for local bar associations, and to oversee providers of continuing education.

            l

Table 3
The State Bar of California’s Allocation of Annual Member Fees by Fund for 2013 Through 2016

		2013		2014		2015		2016
Fee allocation by fund		Active Member Fee	Inactive Member Fee	Active Member Fee	Inactive Member Fee	Active Member Fee	Inactive Member Fee	Active Member Fee	Inactive Member Fee
Funds receiving mandatory fees
	General Fund	$285	$ 45	$305	$65	$305	$ 65	$305	$65
	Client Security Fund	40	10	40	10	40	10	40	10
	General Fund—discipline activity	25	25	25	25	25	25	25	25
	Lawyers Assistance Fund	10	5	10	5	10	5	10	5
	Building Special Assessment Fund	10	10	–	–	–	–	–	–
	Information Technology Special Assessment Fund	10	–	–	–	–	–	–	–
Mandatory fee allocation tota		380	95	380	105	380	105	380	105
Funds receiving voluntary fees
	Legal Services Trust Fund	20	20	30	30	40	40	40	40
	Legislative Activities Fund	5	5	5	5	5	5	5	5
	Elimination of Bias and Bar Relations Fund	5	5	5	5	5	5	5	5
Voluntary fee allocation total		30	30	40	40	50	50	50	50
Grand total		$410	$125	$420	$145	$430	$155	$430	$155

Revenue for Grants

The Judicial Council contracts with the State Bar to administer grants through its Equal Access Fund. In 2015 the Equal Access Fund received more than $14.4 million in revenue for the State Bar to award to qualified legal services projects and support centers that provide legal services to indigent people. The State Bar also receives interest on lawyer trust accounts for the same purpose. Further, the State Bar received $6 million from a national mortgage settlement in 2015 to provide grants for organizations helping California families dealing with foreclosures and community redevelopment legal assistance. The State Bar’s Legal Services Trust Fund Commission awards these grants.

Other Revenue

From 2013 to 2015, the State Bar collected between $6.6 and $7.7 million annually from other sources, including insurance program revenue, rental income, and penalties and late fees. Insurance program revenue accounted for $2.1 million in 2015. Although revenue from these sources is not legally restricted, the board may set it aside during its annual budget process for specific purposes or programs. For example, the board designated insurance program revenue to provide financial support for legal service programs in 2015. The State Bar also deposited its 2015 rental income of $1.8 million—proceeds from leasing to other organizations the unused space in its San Francisco and Los Angeles facilities—into its general fund to support facility‑related expenses, such as construction, equipment, and furnishings.²

The State Bar’s Expenses

The State Bar’s largest expenses included salaries, benefits, and grants. As shown in Figure 2, salaries accounted for the State Bar’s largest expense and increased by nearly $4.9 million between 2013 and 2015. Grants, like those previously mentioned for legal services for indigent people, accounted for the State Bar’s next largest expense. The State Bar reported a decrease in its grant expenses in 2014 because it adjusted its grants cycle to coincide with the calendar year. As a result, it reported only six months of grant activities in its 2014 financial statements. Finally, as Figure 2 shows, the Client Security Fund’s expenses decreased each year from 2013 through 2015. We discuss this decrease in the Audit Results.

Figure 2
The State Bar of California’s Expenses
From 2013 Through 2015

Prior Audit by the California State Auditor

Our June 2015 audit titled State Bar of California: It Has Not Consistently Protected the Public Through Its Attorney Discipline Process and Lacks Accountability, Report 2015‑030, included eight recommendations to the State Bar related to the efficiency and effectiveness of its discipline system and seven recommendations related to improving its financial practices. Specifically, we found that the State Bar’s efforts to align with its mission the staffing for its discipline system had fallen short. In 2011 it employed contractors, shifted staffing resources, and authorized a significant amount of overtime to reduce its backlog of attorney discipline cases, but it discontinued these operational changes shortly thereafter. Its backlog subsequently increased by 25 percent between 2011 and 2014.

To better align its staffing with its mission, we recommended that the State Bar engage in workforce planning for its discipline system. In October 2015, the governor signed Senate Bill 387 (SB 387), which—among other things—requires the State Bar to submit a workforce plan to the Legislature by May 15, 2016, and to implement this plan by December 31, 2016. In response, the State Bar contracted with the National Center for State Courts, a nonprofit organization, to complete the workforce plan by April 29, 2016. The text box shows the tasks named in the contract. State law requires the State Bar to set a goal for its disciplinary system to complete complaint processing within six months from the receipt of complaints and to ensure that it provides appropriate resources to its disciplinary functions. The State Bar expects the workforce plan will result in a reallocation of resources to the discipline system.

We also recommended that the State Bar conduct an analysis of its operating costs and develop a biennial spending plan that includes an analysis of its plans to spend excessive fund balances. SB 387 also requires that the State Bar conduct a thorough analysis of its operating costs and develop a spending plan to determine a reasonable amount for the annual membership fee by May 15, 2016. The State Bar’s operations officer said that the State Bar anticipates finalizing its analysis of its priorities and necessary operating costs by the statutory deadline.

Additionally, SB 387 requires that the State Bar conduct a public sector compensation and benefits study (compensation study) to reassess the numbers and classifications of staff required to conduct its disciplinary activities. We discuss the compensation study in the Audit Results.

Our June 2015 audit also found that in 2012 the State Bar transferred $12 million among its various funds to facilitate the purchase of a building in Los Angeles, despite the fact that its board had restricted some of this money for other purposes. We recommended that the State Bar implement policies and procedures to restrict its ability to transfer money between funds that its board or state law designated for specific purposes. We also recommended that the State Bar implement a policy requiring it to develop and present to its board accurate cost‑benefit analyses for purchases exceeding a certain dollar level. We advised that these cost‑benefit analyses should compare relevant cost estimates and be clear about the sources of funding the State Bar intends to use to pay for the purchases. In response to our recommendation, the State Bar developed related policies in July 2015.

Scope and Methodology

The Business and Professions Code requires the State Bar to contract with the California State Auditor to conduct an in‑depth financial audit of the State Bar, including an audit of its financial statements, internal controls, and relevant management practices. The law requires the audit to examine the revenue, expenses, and reserves of the State Bar, including all fund transfers. We list the objectives we developed and the methods we used to address them in Table 4.

 

Table 4
Audit Objectives and the Methods Used to Address Them

	Audit Objective	Method
1	Identify rules and regulations significant to the audit objectives.	Identified criteria related to audit standards used to meet the intent of Senate Bill 387 and the concerns of stakeholders. Reviewed the working papers and schedule of internal controls testing of the financial statement auditor for the State Bar of California (State Bar) to prevent duplication of effort. Reviewed qualifications and standing of the State Bar’s financial statement auditor.
2	Assess the State Bar’s financial condition for a selection of its funds as well as its plans to establish reasonable reserves.	Reviewed the State Bar’s financial statements for 2013, 2014, and 2015. Assessed the State Bar’s financial condition for significant funds based on trends in revenue, expenses, and net position. Determined net positions restricted by legislation, the State Bar’s Board of Trustees (board), or other external parties. Evaluated the financial risks involved in the State Bar’s long‑term debt obligations, including restrictions on cash and other assets related to debt covenants. Determined the extent to which the board exercised oversight regarding debt decisions. Evaluated the reasonableness of the State Bar’s new fund reserve policies and its plan to implement those policies. Reviewed the State Bar’s 2015 consultant report on its use of fund accounting. Asked management to determine how it addressed any findings and recommendations in the report. Determined the extent to which the board exercised oversight regarding these findings and recommendations. Reviewed the State Bar’s budget documents from 2013 through 2015 and asked management regarding plans to address financial risks identified in its fiscal forecasts. Obtained an understanding and determined the reasonableness of the assumptions the State Bar uses in its budget projections. Verified the status of the State Bar’s development of a biennial spending plan used to determine the amounts of member fees. Determined the reasonableness of the State Bar’s actions to reduce costs.
3	Determine and evaluate how the State Bar records its revenues to ensure proper use and reporting.	Identified the various sources and purposes of fee and nonfee revenue the State Bar collected during 2013, 2014, and 2015. Gained an understanding of the State Bar’s processes for ensuring it properly accounts for and records revenue. Identified and assessed the design and operating effectiveness of the State Bar’s internal controls over receiving and accounting for revenue. Determined whether the State Bar’s internal controls over key functions were operating effectively by observing or testing the process. Selected 34 revenue transactions and determined whether they were recorded appropriately in the correct fund and revenue accounts. Obtained an understanding of the State Bar’s process for classifying and presenting revenues in its financial reports. Determined the amounts of revenue—grouped by sources and funds—that the State Bar received during 2013, 2014, and 2015. Identified each source as a mandatory fee, voluntary fee, or nonfee revenue, and identified each source as restricted or nonrestricted. Assessed the impacts of the State Bar’s new fund reporting structure on the budgeting, accounting, and reporting of significant revenue. Also, determined the extent to which the board exercised oversight of this change.
4	Determine whether the State Bar’s interfund transfers are appropriate and consistent with legal restrictions on funds and consistent with generally accepted accounting principles.	Identified and assessed the design and operating effectiveness of the State Bar’s internal controls over transfers and interfund activity. Efforts included obtaining and evaluating policies and procedures and determining the extent to which the board exercises oversight. Selected 29 transfers that occurred during 2013, 2014, and 2015 and tested operating effectiveness of key internal controls. For a selection of 10 transactions classified as interfund activity, determined the purpose of the transactions and whether the State Bar posted the transactions to the appropriate accounts. For all interfund loans, assessed whether they were for appropriate purposes, properly authorized, and repaid within reasonable amounts of time.
5	Determine whether the State Bar’s expenses are appropriate, reasonable, and correctly assigned to programs and funds.	Identified and assessed the design and operating effectiveness of the State Bar’s internal controls over authorizing, monitoring, and accounting for expenses. Determined—by observing or testing the processes—whether the State Bar’s internal controls over key functions were operating effectively. Assessed trends in major categories of expenses during 2013, 2014, and 2015. Reviewed trends related to travel expenses. Selected 34 expenses and determined whether they were allowable, reasonable, and consistent with the purposes of the related funds, any restrictions, and the mission of the State Bar. Evaluated and determined whether the State Bar’s expenses related to lobbying activities were reasonable and paid from appropriate revenue sources. Determined the amount and reasonableness of administrative expenses, which included professional services and indirect costs, from the Legal Services Trust Fund program during 2013, 2014, and 2015. Obtained and evaluated the reasonableness of the State Bar’s indirect cost allocations for 2015 and determined the status of the review by the State Bar’s consultant of the State Bar’s indirect cost allocations. Assessed the State Bar’s use of employees contracted for professional services, such as attorneys.
6	Determine the effectiveness of the State Bar’s efforts to recover disciplinary costs and Client Security Fund payments to victims by evaluating the effectiveness of the State Bar’s corrective actions related to recommendations the State Auditor made in previous audits.	Asked management for and obtained an understanding of the State Bar’s cost recovery processes. Evaluated the State Bar’s corrective actions related to prior audit recommendations for its cost recovery process. Analyzed the effectiveness and efficiency of the State Bar’s process for billing, accounting for, and monitoring amounts owed to it. Evaluated the effectiveness and efficiency of the State Bar’s various collection methods by analyzing debt outstanding, collection rates by method, number of money judgments enforced, and numbers of cases and amounts associated with debts uncollected within 12 months of beginning collection efforts. Also examined whether any debts passed the statutes of limitations for collection during 2013, 2014, and 2015. Selected 10 court‑ordered debts, including those with restitution or Client Security Fund payments, and determined whether the State Bar took reasonable steps to collect the debts.
7	Determine whether the State Bar’s current compensation levels for its executive management are commensurate with the duties and responsibilities of comparable entities.	Evaluated the scope of the State Bar’s ongoing classification and compensation study. Obtained the State Bar’s most current salary and wage schedules and compared the salary ranges for a selection of executive and management positions at the State Bar with the salary ranges for equivalent positions at state agencies. Reviewed the State Bar’s practices relating to cost‑of‑living adjustments, longevity pay, and merit salary increases. Compared the benefit packages that the State Bar offers its executive management with the benefits offered by state agencies. Reviewed changes the State Bar made to salary ranges for key management positions in 2013, 2014, and 2015. Reviewed employment contracts for a selection of the State Bar’s former and current executives.
8	Determine whether the State Bar’s current governance structure and board composition promote sound operational and financial practices. Identify the board’s oversight of the State Bar’s financial and administrative operations.	Obtained an understanding of the different types of governance structures for State Bars in the United States. Compared the State Bar’s governance structure, oversight structure, and legal restrictions with those of four other large states: Texas (unified), Florida (unified), New York (voluntary), and Illinois (voluntary). Determined whether there have been any recent reviews of the four comparison State Bars’ governance structures, and reviewed any related reports. To the extent possible, compared the financial reporting requirements and level of detail reported for the four comparison states to those of the State Bar of California. Determined the amount of turnover in the State Bar’s executive management and board since 2013.
9	Determine the appropriateness of the formation and use of the State Bar’s Access and Education Fund and the extent of the Board of Trustees’ oversight.	Reviewed use by the State Bar’s Sections’ of the State Bar Access and Education Foundation (foundation) to support its events. Determined whether the State Bar reported its relationship with the foundation appropriately and classified the foundation’s fund appropriately in its financial reports. Determined the amount of the foundation’s revenue and expenses for 2013, 2014, and 2015. Learned the sources of funding used to support the foundation’s expenses and whether it used its funding appropriately. Determined whether the State Bar accounted for the foundation’s fund revenue and expenses appropriately. Ascertained whether the State Bar’s use of the foundation was consistent with state law and the purpose for which the foundation was created. Determined the extent to which the board oversaw the State Bar’s creation and use of the foundation.

Assessment of Data Reliability

In performing this audit, we obtained electronic data files extracted from the information system listed in Table 5. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support our findings, conclusions, or recommendations. Table 5 describes the analyses we conducted using the data from this information system, our methods for testing it, and the result of our assessment.

Table 5
Methods Used to Assess Data Reliability

Information System	Purpose	Methods and Results	Conclusion
State Bar of California (State Bar) JD Edwards EnterpriseOne (JDE) data Accounting data as of January 26, 2016	To make selections of expense, revenue, and transfer transactions from January 1, 2013, through December 31, 2015. To categorize and total expense and revenue transactions from January 1, 2013, through December 31, 2015.	We performed data‑set verification procedures and electronic testing of key data elements and did not identify any issues. To test the accuracy of the State Bar’s JDE data, we traced key data elements to supporting documentation for a selection of 34 expense, 34 revenue, and 29 transfer transactions from January 1, 2013, through December 31, 2015, and found no errors. To test the completeness of the State Bar’s JDE data, we traced the total amounts of the expense, revenue, and transfer transactions to the State Bar’s 2013 and 2014 audited financial statements. Because we found this accounting data to be complete for 2013 and 2014, we have reasonable assurance that expense, revenue, and transfer transactions for 2015 are also complete.	Sufficiently reliable for these audit purposes.

Back to top

---

Footnotes

¹ States that require their practicing attorneys to be members of those states’ bars refer to their bars as unified, integrated, or mandatory. In this report, we refer to this type of bar as unified. Go back to text

² During 2013 and 2014, the State Bar deposited its rental income into its Building Fund and its Los Angeles Facilities Fund. As previously discussed, the State Bar consolidated these funds into its general fund beginning in 2015. Go back to text