May 12, 2016 2015-047
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
Sacramento, California 95814
Dear Governor and Legislative Leaders:
As required by Business and Professions Code section 6145, the California State Auditor presents this audit report concerning the State Bar of California’s (State Bar) financial operations and management practices. This report concludes that the State Bar’s financial‑related reports lacked transparency and contained errors, limiting stakeholders’ ability to understand the State Bar’s operations and the Legislature’s ability to ensure the appropriateness of the State Bar’s fees.
The State Bar has not clearly informed stakeholders of the amounts it estimates it will pay to reimburse members of the public who suffer financial losses because of dishonest attorneys. By the end of 2015, the State Bar estimated it would pay about $18.9 million from its Client Security Fund for such reimbursements. Unfortunately, the Client Security Fund had approximately $2.2 million available by that time, severely limiting the State Bar’s ability to pay these claims. However, beginning in 2012, the State Bar eliminated from its financial statements any disclosure of Client Security Fund claims it expected to pay, reporting instead that the fund’s balance had improved. This impeded stakeholders’ ability to assess the financial condition of the Client Security Fund. After we discussed this issue with the State Bar, it revised its 2015 financial statements to disclose the amount of the Client Security Fund’s estimated payouts.
We identified other instances in which the State Bar’s reports lacked transparency. For example, the State Bar reported the balance in two of its funds as unrestricted—or available for general use—when, in fact, that money could only be used for specific purposes. The State Bar also has not clearly reported its budget assumptions to the Legislature, despite the fact that the Legislature relies on that budget to ensure the reasonableness of the State Bar’s fees. In addition, the State Bar recently pledged its member fee revenue when it entered into a loan agreement without informing the Legislature, even though the pledge might have restricted the Legislature’s ability to lower the State Bar’s fees. After we discussed our concern regarding this loan provision with the State Bar, it replaced this provision with a $7 million debt service reserve. The State Bar also created and used a nonprofit foundation without sufficient oversight of its Board of Trustees (board), and recently used almost $14,800 from its general fund to eliminate the foundation’s fund deficit without its board’s knowledge or approval.
Finally, the State Bar has continued to provide its executives significantly more in salaries and benefits than that of state government executives in comparable positions. Although the State Bar is currently conducting a compensation and benefits study, it did not initially include state government executive branch salaries or benefits in its evaluation. After we raised this issue, the State Bar added state government executives to its evaluation. Overall, we believe that increased oversight and improved financial processes could reduce the risk that the State Bar will face similar problems in the future.
ELAINE M. HOWLE, CPA