Annual report 2015

We’re reporting a surplus of income over expenditure from normal activities (prior to the actuarial charge to the Society's closed final salary pension scheme) of £56,000 for the financial year ended 31 October 2015 (2014 - surplus £116,000). The actuarial charge in respect of the scheme was £219,000 (2014 - £189,000). The Society’s income for the year includes a gain on the sale of Heritable Property of £3,135,000, net of corporation tax, resulting in a total recognised surplus for the year of £2,972,000 (2014 - recognised loss £73,000).

Income & Expenditure Account
Our income (excluding the gain made on the sale of Drumsheugh Gardens) amounted to £10.3 million, an increase of 0.5% from last year. The sources of income were as follows:

Expenditure
Our expenditure was £10.3 million, an increase of 1.1% from last year. Expenditure was split as follows:

Reserves

The Finance Committee reviewed the Society’s reserves policy in light of the proposed move from owned to leased office premises. The reserves policy is now three to six months’ average expenditure. Reserves for this purpose are defined as net current assets plus realisable investments less pension scheme deficit (from the most recent valuation less recovery plan payments made subsequently).

At 31 October 2015 this figure amounted to £3 million (excluding the final instalment of £1.25 million from the sale Drumsheugh Gardens, due in February 2017), which is equivalent to between three and four months’ expenditure. The committee regards this level as satisfactory.

Fixed assets

The sale of heritable property of 25, 26 and 27 Drumsheugh Gardens was concluded successfully for a sale price of £4.25 million, payable in two instalments - £3 million on 12th January 2016 and £1.25 million in February 2017. This transaction has been reflected in these accounts given missives were exchanged in August 2015 and the sale was subsequently completed, leading to a book gain (after corporation tax provision) of £3.14 million. 

Investments 

Investments are stated at cost and not market value. The market value of investments was less than cost at the year-end. This is viewed as a result of normal market fluctuations, and not a permanent diminution in value.

As part of its review of the Society’s reserves during the year, the Finance Committee approved a transfer from cash to investments of £2 million which is reflected in the increase in investment cost in the Balance Sheet.

Cash

Cash balances at the year-end were £8.4 million. Of this sum, subscription income received in advance of 1 November 2015 was £6.4 million.

Pension debt

The Society’s defined benefit scheme was closed to future accrual from 1 May 2010. A full actuarial valuation was carried out at 31 March 2013 by a qualified actuary, independent of the scheme's sponsoring employer. The overall deficit shown by this valuation was £2 million. A deficit recovery repayment plan has been agreed with the scheme trustees which is scheduled over a seven-year period. The next triennial valuation date is 31 March 2016. 

Annual report 

The Society’s annual report includes the president and chief executive's overview of the year, sections measuring progress made against the corporate plan, a report on governance arrangements, the accounts of the Guarantee Fund and a summary of work on equality and diversity.

The Society remains committed to achieving continual improvement in its financial performance through:

• achieving efficiencies and cost savings across the business
• improved financial forecasting
• growth of non-subscription incomes
• maintenance of reserves at an appropriate level
• managing historic final salary pension scheme liabilities through close liaison with the scheme’s trustees

Key risks 

The Society carries out ongoing monitoring and management of the risks it faces. Risks are also considered for each activity within the Society’s strategic objectives and annual plan. The risk register is reviewed monthly by the Society’s Executive team and subject to additional scrutiny by the Audit Committee, Board and Internal Auditors. Key risks include:

• remaining liability on the closed final salary pension scheme and exposure to market risk
• legislative change and risk of changes to current regulatory functions
• loss of public confidence in the Society’s ability to act as an effective regulator
• competitive pressures through alternative business structures and the future economic health of the profession
• failure to deliver the Society’s 5-year strategy

Financial year 2015/16

The Society’s approved budget for 2015/16 left the cost of the practising certificate unchanged at £550, in accordance with the three-year fee strategy adopted by the Finance Committee in 2013. The retention fee was increased by £10 to £100 and the non-practising member fee increased by £20 to £200.

John Mulholland
Treasurer
26 February 2016

The constitution of the Society requires the Council to prepare accounts for each financial year. In preparing those accounts, the Council has undertaken to:

• select suitable accounting policies and apply them consistently
• make suitable judgments and estimates that are reasonable and prudent
• state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the accounts
• prepare the accounts on a going concern basis unless it is inappropriate to presume that the Society will continue in business

The Council has considered the position for the next 12 months and concluded the use of the going concern basis of accounting is appropriate because there are no material uncertainties related to events or conditions that may cast doubt about the ability of the Society to continue as a going concern.

The Council has overall responsibility to prepare annual financial statements for each financial year, which give a true and fair view of the state of affairs of the Society and of the surplus or deficit for that period.

The Council has delegated to the Board its responsibility for the day-to-day operations, including:

• keeping adequate accounting records, which disclose with reasonable accuracy the financial position of the Society
• safeguarding its assets
• taking reasonable steps for the prevention and detection of fraud and other irregularities

The Council is responsible for the maintenance and integrity of the corporate and financial information included on the Society’s website. Legislation in Scotland governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions.

Committee members

John Mulholland (Convener and Treasurer), appointed June 2015
Suzanne Dawson
Graeme Matthews
David Newton
David Preston
Mark Sim, appointed June 2015
Ken Tudhope (Director of Finance, Secretary to the committee)

Governance and financial control 

The Treasurer chairs the Finance Committee which meets four times a year, as well as taking between-meeting decisions remotely. The aim of the Finance Committee is to ensure that annually the Society meets its corporate objectives supported by the effective and efficient use of finances and resources.

In order to achieve this, the Finance Committee will:

• review and finalise the annual budget, in consultation with the Board, Audit Committee and senior management team, for presentation to the Council
• review and, where appropriate, put forward proposals for the alteration of practising certificate fees and subscription levels and bandings
• review the monthly management accounts and make appropriate recommendations
• prepare the Society’s annual accounts and, subject to scrutiny by the Audit Committee and audited by the external auditors, approve them for submission to the Council
• keep under review the level and nature of the Society’s own banking arrangements, investments, borrowings and insurance cover (excluding that relating to insurance of the profession) and take action where necessary or desirable • determine financial controls and propose innovations in financial management
• maintain a register of key risks in relation to finance and resources
• set policy and supervise the procurement process of the Society, including approving the individual award of contracts above a certain threshold amount, as set by the Finance Committee
• provide advice on any other matters referred to it by the Board, Audit Committee, senior management team, or Council

Financial strategy

The financial strategy of the Society is to:

• Ensure best value for members’ subscriptions. Best value means value for money can be achieved and demonstrated.
• Provide financial resources to support the corporate plan. Consideration will be given to the cost and timing of components within the corporate plan and the departmental plans that are developed so that it is clear when resources will need to be made available. Prioritisation for financial resources takes place to ensure the most important objectives are achieved. All budget holders receive monthly income and expenditure accounts for their cost centres to enable performance against budget to be continuously monitored.
• Maintain reserves at an acceptable level. An acceptable level has been determined to be the equivalent of at least three average months’ expenditure.

Overview

2014/15 saw the most significant financial decision made by the Society for many years, involving the sale of its premises in Drumsheugh Gardens and lease of new premises Atria One in Morrison Street, Edinburgh.

The Finance Committee scrutinised a number of financial models to support this decision, including the status-quo option and the impact of moving to other alternative premises. Income & expenditure accounts and cash flows for the 15-year lease term were produced and the assumptions behind the figures interrogated. The figures and overall governance behind the project were also reported on by the Society’s internal auditors and suitable assurance obtained. As a result the committee was happy to support the paper put to council to approve the move.

The committee also reviewed the reserves policy and the impact on the Society’s balance sheet of the proposed move to leased premises. As part of this process it decided to increase the amount of the Society’s reserves invested in balanced stock market portfolio in order to achieve a better investment income return and growth potential, balanced with risk and in the context of the other cash reserves.

Looking ahead, the committee’s focus in 2015/16 will include managing the cost base of the business to reflect the change in premises, and progress on delivery of the strategy to ensure the Society is not exposed to undue financial risk.

I conclude by thanking my colleagues on the Finance Committee for their diligence and observations throughout the year, in particular the former Treasurer David Newton who stood down from Council in May. I am delighted that he has agreed to remain on the Finance Committee and we will continue to benefit from his knowledge and experience.

John Mulholland
Treasurer
26 February 2016

Committee members

Liam McCabe (Convener)
David Bentley, retired 18 September 2015 
Simon Brown, appointed 1 January 2015
Kim Leslie, retired 14 November 2014 
Amanda Millar, appointed 1 January 2015 
Sara Scott
Richard Spilsbury
Eileen Sumpter
David Cullen (Secretary)

Governance and membership

The committee’s membership benefited from the appointment of two new Council members – Simon Brown and Amanda Millar. Both these new members have greatly enhanced the knowledge base of the committee in terms of solicitor practice.

There was one retirement from the committee this year – David Bentley – who served on the committee for just under five years. David was a valued member of the committee. His contributions, particularly in the area of the presentation and analysis of the Society’s annual audit and accounts will be much missed.

The committee’s reporting procedure remained the same as in previous years. The full committee minute is reported to the Society’s Board, with a one page summary report of each committee meeting being given to the Society’s Council. The committee convener also formally reports on the committee’s work at the annual general meeting of the Society. The secretary to the committee is the Society’s registrar.

Responsibilities

The work of the committee is to review and report on the Society’s arrangements for audit, internal control and risk management. The committee oversees the work of the Society’s internal and external auditors. With the benefit of its consideration the work of the auditors, the committee comments and make recommendations on the effectiveness in practice of the Society’s financial policies and procedures, management controls and its arrangements to identify and manage risk.

In this context the committee reviews the following at each of its meetings:

• progress by the Society against its corporate plan objectives especially in relation to their financial impact on the Society
• the Society’s risk register with emphasis on changes in the risk profile and actions taken to mitigate risk

Through that regular review the Committee will question the actions and judgements of the Society’s executive, Board and office bearers in relation to the Society’s financial stewardship, safeguarding of the Society’s assets and the extent to which the Society achieves best value.

The committee oversee the Society’s relations with the external auditors. To this end it receives and comments on the Society’s annual financial statements prior to their approval by Council and receives the report from the Society’s external auditors on their work in forming their opinion on the financial statements.

The committee also commissions and oversees the delivery of an agreed programme of work from its appointed internal auditors. It will also follow up to ensure that recommendations contained in internal audit reports are implemented within a reasonable timeframe.

The committee will from time to time carry out reviews into or report on ad hoc matters as it may consider appropriate or as it is requested to do by Council or the Society’s office bearers.

Overview

The committee met on five occasions this year. The work of the Committee should be seen within the context of the Society’s overall approach to good governance as the Committee plays a key role in holding the Society’s office bearers, Council and senior leadership team to account for the management of risk and the effective operation of all risk management systems. To this end the committee can report that the internal audit system (by an external firm of accountants) completed its first full year of operation. A total of eight internal audits were carried out in the year. The internal auditors’ reviews covered the following areas of the Society’s operations:

• Review of potential relocation project
• Smartcard project
• Review of IMIS system
• IT systems
• Budgetary & financial controls
• Governance – regulatory sub-committees
• Risk management
• Follow up Review

The committee was satisfied with the overall conclusion of the internal auditors which was that the Society does have adequate and effective risk management controls and governance processes in place to achieve its long term objectives.

A major issue which the committee reviewed at the end of the year was the Society’s internal review of the regulatory systems in relation to the case of the former solicitor Christopher Hales. This review has resulted in a number of planned improvements in the Society’s regulatory processes which should be implemented in full by the end of the first quarter of next year.

The committee reviews the principal risk register of the Society at each meeting to again ensure appropriate and timeous risk management actions are taken to mitigate such risks. The committee also reviews the performance of the Society’s auditors in terms of their performance, cost and independence.

A thorough review of the risks on the register has resulted in a complete overhaul of these risks as well as the approach to risk mitigation and management. The major risks to the Society all relate to the performance and discharge of the Society’s regulatory duties.

I conclude my report by thanking all committee members for their contributions over the course of this year.

Liam McCabe
Convener
26 February 2016 

We have audited the accounts of the Law Society of Scotland for the year ended 31 October 2015, which comprise the income and expenditure account, the statement of total recognised gains and losses, the balance sheet, the cash flow statement and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice).

This report is made solely to the Society’s members, as a body, in accordance with relevant legal and regulatory requirements. Our audit work has been undertaken so that we might state to the Society’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Society and the Society’s members as a body, for our audit work, for this report, or for the opinions we have formed. 

Respective responsibilities of Council and auditors

As explained more fully in the statement of the Council’s responsibilities, the Council is responsible for the preparation of accounts which give a true and fair view. Our responsibility is to audit and express an opinion on the accounts in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s ethical standards for auditors.

Scope of the audit of the accounts

An audit involves obtaining evidence about the amounts and disclosures in the accounts sufficient to give reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Society’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Council; and the overall presentation of the accounts. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited accounts and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies, we consider the implications for our report.

Opinion on financial statements

In our opinion, the accounts:

• give a true and fair view of the state of the Society’s affairs as at 31 October 2015 and of its surplus for the year then ended
• have been properly prepared in accordance with UK Generally Accepted Accounting Practice

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where we are required to report to you if, in our opinion:

• the information given in the annual report is inconsistent in any material respect with the accounts; or
• proper accounting records have not been kept; or
• the accounts are not in agreement with the accounting records and returns; or
• we have not received all the information and explanations we require for our audit

Henderson Loggie
Chartered Accountants and Statutory Auditors Edinburgh
Eligible to act as an auditor in terms of section 1212 of the Companies Act 2006
26 February 2016

For the year ended 31 October 201

Christine McLintock
President
26 February 2015

Christine McLintock
President
26 February 2015

NOTE 1 Accounting policies

The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the financial statements, except as noted below.

Basis of preparation

The financial statements have been prepared in accordance with applicable accounting standards and accounting rules modified to include the revaluation of land and buildings. The Society has applied transitional rules contained in Financial Reporting Standard 15, Tangible Fixed Assets, to retain previous valuations as the basis on which the assets are held.

Basis of consolidation

The consolidated accounts include the accounts of the Society and its subsidiary undertaking, The Law Society of Scotland Services Limited, made up to 31 October 2015.

Heritable property

Missives for the sale of Drumsheugh Gardens were concluded in August 2015 and as a result the sale, concluded in January 2016, is incorporated in these accounts. 

Leasehold improvements

Leasehold improvements are depreciated over the length of the lease.

Depreciation

Depreciation is calculated to write off the cost of items over their estimated useful lives as follows: Office machinery three to five years Office equipment three to ten years Office fixtures and furniture five to ten years Motor cars four years

Investments

Investments are stated at cost. Investments are only stated at below cost where the Council believes their diminution in value is permanent. Where cash is retained by the investment brokers for reinvestment, it is included within investments.

Income recognition

The Society recognises all categories of income in the period to which they relate. Membership income received that relates to future periods is held on the balances sheet as fees in advance.

Taxation

The Society is liable for corporation tax on interest and dividends, chargeable investment gains and publication royalty payments. Full provision is made for corporation tax on assessable income.

Running costs

Running costs include travel, accommodation, legal fees, professional subscriptions, and other direct costs where applicable.

Pension scheme - defined benefit pension scheme

The Society operates a pension scheme providing benefits based on final pensionable pay (closed to new members from 30 June 2003 and closed to future accrual from 1 May 2010). The assets of the scheme are held separately from those of the Society. Pension scheme assets are measured using market values. Pension scheme liabilities are measured using a projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. The pension scheme surplus (to the extent that it is recoverable) or deficit is recognised in full. The movement in the scheme surplus/deficit is split between operating charges, finance items and, in the statement of total recognised gains and losses, actuarial gains and losses.

Pension scheme - defined contribution pension scheme

The Society contributes to a group personal pension plan on behalf of certain employees. The assets of this scheme are held separately from those of the Society in an independently administered fund. The amount charged to the income and expenditure account represents the contributions payable to the scheme in respect of the accounting period.

Provision for liabilities

Where the Society requests the court to appoint an external Judicial Factor, the Society has a contractual obligation to meet any shortfall where the estate under administration is insufficient to meet the commission payable to the Judicial Factor as fixed by the Accountant of Court. A provision for liabilities and charges is recognised in accordance with Financial Reporting Standard 12. In cases where the Judicial Factor is internal and additional costs require to be incurred in order to carry out the work, a provision is also made. During the administration of an estate, the provision is adjusted based on the best available information.

NOTE 18 – Corporation tax

18.1 Corporation tax on operating activities

The majority of the Society’s income (and related expenditure) is not subject to corporation tax.

This represents the tax charge for the gain on disposal of Drumsheugh Gardens after deducting original cost/1982 valuation, indexation relief and deduction of direct costs.

NOTE 19 - Fixed assets

19.1 Tangible fixed assets

19.2 Listed investments

The market value at 31 October 2015 was £1,884,000 (2014 - £234,000). No permanent diminution in value is anticipated.

NOTE 20 - Debtors

Due after more than one year:

Due within one year:

NOTE 21 - Creditors: amounts falling due within one year

NOTE 22 - Capital account

NOTE 24 - Pension schemes 

24.1 Defined contribution pension scheme

The Society operates a group personal pension on behalf of certain employees. The pension cost charge for the year in respect of those employees represents contributions payable by the Society to the scheme and amounted to £395,000       (2014: £365,000). Contributions outstanding at 31 October 2015 amounted to £46,000, being contributions for the month of October 2015.

24.2 Defined benefit pension schemeThe company operates a defined benefit pension arrangement called the The Law Society of Scotland Staff Retirement Benefits Scheme. The following disclosures exclude any allowance for defined contribution schemes operated by the company.

The company expects to contribute £219,000 to the scheme during the year to 31 October 2016.

The principal assumptions used to calculate scheme liabilities include:

Under the adopted mortality tables, the future life expectancy at age 65 is as follows:

Assets

The major categories of assets as a percentage of total assets are as follows:

The actual return on the scheme’s assets over the period to the review date was £308,000.

The assets do not include any investment in shares or property of the Society.

The expected return on assets is a weighted average of the assumed long-term returns for the various asset classes.  Equity and property returns are developed based on the selection of an appropriate risk premium above the risk free rate which is measured in accordance with the yield on government bonds. Bond returns are selected by reference to the yields on government and corporate debt as appropriate to the scheme’s holdings of these instruments.

Amounts recognised in the balance sheet at 31 October 2015

Amounts recognised in the statement of total recognised gains and losses over the year

Amounts recognised in the profit & loss account over the year

Please note that due to part of the surplus being unrecoverable then under the requirements of FRS17, the expected return on assets has been reduced from £388,000 to £268,000 and there is an item of £400,000 in the STRGL which means that overall the disclosed surplus for the funded benefits is limited to £0.

The unadjusted amount of the expected return on assets is shown in the asset and liability reconciliation.

Reconciliation of assets and defined benefit obligation

The change in the assets over the period was:

 The change in the defined benefit obligation over the period was:

Sumary of prior year amounts

*Does not include allowance for changes in assumptions 

NOTE 25 - Notes to the cash flow statement

25.1 Reconciliation of surplus to net cash inflow from operational activities

 25.2 Analysis of net funds

NOTE 26 - Related party transactions

26.1 Scottish Solicitors’ Guarantee Fund

Members of the Scottish Solicitors’ Guarantee Fund Committee are also members of the Council of the Law Society of Scotland. At the year-end, a balance of £465,933 (2014 - £89,563) was due to the Scottish Solicitors’ Guarantee Fund, which included subscriptions received before the year-end for the 2015/16 subscription year. During the year, overheads of £70,529 were charged from the Law Society of Scotland to the Guarantee Fund (2014 - £70,327).26.2 Scottish Solicitors’ Benevolent Fund Three trustees of the Scottish Solicitors’ Benevolent Fund are also members of the Council of the Law Society of Scotland. Two trustees of the Scottish Solicitors’ Benevolent Fund are employees of the Law Society of Scotland. At the year-end, a balance of £6,619 (2014 - £29,476) was due to the Law Society of Scotland.26.3 The Law Society of Scotland Services Limited

The Society has a wholly owned subsidiary company which in turn holds a 20% shareholding in Legal Post (Scotland) Limited. The shares were acquired for negligible consideration. At the year-end, a balance of £1,014 was due to (2014 - £5,613 due from) the Law Society of Scotland. The Law Society of Scotland Services Limited post-tax profit for the year to 31 October 2015 was £36,334 (2014 - £41,204). During the year, the Society purchased services from Legal Post (Scotland) Limited amounting to £114,228 (2014 - £127,229).

26.4 Legal services

Some Council members are partners of firms instructed by the Law Society of Scotland to provide legal services to the Society. Firms of solicitors are appointed to the Society’s panel after a competitive tendering process. None of the office bearers’ firms provided any services to the Society in the year ended 31 October 2015.

26.5 LawCareDuring the year, the Society paid £21,150 (2014 - £15,300) to LawCare, a registered charity, for pastoral care services. An employee of the Society is a director of LawCare.26.6 Pritchard TrustDuring the year, the Society paid £10,225 (2014 - £10,000) to the Pritchard Educational Trust, a registered charity. The Society’s President and Vice President are trustees.

Judicial factory work referred to fees set by the Accountant of Court.

NOTE 31 - Contingent liabilities

In appointments of external Judicial Factors, the Society has an obligation to meet any shortfall where the estate under administration is insufficient to meet the commission payable to the Judicial Factors as fixed by the Accountant of Court. In cases where a potential shortfall is identified, a provision representing the best available estimate of the liability is made within the accounts. However, the Society may also have a liability in other cases where a Judicial Factor has been appointed but it is not possible to quantify the liability at the balance sheet date. The existence of these liabilities depends on the funds collected by the Judicial Factor in the administration of the estate and the Society may receive a refund or have to make further payments.

NOTE 32 - Secured asset

In 2014, the Society assigned security over a specific bank account through a Scots law pledge to the trustees of the staff retirement benefits scheme. The sum secured is £1 million. The security becomes enforceable if the Society defaults on its annual repayment obligations, and remains effective until the next triennial valuation is agreed.

NOTE 33 - Provision

The Society entered into a contract for leasehold improvements for £1.04 million on 11 August 2015. At 31 October 2015, there remained £682,000 still to be billed, all of which has been capitalised under leasehold improvements.