Audit rips California’s state bar for shady finances and bloated salaries

The agency charged with regulating California’s attorneys has failed to give a transparent view of its finances while its top tier of executives have enjoyed more generous salaries than the governor and attorney general, according to a scathing state audit released Thursday.

The review of the State Bar of California also questioned the spending by a special non-profit set up under a previous state bar executive, and the audit faulted the agency’s leadership for a years-long delay in the program that compensates those who are swindled by corrupt and dishonest lawyers.

At the end of 2015, the review found, the state bar had about 5,500 pending claims by the victims of attorney theft – with an estimated $16-million shortfall for the payments. Some victims of misconduct could wait up to five years before receiving reimbursement, the review stated.

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“The State Bar’s long delays in paying claims harm the people who are waiting and who may be counting on these resources to meet basic needs,” according to the report released by State Auditor Elaine Howle.

The 68-page report is the latest setback for the nation’s largest state bar, which oversees more than 250,000 attorneys and is funded mostly by annual dues. The quasi-public agency, considered an arm of the state Supreme Court, oversees the licensing of attorneys, imposes a continuing education on active lawyers, and intervenes when people have disputes with their legal counsel. The bar also metes out discipline for misconduct, subject to the approval of the state supreme court.

The organization has long been bedeviled by conflict and controversy, with lawmakers publicly excoriating the agency for being inefficient and overly political. In recent years, internal strife has grabbed headlines beyond legal trade papers.

The recent saga erupted around 2014, when the bar’s board of trustees fired executive director Joe Dunn, a former state senator from Orange County and current congressional candidate. Dunn filed a whistle-blower lawsuit, alleging that the bar was altering records to conceal a backlog in complaints against attorneys.

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Acrimony escalated when parts of a confidential investigative report into Dunn’s tenure were released to journalists. An arbitrator later tossed out Dunn’s lawsuit, but gave him the option of amending some of his complaint.

Last month, Jayne Kim, a former federal prosecutor and the bar’s chief trial counsel, announced her resignation, months after the bar’s employees gave her a vote of “no confidence.”

The recent audit faulted the bar for paying its top 13 executives with salaries exceeding that of Gov. Jerry Brown, who annually receives about $183,000. Auditors noted that the state bar’s executive director has an annual salary of $267,000, while the directors of larger state agencies like the Department of Social Services, which has about 4,000 employees, receives about $220,000. The state bar has less than 600 employees between offices in L.A. and San Francisco.

The bar’s accounting practices were also criticized, with auditors knocking the bar for violating its own financial control policies and mis-classifying funds that have restrictions in how they are spent. Such errors distort how lawmakers and bureaucrats assess the organization’s financial status, the audit stated.

Much of the criticism centered on the fund that compensates legal clients that are the victim of theft, which rose precipitously in 2009 amid the recession. Auditors noted that to process the 5,500 pending applications for compensation, the bar has 11 staff members, including three attorneys.

As the backlog stood, however, the bar began in 2012 to omit from its financial reports the estimates of the cost of the victim compensation program. Instead, the financial statements showed only the fund’s overall balance, which improved; the omission had the effect of masking the looming financial trouble, according to the audit.

Many of the difficulties in the compensation program owe to the roughly $91 million in outstanding debts since 2003 from attorney misconduct cases, according to the audit. State reviewers acknowledged it is difficult to collect money from resigned or disbarred attorneys, who may have little incentive or resources to pay. The bar’s top lawyer has filed hundreds of money judgments to recover the funds, the audit stated.

Elizabeth Rindskopf Parker, the executive director who succeeded Dunn, accepted the vast majority of the audit’s recommendations but faulted the report for using “highly critical” headlines that overstate the organization’s issues and for not distinguishing between recent changes.

During the past few months, the bar’s new leadership has taken a “reform-minded” approach to resolving “longstanding organizational, operational and fiscal challenges,” Parker wrote.

“We believe a close look at the audit findings shows we have made significant progress,” Parker said in a separate statement.

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Parker did take issue with criticism of her salary, noting that it is within the range of similar positions at other state bars. And she was clear about her view on the nonprofit that was set up in 2013 by Dunn, calling its operations “highly unusual,” according to her statement.

The non-profit was established to allow tax-deductible donations to support niche legal programs and legal aid to the indigent, according to the audit.

But the nonprofit ended up spending two-thirds of its funds on expenses unrelated to its stated purpose, including a $4,800 Sacramento hotel bill and a $17,000 state fair exhibit, according to the audit. The latter expenses occurred months before the non-profit was actually established, but it paid the bills anyway.

When the nonprofit developed a nearly $15,000 deficit in late 2015, the bar used general funds to cover the bill – without the state bar’s oversight board knowing or approving of the expenditure, according to the audit.

State auditors feared what may befall the agency if such lax financial controls go unchecked: “Lacking proper oversight, the State Bar could create a similar nonprofit in the future and use it for questionable purposes.”

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For more California news, follow me @MattHjourno. E-mail me at matt.hamilton@latimes.com.