Building Control and Mandatory Auditing
20 February 2020
By Honorary Consul Kim Lovegrove MSE RML FAIB, Chairman of the IBQC, Senior Construction Lawyer and Law Reform Consultant, Lovegrove & Cotton – Construction and Planning Lawyers
Many countries are redesigning their building regulatory ecology in the post-Grenfell era. The risk landscape of the building industry has changed profoundly in the last decade and the pendulum is swinging back in some countries from “market-based self-regulation” to far more intrusive regulation and probity stringency.
The Varying Sustainability of Private Certification in Japan, the UK, Australia and New Zealand
Some jurisdictions in the antipodes, along with the United Kingdom and Japan, have by force of statute introduced a privatised alternative to traditionally public-sector led building approval processes.
The motivation for introducing private certification was predicated by different drivers in different countries. In the antipodes in the early 90s private certification was introduced to free up the building approval process and expedite building permit delivery, which indeed occurred. In the case of Japan, however, the drivers were somewhat different in that a key driver was to increase the resourcing and frequency of inspections.
Japan introduced private sector involvement in building regulation in 1998, when it became clear that the public sector lacked the capacity to handle the required inspections and confirmations with adequate scope and depth. In 2016, thanks to private sector participation the rate for final inspection was more than 90% – compared to a rate of less than 40% before 1998. It was the great Hanshin Awaji Earthquake in 1998 that revealed the consequence of the low inspection rate: the damage pattern showed construction deficiencies (such as lack of bearing walls for wooden houses) that final inspection would have detected and required remediation for. In response, Japan made changes in its system for confirmation and inspection, including the use of private inspectors to meet demand.[1]
But in recent times, a concern has emerged in some jurisdictions that private officials are not always sufficiently independent from the actors that engage them (such as owners, developers and builders), and there are calls for the redesign of probity controls to better manage the exercise of professional discretion, particularly in performance code cultures.
The Japanese system with private certification that has proven to be resilient, and by resilient it is meant that it is surviving and prospering, has very robust probity regulation in the Japanese Building Standard Law. When the writer was retained by the Japanese government to partake in a law reform think-tank a few years back, he was informed that Japan legally imposed mandatory auditing of private certifiers.
In jurisdictions such as the Australian states of Victoria and New South Wales, the governments do indeed have an auditing capability, but the audits are not mandatory and here belies a key if not profound difference between the Japanese approach and the antipodean approach. Note that reference is made to the ‘antipodean’ approach because private certification was also introduced in New Zealand; but early in the third millennium, the profession was extinguished in that country, primarily on account the departure of insurers from the New Zealand private certification underwriting market. It is considered that the introduction of mandatory auditing of private certifiers/building surveyors should be obligatory by law because mandatory auditing regimes ensure that problematic conduct and habits can be picked up before they ‘morph into’ a more problematic behavioural patterns.
The Deterrent Capacity of Enforcement/Accountability Regimes
Furthermore, research carried out by the United States National Institute of Justice, albeit referring to criminal conduct rather than practitioner misconduct, noted that “[enforcers] deter [malpractice] by increasing the perception that [those contravening regulations] will be caught and punished… …the certainty of being caught is a vastly more powerful deterrent than the punishment…”[2] Such findings confirm that sound enforcement regimes and an awareness of the enforcer not being far away at any time can help shape the correct ethos for a profession.
The Compulsory Auditing Regime for Australian Legal Practitioners – An Exemplar
The mandatory auditing regime for the legal fraternity in Australia is exemplary in terms of its bolstering solicitor accountability. If solicitors hold client monies in trust, which is often the case in property conveyancing transactions, such solicitors are required by law to be audited annually by an ‘external examiner’. This mandatory auditing regime does not in and of itself inoculate the system of the rare incidence of solicitor defalcation, but has an overwhelmingly positive probity impact as it ensures that misuse of client monies is indeed relegated to the ‘realm of the rare’.
Furthermore, it is an early warning detector system in the sense that recalcitrant conduct will always be located and dealt with as the annual audit system is a failsafe regulatory mechanism as regards the identification of errant practices.
The Virtues of a User-Pays Auditing System
An additional benefit of the solicitor mandatory auditing regime which makes it an international exemplar, in the writer’s view, is that the system is user-pays. The law firms have to pay for the independent auditors to carry out the annual audits and the auditors are required to report to the Legal Services Board (or equivalent), referring any errant behaviour to the investigatory bodies. It is a bit like paying for your own policeman that does indeed carry out real police investigation work without fear or favour.
The regulator, i.e. the Legal Services Board of Victoria (in the Victorian context), may appoint the auditor. If the law firm wishes to appoint an auditor, it must notify the Legal Services Board and the auditor must be an approved professional – in the case of Victoria, featuring on the ‘external examiner register’.[3] When it comes time for the law firm (i.e. the user) to pay for the audit, the law firm pays the Legal Services Board and this money is remitted to the auditor from the Legal Services Board.[4]
Meanwhile, the fact that the system is user pays means that government coffers are not burdened with underwriting the rather expensive operation. Instead, as the law firm is liable to pay for auditing, the regime is effectively self-funded and government funds that might have otherwise been tied up with such a regime may be directed elsewhere – this is particularly important for building regulators who require large budgets to exercise their statutory duties effectively. In the legal fraternity, costs involved with operating a trust account are simply the costs of doing business.
The Take-out for Reforming Jurisdictions
It is considered that jurisdictions that are flirting with the idea of introducing private certification or jurisdictions that have introduced private certification and are intent on ensuring that all of the important probity belts and braces are intact will make annual auditing of private building officials compulsory by law. The writer would even go further to suggest that absent the establishment of mandatory auditing regimes, private certification is not sustainable in the long term and will be one of the ‘endangered species’ professions.
Footnotes:
[1] World Bank, ‘Building Regulation for Resilience converting Disaster into a Safer Built Environment the Case of Japan’, p 42.
[2] National Institute of Justice, ‘Five Things About Deterrence US Department Office of Justice Programmes’.
[3] See Victorian Legal Services Board, ‘Appointing an External Examiner’, accessed at https://lsbc.vic.gov.au/?page_id=834 .
[4] For further information see Law Institute of Victoria, ‘Trust Money and Trust Accounts Fact Sheet’, accessed at https://www.liv.asn.au/PDF/For-Lawyers/Regulations/LPUL/LPUL_FactSheet_TrustMoneyAccounts.aspx; Legal Profession Uniform Law (NSW), s 155(2), s 160.
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