The Law Society of Scotland - Annual Report & Accounts 2004

Financial Review

Financial Strategy
The financial strategy for the Society is to:

secure value for money for members from their subscriptions and to set and monitor budgets with that in mind;
maintain and monitor the operating budget and forecast updates, on a better than break even position;
maintain reserves at an appropriate level, allowing for the funding of major projects and strategies from those reserves.

Statement of Council’s Responsibilities
The Constitution of the Law Society of Scotland 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 judgements and estimates that are reasonable and prudent;
prepare the accounts on the going concern basis unless it is inappropriate to presume that the Society will continue in business.

Income & Expenditure
Overview
The Society is able to report a surplus of income over expenditure from normal activities of £171,000 for the financial year ended 31 October 2004. This represents a £165,000 saving on the original budget, but broadly in line with the projected £150,000 surplus reported at the Annual General Meeting in May 2004.

A comparison of the net income and expenditure values for each of the last five years is included below together with the budget projections for 2004/05.

Income
During the year, income increased by £587,000 to £5,495,000. This increase principally comprises the additional £506,000 from subscriptions approved at the 2003 Special General Meeting.

The restructured Update department continues to deliver exceptional financial performance. Net income before deduction of salary and overhead costs, increased substantially to £227,000. This increase is largely a consequence of the full year targeted marketing campaign, which helped generate a 46% increase in delegate volume. Another contributory factor, in addition to the topical seminar programme, was the successful Money Laundering Conference event that took place during March. It is anticipated that the format of this large single conference style event will operate on a commercial basis to replace the historical loss making Annual Conference.

It is also pleasing to report continued growth from the paper based Journal. Net income increased £10,000 to £75,000. This has been achieved by a positive increase in advertising revenues. During the year, the new On-Line Journal was launched to which £14,000 of operational costs have been incurred and included in the overall net Journal income.

A comparison of the net income mix received in each of the last five financial years is included below together with the budget income projection for 2004/05.

Expenditure
Before the deduction of exceptional items, expenditure increased to £5,326,000. You will note the individual year on year increases from within the financial statements, however some key areas are noted below.

Salary costs increased to £3,025,000. As at 31st October 2004, there were 126 employees on the payroll, an increase of four employees based on the head count as at 31st October 2003. The increase includes the additional cost of new employees recruited during the year, together with the annual salary review. In addition, the full year cost of new employees recruited during 2002/03 has been incurred given that only a partial charge was allocated the previous year.

The operation of the Client Relations Office was significantly restructured during quarter four of the previous financial year. The restructure was required to create a more robust complaints handling procedure. As a consequence, the 2003/04 accounts include £132,000 of payments made to newly appointed external reporters.

Client Relations Office and salary costs aside, it should be noted that expenditure across all other areas of the Society decreased 1.68% to £1,868,000. While part of this reduction can be explained by cyclical timing, it is encouraging to report a near 2% reduction in general operation and administration costs, particularly in a period of growing establishment.

A comparison of the net expenditure mix received in each of the last five financial years is included below together with the budget expenditure projection for 2004/05.

Exceptional Items
You will recall that during November 2003, Council agreed to write-off the full cost of all expenditure expended on the Lawseal project into the accounts for 2002/03. As at 31st October 2003, the full write-off included accrued adjustments for invoices not paid at that date. During the financial year to 31st October 2004 a saving of £2,000 was made against the accrued write-off. This balance is credited within the accounts of the Society. The total cost of the Lawseal project was therefore £343,000.

Balance Sheet
Overview
Net Assets increased during the year by £185,000 to £1,002,000, reflecting the actual operating surplus. This increase has helped reinstate reserves following the reduction incurred during 2002/03 arising from the exceptional Lawseal write-off.

Investments
Although investments are reported at cost, it should be noted that the market value of investments increased by £16,000 to £157,000 during the twelve-month period. This increase is in line with overall market performance during the same period. With the assistance of the brokers, Gerrard Ltd, the Society continues to monitor the investment portfolio with reference to the risk profile and investment objectives of the fund.

Pension Scheme
You will recall from previous reports that the Society’s final salary pension scheme closed to new recruited members with effect from 1st July 2002. Given the one-year joining criteria, the scheme officially closed to new members on 30th June 2003. Under the FRS 17 valuation model, the actuarial surplus on the final salary scheme decreased from £720,000 to £51,000 during the financial period, taking account of changes in actuarial assumptions. The next detailed triennial valuation will be produced as at 1st April 2005. The effect of this valuation should be carefully considered, against any significant impact on the future funding of the scheme.

As a consequence of the closure of the final salary scheme, the Society established a defined contribution Group Personal Pension Plan, for new employees eligible to join a pension scheme after 1st July 2002. Contributions to this Plan by the Society are included within the annual payroll costs.

Cashflow
The balance of cash in the bank at 31st October 2004, increased during the twelve-month period by £34,000 to £800,000.

Financial Control
When the original budget plan was approved (September 2003), the model allowed for costs of the Lawseal project to be written off over a three-year period. Given that the full cost of Lawseal was written off during 2002/03, the budget provision of £81,000 was automatically released at the beginning of the financial year.

Before the President’s Committee took over full financial responsibility from the Finance Committee during February 2004, the Finance Committee approved £75,000 of additional expenditure against the original budget plan.

The President’s Committee considered and approved four additional funding requests during the year, resulting in additional expenditure of £58,000.

The internal management team comprising the Chief Accountant and individuals account managers with budgetary responsibility, delivered net savings of £217,000 during the year against the original budget plan. These savings were delivered, following a series of accounting review meetings to which actual financial performance was monitored against the original budget plan.

After release of the Lawseal provision, a total net saving of £84,000 was made against the original plan. This saving represents 1.52% of net income secured during the year.

Financial Year 2004/05
After careful consideration of all 2004/05-budget requests, the budget plan is to run a surplus of £76,000. Together with the normal operational costs, the budget plan provides for significant capital investment in Information Technology to upgrade and replace the existing membership database. The ‘Regulatory Membership System’ is a critical database that enables the Society to deliver core day-to-day operational functionality. We believe that this investment will not only increase the quality of internal performance, but will help create a modern technological solution to which the Society can deliver increased communication and quality services to its members in the medium to long term.

Ruthven Gemmell
Treasurer