Part II: Identify Trust Accounting Issues by Asking the Right Questions

This is part two of a two-part blog series. Part one can be found here.

Many attorneys run into issues related to the improper management of trust accounts, and some firms don’t have the appropriate safeguards and checks in place to help prevent these kinds of problems.

As an attorney, you have a responsibility to act as a fiduciary over client funds, including adhering to all applicable laws and rules regarding trust accounts. The consequences of mismanaging trust accounts can be severe. Trust account violations and abuses can be damaging to your firm’s reputation and can result in problems with the state bar association — and, in some cases, have led to the ultimate demise of an entire firm.

Though the nuances of laws and bar rules may be different from state to state, the mechanics of handling a trust account are basically the same. You should take the necessary steps now to proactively assess your firm’s policies and procedures over trust accounting, and make sure your firm is in compliance with state laws and bar rules.

Ask yourself the following questions to determine whether you need to take action to address any potential issues.

Are you performing trust account reconciliations on a timely basis?

There are four corners of trust accounting. Understanding these is crucial to accurately balancing and reconciling your accounts:

1. Trust bank reconciliation for each trust account
2. Trust subsidiary ledger, detailed for each trust account
3. General ledger asset account representing the cash balance in the trust bank account
4. General ledger liability account representing the trust liabilities to clients

Are you keeping separate accounts to avoid comingling of client funds?

• Are separate, interest-bearing bank accounts maintained for each trust account containing large or long-term client funds? Is each account clearly labeled as a trust account with the client’s name? How is the interest on these accounts tracked and accounted for?
• Are any firm or attorney funds (not belonging to a client) held in trust accounts?
• Are any client funds held in firm or attorney operating accounts?
• What is the firm’s policy for deciding to place funds in an interest-bearing IOTA account or segregated account for a specific client? What criteria are considered?
• How is the interest on IOTAs tracked and accounted for?
• If terms of the engagement agreement require retainers to be held in trust, are such procedures adhered to consistently?

Are you maintaining required records and properly tracking client funds?

• For all trust funds received, are the date and source clearly identified as well as the client matter for which the funds were received?
• For all disbursements and transfers from the trust account, is appropriate supporting documentation maintained? Is that supporting documentation reviewed before disbursements are authorized?
• Does someone in upper management oversee the trust account report review process and hold attorneys accountable for adhering to the firm’s policies and procedures regarding trust accounts?

Have you reviewed your trust reconciliation practices?

• Are trust bank account balances regularly reconciled to the sub-ledger balances? Are the sub-ledger balances regularly reconciled to the general ledger balances?
• Does the firm have detailed, step-by-step instructions for the individuals who prepare and review trust bank reconciliations?
• Is someone assigned to verify that the sign-off section on the bank reconciliation form indicates who prepared and reviewed the reconciliation and on what date?
• Are all of the trust account bank reconciliations regularly reviewed by someone in upper management?

Have you made any improper trust disbursements?

• Can you confirm that disbursements of legal fees are not made before the attorney has earned those funds?
• Can you confirm that disbursements are not made before there are adequate funds in the trust account?
• Are you setting proper timing of transfers so that legal fees are not transferred from a trust account to the firm’s operating account before the attorney has earned those funds?
• What documentation is provided to the authorizing party in order to approve a trust disbursement?
• How does the firm educate attorneys regarding the need for adequate documentation for disbursements? Are attorneys required to attend training on the firm’s policies and procedures regarding trust accounts?

Is there appropriate segregation of duties in your trust account management?

• Can the preparer of the check request forms also be the approver?
• Who has the authority to process checks?
• Who has the authority to sign checks?
• Can an account signor also prepare checks?
• Does someone other than the preparer of the bank reconciliation review and approve the reconciliation and compare the balance on the bank reconciliation to the total of the sub-ledgers and general ledger on a monthly basis?

Do you have too many trust accounts?

• Are there policies and procedures in place regarding the authorization to open additional trust accounts in different banks or different branches of the same bank?
• Does management have a clear understanding of the purpose of each client account?

If these questions raised concerns about your legal firm’s management of trust accounts, it may be time to consult with an independent third party who can advise you on best practices for staying in compliance with state laws and bar rules surrounding trust accounting. Contact me or another Kaufman Rossin professional for assistance with complex trust accounting matters.