Are you Babysitting Your Trust Bank Accounts?

Duty is in the Details

The number one reason for attorney professional discipline is misappropriation of client trust accounts.  According to the North Carolina State Bar Journal’s  Winter 2015 edition only 6 out of 57 lawyers/firms audited had no deficiencies; that is only 10.5% in good standing. Are you prepared? Will your trust accounts pass a random audit?

Have you sat down and gotten up close and personal with your client trust accounts lately? Perhaps you leave this responsibility to a paralegal or another associate within the firm. Amidst the daily operations of a busy practice, the detailed task of monthly and quarterly trust account reconciliation can get lost in the shuffle. Because attorneys are personally bound to their clients by a fiduciary duty, the highest legal standard of care, an accurate handling of client trust accounts is crucial, and required by the North Carolina State Bar.

Looking for Errors in A Haystack

Armed with the knowledge that your client is owed a fiduciary duty, how do we ensure their interests are completely protected? We look for errors in a haystack, starting surprisingly with your financial institution. Contrary to popular belief, the bank where your client trust accounts are held may be making accounting errors without your knowledge.

Experienced accountants in the industry have seen bank errors that run the gamut. From banks clearing checks out of the wrong bank accounts, to posting checks for which stop payments were issued, to honoring checks for the incorrect dollar amounts, errors come in all shapes and sizes.  Although these are bank mistakes, it is ultimately your responsibility to catch them. This is done by completing the monthly bank reconciliation. An accurate timeline is crucial to keeping your client trust accounts in compliance.

Absent monthly and quarterly trust account reconciliation, any banking errors not identified will have consequences. These consequences may likely come in the form of negative trust balances, bank service fees being paid with trust funds, or a bounced check, just to name a few. Recall that once a bounced check has been recorded with your bank, they are under an obligation to contact the State Bar and report a violation.  

Questions to ask yourself when looking for client trust account errors:

• How do I look for errors?
• What is my procedure to reconcile my client trust accounts?
• What type of paper trail do I need?
• Am I reconciling monthly (balancing the bank statement with my checkbook)?
• Am I reconciling quarterly (balancing the reconciled checkbook to the client ledger balances). This process is also known as the Three-Way Reconciliation.
• What is my process for getting information to the State Bar?

Whether you maintain your checkbook in the old-fashioned, hand-written method, or use a software program, it is critical to reconcile monthly and quarterly so any mistakes can be identified and corrected immediately. Expect errors to occur; however, when they are found and corrected in a timely manner, your firm’s consequences and any violations are limited.

Important Facts to Know

Here is a list of five important facts every attorney should know about their trust accounts:

•  You are required to reconcile your trust bank accounts monthly.  (The NC Bar Journal audit revealed 26% failed to conduct monthly reconciliations.)
• You are required to prepare a quarterly reconciliation. This is different from the required monthly reconciliation. (The NC Bar Journal revealed 47% failed to conduct three-way reconciliations each quarter.)
• All managing attorneys in your firm may be professionally responsible for violations of the trust accounting rules.
• You are required to escheat abandoned funds (outstanding checks and/or old client balances) to the Office of the North Carolina State Treasurer.
• You are required to notify NC IOLTA of your IOLTA status when opening, closing, or updating a client trust account.

Fostering Solutions

If you or your firm lack the time or expertise to complete these duties effectively, consider contacting a qualified accountant, such as myself, that specializes in trust accounting for law firms. Leveraging expert services like those of Escrow Consulting & Accounting, Inc. to reconcile your client trust accounts can allow you and your firm to focus solely on client representation.

Any mistake that goes unresolved may potentially result in State Bar disciplinary action. Don’t let a bank error allow your trust accounts to fall out of compliance. Be proactive instead of reactive by enlisting a third party trust account expert to “babysit” your bank accounts.