In the last year of creating a new functional foundation for the legal profession, the California State Bar has learned the blind spots and weaknesses of its licensees. It turns out the mistakes being made are consistent across hundreds of attorneys managing trust accounts. This article will discuss the top 6 trust accounting mistakes being made. Remaining in compliance requires being well-versed on current trust accounting regulations and awareness of common pitfalls to avoid. This will keep your firm steps ahead when providing legal services to clients.
At large firms, there are often many attorneys requesting to open trust accounts. The volume of both trust accounts and signees is a considerable strain for the ones handling administrative tasks for the firm. This strain can cause difficulty in verifying that the trust accounting policies are being followed.
Small firms may have an easier time simply due to having a lesser number of accounts to account for. No matter the size of the firm, a formal process for requesting and approving new trust accounts will help make this situation more manageable.
Pro Tip: Consider working with an experienced bookkeeper to assist in the day to day of trust account bookkeeping. Remember, at the end of the day it is solely the attorney assuming responsibility for the account. If you are shaken in your accounting duties, consider reaching out to SmartBean® for assistance with your CTAs and IOLTAs. Complete further reading here on how to interpret and make sure you are prepared moving forward after receiving monthly- three way reconciliation prepared by your bookkeeper.
Many times when an employee is embezzling funds it is because they have the most access. Meaning the employee has the most frequent touch points with the money. To reduce the risk of fraud, critical tasks should be separated amongst more than one individual. The mistake many firms make is employing one person for important processes: custody of assets, trust account reconciliation, record-keeping, and authorization of movement of assets. When multiple individuals are trained in these key responsibilities, employees can be rotated on a periodic basis. This prevents theft as well as ensures there are trained individuals for when others are out of office.
Firms need an effective way to create a clear policy regarding the payment of client costs. Many firms do not have this process set up and as a result improper “borrowing” occurs. This can be in the form of disbursing fees before they have cleared the account, causing the use of other clients money, which is strictly prohibited in client trust accounts per Rule 1.15. A compliant way to avoid improper authorization for disbursement is to require dual signatures for checks over a certain amount. This will prevent likelihood of embezzlement.
Trust account reconciliation is a task that must be performed on a monthly basis. According to the Client Trust Account Protection Program, record-keeping must be completed by all attorneys with trust accounts and documentation must be held up to five years post the final fee payment. Another healthy trust accounting practice is having attorneys sign off on having reviewed reconciliations.
Additionally, the monthly reconciliation should be reviewed once a year. This should be completed unannounced by an individual other than who typically completes the three-way reconciliations. This will assure your firm is able to identify any miscalculations or inaccuracies in the reconciliations.
Adhering to the record-keeping rules of client trust accounting is the only way firms can avoid violations. Firms that fail to maintain trust account records in compliance with bar rules often do not have the necessary audit trail to track client funds. For large firms, it is especially important to practice proper record-keeping, since the high number of accounts can cause complexity.
Firms must treat it as an imperative to create a culture at the firm in which licensees take full responsibility for the wellness of their client trust accounts. This should include following trust account best practices and setting clear policies on following safekeeping of funds regulations.
Commingling is one of the most complex client trust accounting regulations and therefore the most commonly made mistakes come from this. Rule 1.15 and CTAPP regulations in Rule 2.5 make explicit the stipulations on when client and firm funds can be in the same account. Trust accounts must be clearly labeled as trust accounts at an accredited banking institution. Lawyers are only allied to hold funds not belonging to a client in the trust account as long as the amount is enough to sufficiently cover necessary bank fees. All earned fees must also be deposited into an attorney’s own account once the funds transfer ownership. Attorneys must remain up to date and keep these practices as it's one of the most heavily weighted fiduciary responsibilities.
At SmartBean®, it is our goal to assist attorneys in the ever-present goal of practicing compliance with California's new Trust Account Bookkeeping requirements. Our experienced team specializes in helping attorneys meet bookkeeping and reporting obligations. One of the benefits of working with SmartBean® is avoiding these most commonly made mistakes with us on your team! SmartBean® offers free consultations. Schedule yours today to learn how we can be of service to your firm!
