Have you ever wondered why trust account problems remain one of the top reasons attorneys are disciplined in the US? Certainly there have been and will continue to be attorneys whose trust accounting activities were so egregious they deserved to be disbarred. Truth be told, however, this doesn’t account for all of the problems. In many situations the subject attorney simply didn’t prioritize maintaining proper and appropriate financial practices in the office and things simply got out of hand. Now for a side note. Be aware that a lack of intent, shoddy record keeping practices, and/or restitution are not effective defenses to a misappropriation or conversion of client funds complaint.

Let’s hit the obvious ethical issue first and I know you know this but it bears repeating. Client funds belong to the client, period, end of discussion. This means there will never be any circumstance where it would be proper to borrow funds from your client trust account, temporarily or otherwise, and yes this needs to be said. I don’t care if you are trying to make payroll, need to cover a quarterly tax payment, or are taking care of your bar dues. You also can’t borrow from one client to cover a check to another client nor can you cut a check to take care of your personal expenses. Finally, you may not keep an unearned advance fee, hold onto non-disputed client funds as leverage over disputed earnings, or apply client funds to one of that client’s previous unpaid bills. Believe it or not, all of these examples have actually happened. Learn from the missteps of others and just say no if ever tempted.

The flow of earned funds between your trust account and operating account can also unintentionally create a problem. Many attorneys withdraw earned funds from the trust account at the same time a bill is sent to the client. Be careful here. Should a client ever dispute a bill, the disputed funds must be placed back in trust until the dispute is resolved. If you made a significant withdrawal at the same time a bill was sent, perhaps to pay personal and professional bills, and then do not have the wherewithal to come up with those funds should a dispute over that bill arise, you’ve got a serious problem. Don’t fall into this trap. Trust account withdrawals are better handled as follows. Once a fee is earned, send the client a bill reflecting the deduction from the amount remaining in trust. The bill should state that if there is a question on the bill, the client should contact you within ten days; otherwise you will make the indicated withdrawal at the end of that time. You are going to wait for twenty days from the day the bill was sent, ten days for the bill to be delivered and ten days to see if the bill is disputed, before actually withdrawing the earned fee.

A very real and serious concern is in trying to prevent the misappropriation of client funds and unfortunately all too often it’s a long-term trusted staff member who goes rogue. You must be proactive in trying prevent this from happening. First, if you are using an accounting software package, make certain that the audit functionality is turned on so that you can preserve the audit trail of every transaction and, of course, periodically review the audit trail report. Make certain that no disbursement can be made from the trust account without two signatures or at least a contemporaneous review by a second person. In a sole practitioner’s office, this does mean that you must see all trust account checks that are prepared. That’s just the way it is. Also, be attuned to significant changes in the behavior of anyone who deals with client property of any type. Significant changes in behavior may signal a mental health or substance abuse problem that can lead to the theft of client property.

Second, never allow support staff to open the trust account bank statement. This envelope should be given to you unopened.  Under the rules of professional conduct, you have a duty to monitor the activity in your client trust account. Your professional license is on the line with this account so stay on top of it. Look at the bank statement and make certain there is a corresponding check for every debit noted there, review the signature on every cleared check for authenticity, and make certain that every debit in the account is appropriate and understood. Heaven forbid you discover an EFT to a PayPal account that you knew nothing about. Once this is completed, the bank statement may go to the staff person responsible for account reconciliation.

When the reconciliation process is complete, have the reconciliation report returned to you in order to allow you the opportunity to review the numbers. Check this report against the original bank statement, and then sign and date the report and bank statement in order to document attorney oversight of client funds. The trust account’s bank statement must be reviewed each month and the reconciliation report and bank statement reviewed together at least quarterly.

Finally, remember that the reconciliation process is to be a double reconciliation process. Trust account records must include a general ledger and a separate sub account ledger that tracks all activity by individual client. Use an accounting system that has the ability to continually track individual client sub-accounts as well as the general ledger balance and see that all necessary personnel are properly trained in the rules applicable to client trust fund accounting. At a minimum, the individual client sub account ledger must detail every receipt and disbursement, the date of the transaction, a notation on the nature of the transaction, the balance in trust for each client, and the client’s name and address. Any entry or transfer errors should be corrected as soon as they are discovered and fully documented as to why the corrections were made and who made them. Then every month, two reconciliations should be done. The first is going to be a reconciliation of the bank statement to the general ledger, and the second will be a reconciliation of the bank statement to the individual sub account ledger. Of course these two reconciliations must agree with one another and be balanced to the penny. If they are not, figure out why and correct the problem. You never want to allow the trust account to remain out of balance. Understand that it is going to be much easier to determine where a misstep occurred at the time it occurred as opposed to trying to figure out what happened years later during an audit by the Bar.