The proper protection of client trust funds begins with the reconciliation of trust account records to the bank statements, as required under Rule 1.15-3(d) of the Rules of Professional Conduct. In addition, further controls should be considered to safeguard client funds against external and internal fraud.
Risk Mitigation Strategy for Attorney Trust Accounts
Review bank activity daily.
A proactive approach is essential to effective fraud prevention. Daily review of online banking activity helps detect unauthorized transactions early. Fraudulent transactions continue to increase and often begin with small, less noticeable amounts before escalating to larger withdrawals within a short period.
Another safeguard is Positive Pay, a program offered through your bank, where the firm provides the bank with a list of authorized payments and only those transactions are allowed to clear. This control is recommended for both trust and non-trust bank accounts.
Disburse client funds fully and promptly.
Review the subsidiary (client) ledger balances monthly to ensure client trust funds are disbursed to a zero balance promptly at the end of legal representation. Retaining funds is an easy target for internal fraud.
Follow up on uncleared checks.
After completing the monthly bank reconciliation, review all outstanding (uncleared) checks. If a check remains uncashed for six months, contact the payee to confirm receipt and request that it be deposited.
If a replacement check is issued, a stop payment should be placed on the original check to prevent duplicate negotiation and over disbursement.
Checks outstanding for five years must be addressed and, if deemed abandoned, escheated in accordance with Rule 1.15-2(r). Locating payees after an extended period can be difficult and time consuming. Proactively addressing outstanding checks once they are six months old reduces administrative burden and helps mitigate the risk of misappropriation and internal fraud.
Review voided checks.
Monthly review of voided checks is necessary to ensure replacement checks are issued correctly. This control helps in identifying potential internal fraud and to prevent misappropriations of funds.
Review client ledger when signing checks.
When signing trust checks, the full client ledger should always be reviewed to ensure the payee and amounts are accurate. In addition, if a check relates to a client that you no longer represent, determine why the check is being issued and verify the legitimacy of the transaction, including the payee.
Reconcile timely.
Before an attorney can conduct any review, the trust records must first be reconciled to the bank statement monthly as required under Rule 1.15-3(d). While outsourcing the reconciliation has many benefits – such as enhanced oversight and stronger segregation of accounting task – the accountant engaged should have specialized expertise in attorney trust accounts and an in-depth knowledge of Rule 1.15 of the Rules of Professional Conduct.
Segregation of duties.
In order for these risk mitigating measures to be effective, proper separation of duties is essential.
The person identifying aged funds or uncleared checks should not be the person to contact the payees, and neither of those individuals should have authority to void checks or issue replacement checks.
While not all law firms have the capacity to implement a full segregation of duties, the most critical separation is between the person who prepares or prints checks and the person who signs them. These functions should never be performed by the same person.
Additionally, in accordance with Rule 1.15-2(s)(1) and (2), the employee authorized to sign checks or initiate electronic transfers may not reconcile the bank.
Conclusion
The implementation of strong internal controls and proper separation of duties is essential to protecting client trust funds. These safeguards help reduce the risk of errors, allow for early identification of fraud, and help to prevent misappropriations of trust funds – whether intentional and inadvertent.
Establishing and maintaining such controls within a firm will increase protection of your client trust funds.
