Common Pitfalls in Your Trust Account

common pitfalls of trust account
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Lawyers with the best intentions can find themselves unprepared for North Carolina State Bar random audits. With the daily operation of a successful practice, the detailed task of monthly and quarterly trust account reconciliation can get lost in the shuffle. Since attorneys are personally bound to their clients by a fiduciary duty, including the highest legal standard of care, accurate handling of client trust accounts is crucial as well as required by the NC State Bar.

As a trust accountant, I can spot common pitfalls before they result in disciplinary actions resulting from a random audit or other investigations of a trust account by the NC State Bar.

MAKE SURE YOUR SOFTWARE IS SUFFICIENT

Most lawyers look for practice management software to streamline their daily tasks. Unfortunately, the software may not include the capability to meet a firm’s monthly requirements to reconcile the trust bank account because it is marketed “reconciliation capable.” This means it may require you to sync with other software to complete monthly bank reconciliations. Without this second product, you may not be able to comply with Rule 1.15.

DELEGATION AND OVERSIGHT

I encourage the separation of accounting duties in a firm to minimize the possibility of mistakes, inadvertence or fraud by ensuring that no one employee unilaterally undertakes or oversees the trust account. Creating internal controls is prudent for your operating bank account, but is even more critical, and required, in a client trust account. You have a fiduciary duty to your clients to protect their funds. NC State Bar Rule 1.15 is designed to help you create the internal controls necessary to protect not only the client but also you and your firm.

Answering Legal Banner

As a rule of thumb, more than one employee should complete the daily, monthly and quarterly tasks for your trust accounts. The same person should not receive client funds, make deposits, enter the deposits into accounting software, write checks, sign checks or reconcile the bank accounts. Having one person completing all these tasks is a recipe for disaster.

In small firms, it is not uncommon for one lawyer to personally make the client trust deposits. This can result in a false sense of security. While preventing embezzlement is often their primary concern, it overlooks the human element of a simple mistake.

Example: While doing trust accounting for a new client, I discovered that two deposits containing client trust funds were mistakenly deposited into the firm’s operating bank account. Because the lawyer personally made the deposit, he was confident that client funds were deposited in the trust account. When the checks were disbursed from the trust account, it caused an over-disbursement of nearly $50,000.

ALL ACCOUNTANTS ARE NOT ALIKE

If you broke your leg, would you go see a heart surgeon? If you were having chest pains, would you go to an orthopedic specialist? Of course not. While both doctors are experts in their fields their skills do not overlap.

The same is true in the accounting field. There are a variety of areas of expertise – public tax accounting, project accounting, forensic accounting or auditing, just to name a few. We are all highly qualified in our respective fields, but our expertise may not overlap. Trust accounting has a unique set of rules defined specifically in Rule 1.15, and is not taught in any college accounting degree programs or included in the CPA exam.

Example: After being hired to audit an attorney’s trust account, I learned they sent their trust account documents to their CPA every month for nearly 10 years. Sadly, the CPA did not know trust accounting rules and only prepared the traditional bank reconciliation. As a result, the trust account was short, nearly $25,000.

FOCUS ON YOUR PRACTICE

The two examples above resulted in disciplinary actions by the State Bar against the firms. No attorney wants to see their name printed in The Disciplinary Department of The North Carolina State Bar Journal or have to deal with a costly and time-consuming disciplinary action that would follow a State Bar audit if the trust fund is non-compliant.

If you or your firm lacks the time or expertise to complete these duties properly, consider hiring a company that specializes in trust accounting for law firms. By leveraging the expertise of a trust accountant, you are able to: (1) comply with Rule 1.15; (2) maintain your trust account properly; and (3) be prepared for an NC State Bar random audit.

Giving you the time to focus on representing your clients and building your practice.

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