As an attorney, your primary focus is interpreting and applying the law to provide the best possible legal services to your clients. However, the Supreme Court has recently ruled that you must further possess accounting knowledge to keep your trust bank account(s) in compliance. On June 9, 2016, the Supreme Court approved the amendments to Rule 1.15 of the Rules of Professional Conduct. Not only are you expected to be versed in these amendments, but your compliance is now mandated.
Raleigh ethics attorney, Deanna Brocker, recently commented, “I anticipate seeing an increase in trust account violations with the recent change of rules.” However, by utilizing the expertise of an accountant with a working knowledge of the trust account rules, you will be afforded the peace of mind needed to focus on the main part of your practice, which is providing exceptional legal representation to your clients. This serves as a reminder that not all CPAs specialize in trust account rules.
As accountants, we encourage separation of duties as a method to minimize the occurrences of mistake, inadvertence, or fraud by ensuring that no one employee has the ability to unilaterally undertake or oversee the trust account. Creating internal controls is prudent for your operating bank account, but is even more critical in a client trust account. You have a fiduciary duty to your clients to protect their funds, and some of the amendments are designed to help you separate those duties, thus creating the internal controls necessary to protect not only the client but you and your firm.
As a rule of thumb, more than one employee should complete the daily, monthly and quarterly tasks for your trust accounts. Having one person completing all of these tasks is a recipe for disaster. Although it can be difficult to implement multiple levels of separation in smaller law firms, the Supreme Court ruled attorneys cannot allow an employee with check signing authority to reconcile the trust bank account. Leveraging the expertise of a third party to reconcile your client trust accounts can give you peace of mind and keep your trust account in compliance.
Summary of Amended Trust Account Rule 1.15
- All checks drawn on a trust account must be signed by a lawyer, or by an employee who is not responsible for performing the monthly or quarterly reconciliations and is supervised by the lawyer.
- An one-hour CLE is required of the lawyer or supervised employee with check signing authority.
- No trust account checks can be signed using signature stamps, pre-printed signature lines, or electronic signatures.
Reconciliations and Review Process:
- The lawyer shall review the monthly bank statement and canceled checks, and create a report documenting the review.
- Any discrepancy discovered during the reconciliation or review must be investigated and resolved within 10 days.
- The lawyer shall complete a random sample of at least three transactions to ensure disbursements were made properly by reviewing statement of costs and receipts, client ledgers and canceled checks.
It is important to discuss both the process for proper completion of the quarterly random sample review and its purpose. More importantly, you need to be able to identify theft and errors. Walking through the checklist without knowing what you are looking for is a meaningless task. Although time consuming, this random sample review can help identify early detection of inadvertent errors and/or internal theft.
First, identify the originating document that resulted in your office making the disbursement. Then, locate this check recorded on the client ledger and the canceled check included with the bank statement. Do not be overwhelmed by this process. You are simply tracing the transaction to ensure the disbursement should have been made and was made properly. When reviewing the canceled check, be sure to confirm both the dollar amount and the payee. Lastly, if employees know this random review is being performed, it would certainly discourage intentional wrongdoing in your firm.
The takeaway on the Rule 1.15 changes enacted by Supreme Court are simple and as Ben Franklin aptly coined, “an ounce of prevention is worth a pound of cure.” By safeguarding your client trust accounts now and further entrusting this task to an experienced third party, you are ensuring the fiduciary duty to your client is met. A system of multiparty checks and balances must be present. If your office needs assistance maintaining this important duty, seek help with the implementation and process so you avoid small problems that become larger and more difficult to fix as time goes on. Dawn Cash-Salau