Having your trust account(s) audited by the NC State Bar can be a scary experience, even for diligent lawyers, whose trust accounts are being audited. Your livelihood can be on the line, and your concerns are justified.
Will You Pass the Audit?
So, what do you do once you receive the letter from the State Bar stating you have been selected for random audit? Hopefully, you know exactly where to go to pull the reports required for the audit. If you do not, it is important to act fast.
If the trust bank account has not been reconciled, then your first course of action is to gather all the bank statements, deposit slips, and cancelled checks since the most recent reconciliation. This may require you to order copies from the bank, which will take additional time. You will also want to hire an accountant with experience in trust accounting, especially one that knows the trust account rules. It is critical to have the right people by your side.
Unfortunately, you cannot turn back time and reconcile the trust account timely, as required, however you want to make every effort possible to have the bank account(s) reconciled before your audit date. In many cases, the auditor identifies violations of the trust accounting rules. Depending upon the severity of the violations, you may also need to hire a lawyer.
To Delegate or Not?
Proper management and oversight of your clients’ trust funds is serious. The SCONC has ruled which tasks can, and cannot, be performed by someone other than the lawyer. The SCONC wrote the rules, and the State Bar enforces them. Trust accounting is typically the last task any lawyer wants to deal with. Your dream in life was to be a lawyer and to help people with their legal matters, not to be an accountant. However, properly maintaining and safeguarding your clients’ trust funds are tasks that cannot be ignored. Furthermore, your clients deserve the best service from you, including protection of their funds.
Daily tasks, such as making deposits and check writing, are tasks that can be delegated to an employee. However, the trust bank account can only be reconciled by an employee without check signing authority. Every month the lawyer must review the bank statements, cancelled checks, and reconciliation reports. On a quarterly basis, a lawyer must perform a random review of at least three transactions to verify the disbursements were properly made.
The Bar Journal Audit Report
Do you ever read the random audits section in The North Carolina State Bar Journal? It’s a review of the audit findings, and it is a great way to self-audit. As you read the violations ask yourself, “Am I doing this?” For example, the Audit Report for second quarter of 2023 reported 31% of the lawyers audited failed to review bank statements and cancelled checks each month. How does your trust account reports compare? Do you have clients with a negative balance? If you do not know the answer, then you may be looking at several violations.
Additionally, the quarterly three-way reconciliations were not prepared for 14% of the lawyers audited. Often, the trust bank account is reconciled, but it stops there. Without a three-way reconciliation you have no way of knowing if you have clients with negative balances. If you conduct a self audit, and you find yourself in violation, or even asking what the violation means, then I urge you to take the next step to avoid being a statistic.
Be proactive. Having an accountant with trust accounting experience on your team can be the perfect way to lighten the stress, so when an audit date is scheduled you are able to perform your daily tasks, without the burden of having to get your trust accounts current and in compliance.