I had a chance recently to interview Tim Batchelor, the State Bar’s interim auditor, about himself, the State Bar’s audit program, and what he sees as the biggest problems for attorneys. Here were his responses:
1. How long have you been with the State Bar and what did you do before that? I came to work for the Bar as a staff investigator in 2003. Prior to that I was a Special Agent for the SBI for 26 years, retiring in 2003.
2. What do you see so far as the biggest problem with trust account compliance? I began working with Mr. DeMolli (former auditor) in November 2012 and accompanied him on audits during the final quarter of 2012. It quickly became apparent that the most significant and reoccurring problems founds are consistently: (1) trust account balances of funds belonging to all clients are not reconciled with the current bank statement at least quarterly, (2) reconciliations of the monthly trust account bank statement are not properly documented or not done in a timely manner, (3) failure to identify the client on the face of the trust account checks, deposit slips and wire confirmations, and (4) failure to escheat abandoned or unidentified funds in the trust account.
3. What should an attorney do now, if they want to do a self audit or ensure compliance? If the lawyer is currently uninvolved in the mechanics of the trust account reconciliation process, become involved and understand what your staff is doing. Review the rules to understand what is required. Share that information with staff and immediately make corrections and improvements in the current process where needed. Document findings and actions taken. Self report serious problems discovered. Periodically review the trust account bank statements and reconciliation documents your staff produces. Assure staff receives proper training, updated information and adequate supervision. Checks and balances within the office is a good business practice.
4. What should someone do in preparation for a visit from you? The State Bar auditor is looking for a complete trust account audit trail. A lawyer’s internal trust accounting records should be reconciled with the monthly trust account bank statements. Every credit and debit in a trust account should be attributed to a specific client and a ledger maintained for each current client. Reconciling the general ledger/checkbook register with the monthly bank statement, coupled with the required quarterly reconciliation, will ensure a proper audit trail and will reveal any discrepancies in a timely manner. Document any unusual activity. Retain all trust account records and assure they are readily retrievable. Backup and secure accounting records offsite.
Specifically in preparation for the auditor’s visit, gather the most current 12 months bank statements for each trust account. Attach all internal monthly reconciliation documentation and the quarterly reconciliation documentation. Assure canceled checks (front and back) or digital images are provided as well as all deposit slips, wire confirmation and credit card receipts. Make your general ledger/checkbook available. Client ledgers should also be available for the auditor’s review. Your copy of the Bank directive for each trust account should be provided for the auditor’s review. Be prepared to pull client files, especially real estate files for the auditor as needed. Have the person who daily handles the trust account activity available to explain the process used.
Whew! That sounds like a lot of work. My advice: avoid the last minute scramble. Set aside some time to get your trust account records in order and to make them readily accessible before you get that dreaded letter from the State Bar auditor. It will save you a whole lot of heartburn down the road.