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The Devil is in the Details: Common Trust Accounting Issues

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Recently at a NCBA Law Practice Management & Technology Section Council meeting, Peter Bolac, the Trust Account Compliance Counsel at the State Bar, presented “Common Trust Accounting Issues.”  The presentation was exceptionally beneficial to both small and large firms and focused on several areas: employee theft, check scams, reconciliations and outstanding checks on trust accounts.  Although it is essential to have a comprehensive reconciliation and accounting procedure in place with checks and balances, Peter provided several easy ideas to add to that procedure.  From his presentation, I derived some easy-to-implement and smart accounting practices to safeguard your trust accounts and your law license:

1)      Always, always, always be vigilant; as we all know, lawyers have a professional duty to supervise their non-lawyer staff and can be disciplined by the Bar for failure to do so;

2)      Have well-documented and sound accounting procedures in place that are followed consistently.  Consult an expert if you are unsure of what those procedures should look like;

3)      Write a letter to your bank stating that the principals or partners are the only ones who are  authorized to transfer/withdraw money.  Although the Rules permit non-lawyers to be signatories on trust accounts, best practices dictate that non-lawyers should not be signatories;

4)      Reconciliations are still the number one problem with attorney trust accounts.  Although quarterly 3-way reconciliations are required, it is a better practice to do them monthly. The 3-way reconciliation compares the sum of the individual client ledgers to the firm’s general ledger and to the bank statement. Peter provided a Trust Account Reconciliation Sheet to our group and gave us permission to share.  Feel free to call us for a copy.

5)      Implement a system so that different employees do different functions, such as:

(a) The person who opens and reviews the trust account statements should not also reconcile the accounts.

(b) The person who issues checks should not complete the reconciliations;

(c) The employee completing the reconciliations should not be the only person to review the reconciliations.

6)      An attorney needs to carefully review the reconciliations and periodically spot check the source documents (account statements, checks and deposit slips);

7)      Consider Positive Pay. It is an anti-fraud service offered by banks and protects companies against altered checks and counterfeit check fraud.  After a firm cuts checks, the firm transmits to their bank a list of the checks they issued with the check number, date and dollar amount.  The bank imports the list into their computers.  When checks are presented to the bank for payment, the bank will match each check presented to the firm’s previously transmitted lists.  If a check does not match, it will not clear.

8)  A lawyer may only take funds remaining in the trust account if the funds can be conclusively documented as the lawyer’s money;

9)  Regarding outstanding checks on trust accounts, if the check is over five years old, the funds may qualify for escheatment according to N.C.G.S. 116B-53.  Make sure you have a process in place and each year review the trust accounts to determine which funds should be escheated.

10)  Miscellaneous items: (a) Make sure the account is set up as an IOLTA account;  (b) When you meet with your bank, go with your NSF directive; (c) Bank statements must include copies of canceled checks; (d) SIZE does matter (when it comes to check copies from the bank) and the rules are very specific; (e) Specify clients, bank name, and check number on all trust account deposit slips and keep a copy; (f) Keep records for 6 years; and (g) Words not to use with trust accounts are “borrow, adjustment,” and “auto-reconcile.”

Last great tip derived from the presentation:  Peter Bolac is now on Twitter and you can follow him @TrustAccountNC for attorney scam alerts and other news affecting attorneys and their trust accounts.