Checking Under the Hood of Your Trust Account
August 23, 2014
Are you doing the ethical equivalent of checking under the hood and kicking the tires of your trust account? If not, you better make some time to do so, and soon. Over the last several years, the State Bar has made a concerted effort to step up enforcement concerning supervision of trust accounts, or lack thereof. It primarily has done this by aggressively pursuing disciplinary action against attorneys who fail to satisfy what it considers to be adequate supervision and oversight of trust accounts.
A significant number of attorneys have received public discipline, including active or stayed suspensions. Many of these individuals were experienced, well- respected attorneys with previously unblemished disciplinary records and in many instances very impressive credentials. If you believe you are immune because you’re in a large or well-established firm or because you’re not the partner or principal directly responsible for the trust account, think again. This is an issue that potentially affects any lawyer in North Carolina whose firm handles trust funds. The most common reasons that lawyers have gotten caught in this disciplinary net is either because: (1) they placed too much faith in a trusted employee, who betrayed it, or (2) they abdicated, rather than delegated, their responsibilities concerning the trust account to an employee or outside bookkeeper or accountant.
It is not possible in this format to provide an exhaustive list of the potential issues or pitfalls on this subject. Instead, I will cover three of the most common areas that have ensnared some very good lawyers over the last several years. There also is an e-publication available on our Firm website that addresses these issues entitled, “Tips for Safeguarding Client Trust Funds.” https://brockerlawfirm.com/wp-content/uploads/2014/02/Trust-Funds.pdf
First, all the lawyers in a firm must ensure that they have an adequate system in place to comply with the trust account rules, including adequate supervision of non-lawyers. In the last few years, if trust funds were stolen or even just misapplied by employees or other non-lawyers and there was an inadequate system in place concerning trust account supervision (or none at all), the State Bar has obtained a stayed or active suspension against at least one of the lawyers in the firm in many cases.
Second, even when there is a system in place, if funds are misused or misappropriated by an employee, the State Bar has issued public disciplinary action against one or more lawyers in the firm. Public discipline has been imposed even when the lawyers discovered the theft, self-reported it to the State Bar as required, and took all other possible corrective remedies after the discovery, including full reimbursement to the client and pursuing criminal charges against the embezzler. In essence, the State Bar has taken a strict liability approach to trust account violations concerning misuse of the funds.
Third, the State Bar has taken the position that supervising attorneys are required, at least periodically, to review the trust account bank statements, checks, deposit slips, wire transfers and other source documents. Although this requirement is not specifically set forth in the Rules, Comments or Formal Ethics Opinions to my knowledge, the Bar consistently has taken the position in recent years that such review of source documents is required as part of a lawyer’s duty to adequately supervise non-lawyers with respect to trust accounts. According to the State Bar, it is not sufficient for an attorney merely to review trust acccount summaries prepared by a non-lawyer without crosschecking or confirming the information in the summaries with the corresponding source documentation, at least periodically.
In other words, the State Bar expects that lawyers will go beyond just merely observing if things appear to be running smoothly and requires them to check under the hood of their trust account, at least periodically. A good place to start for a DIY approach is the State Bar’s Trust Account Handbook, which is available on its website. Our Firm also offers customized trust account procedural assessments for law firms and lawyers who need outside assistance. However you decide to do it, it is past time to roll up your sleeves and get your hands dirty.