HAVE YOU EVER BEEN TO A TRUST ACCOUNT AUDIT? - I HAVE!

Actually. over the course of my 34 year career here in Tampa, I have been to 3 full-blown trust acount audits. It was almost 4, but I was able to reconcile one lawyer’s trust account before the inquiry became an audit.

I remember about 25 years ago attending a solo and small firm luncheon on the topic of trust accounting. That section was newly developed and I remember the chair person introducing the speaker on the topic of trust accounting. He actually did a mime of what a trust account audit was like and he was very much on target.

When you get served with a subpoena, you essentially turn over everything the Bar association and go through everything but a cavity search. This chair person mimed handing over everything including his underwear to an auditor. I still laugh every time I think about it. But, his performance was spot on.

When any grievance is filed with the Bar related to the trust account such as how long it takes for a client to get a PI settlement, how long it takes to turn over guardianship money or the proceeds of an estate for example, this will trigger an audit. As will notification from your bank that a check was presented on your trust account and there were insufficient funds to pay the check. And, as a case that happened that I was involved in, the trust account was used to fund filings through the court e-portal, and there was not enough money in the account to cover the filing fee. All of these problems will trigger an audit of some kind.

First, do not use your trust account as the method for payment via the eportal. Use your operating account or a firm credit card. The Bar does not care if your operating is overdrawn - they do care if your trust account goes into overdraft when there should be money in there.

Second, keep immaculate trust account records. Make sure the trust account is reconciled EVERY month - not just the bank balance to your ledger balance. You have to reconcile the client balances as well. That is, a ledger that shows the balance in the account for each client, which has to be equal to the bank balance and your checkbook balance. I personally take it one step further - that is - to identify not only each client’s amount but how much is costs and how much is fees.

Attending a trust account audit is a nightmare. None of the attorneys who were audited ever attend the audits. They sent me. Even though at that time my job duties did not include anything having to do with the actual management and reconciliation of an account. The benefit to me of course is that I know everything about trust accounting and are afraid to ask.

The auditor closely examines every single deposit, withdrawal and transaction on the account. They look at the check sequence and want to know why there is a break in the sequence. When I am responsible for the transactions on a trust account and I have to void a check, I keep it. I have an attorney who once printed an operating account check on a trust account check. We kept the check so we could show what had happened in case of an audit.

The Bar rules for trust accounting are such that a “bookkeeper” who is not a law firm bookkeeper does not know the rules. If you get audited you will be hard pressed to make the argument that it was your bookkeeper’s fault. How many times have we read or heard about disciplinary procedures where bookkeepers have been the cause of trust account problems? The answer is too many.

I recently presented at a HCBA Solo and Small firm luncheon. In attendance was an attorney who worked for the Bar more than 30 years ago as an investigating attorney. He and another attorney left the Bar to start a law firm representing attorneys facing Bar disciplinary actions. I think he said it best, and I quote “you might think you know what you are doing or that you have a bookkeeper that knows that they are doing when it comes to your trust account. You may even think your CPAs know, but they don’t.” He is correct. With all due respect to CPAs most of them do not know the rules or procedures when it comes to trust account reporting.

Avoiding using your trust account as a way to stay out of trouble with the Bar will really only get you so far. Replenishment retainers billed against on an hourly basis require use of the trust account, as do deposit and disbursements of personal injury settlements.

You can only stick your head in the sand for so long. Sooner or later you will have to come up for air and realize that trust accounts are at one time or another a necessary evil.

Be sure that you pay attention to all the rules regarding monies entrusted to you for the benefit of a client. Put safeguards in place to avoid trans-positional errors. Make sure every penny of your trust account is always assigned to a client.

In Florida if your trust account is audited and it involves their on-staff CPA, be prepared to get a bill to pay the CPA for the audit. I have seen it run several thousands of dollars.

Also, when you get served with a subpoena, you can ask for an extension of a week or two to get the records to the Bar. This undoubtedly raises a red flag that you have not been reconciling the account and keeping up the client ledgers; otherwise you would not need an extension.

If you need help with reconciling your trust account every month and complying with the Bars rules, call me at 813-340-9569 for a free consultation.

I am an independent law firm administrator and author of the best seller, “From Lawyer to Law Firm - How to Manage a Successful Law Business”. I help attorneys with managing the business of practicing law® and growing their practices in such a way that they are sustainable and successful.