As a law firm administrator, trust accounting issues need to be your primary concern, according to Joryn Jenkins, a collaborative divorce attorney, author and CEO of Open Palm Law and Open Palm Press in Tampa, FL.
Elizabeth Miller, an independent law firm administrator in Tampa Bay, agrees, adding that of five trust account errors that could land you in serious trouble with your bar association, “probably the most important one is drawing on client funds too early.”
Miller says just because a client gives you a check to be held in trust and you deposit it, doesn’t mean that those funds are immediately available to you. If you withdraw funds from a trust fund account to cover expenses without knowing that the check has cleared, “you are taking money from another client and the bar association is going to have a problem with that because technically you are out of trust.”
If you look at your bank statement and it says a deposit is pending, that money is not yet there and you must not draw on it, says Miller.
Otherwise, the bar association could audit you and discover that you have used one client’s money to cover expenses for another client.
“Even when the funds clear, I would prefer to wait a day or two to draw on those funds,” she says.
As with checks, it is also important to contact your bank to ensure that any wire transfers have actually gone through and that the money is sitting there.
Jenkins says another serious trust accounting error involves failure to maintain individual client ledgers to keep careful track of which money belongs to which client.
Miller notes law firms can purchase billing programs to maintain client ledgers. She stresses the need to diligently make entries every time you deal with a trust account.
She keeps a separate spread sheet for every client, “not only to break down how much money each client has, but what that money represents.”
Number three on the list of the top five trust account errors is failure to reconcile your trust accounts every month.
“How are you going to pull money from trust to pay a client’s bill if you don’t know how much money is in there?” asks Miller.
In the event that your bar association audits you and you request a time extension to provide paperwork, that raises a red flag that you have not been properly maintaining your trust account information.
Number four on the list that could land you in trouble is having a credit card merchant debiting a trust account to collect service fees. You need to keep on top of that issue by transferring money from your operating account into your trust fund account to cover those fees.
Last on the list is paying fees to your firm from client trust monies without a billing statement.
“The number one trust account rule is, protect the client,” says Miller. “That (means) not taking funds too early, making sure you have documentation and making sure you have a paper trail of where every penny went.”
Jenkins recommends hiring someone who knows how to properly maintain trust accounts and prepare monthly reconciliations. The best person is not necessarily a Certified Public Accountant (CPA), because CPAs may not know how a bar association wants trust accounting issues handled.
Committing a technical violation regarding a trust fund, such as accidentally transposing numbers or mistakenly entering a deposit under the wrong client’s name could cause you a lot of stress, although it will generally not result in your suspension or disbarment. However, misappropriating or stealing client monies most certainly will, according to Jenkins and Miller.
“The bar does not consider ignorance of the rules an excuse for trust fund violations. Remember, it’s your name on that bar license,” says Jenkins. “Stay on top of your trust accounting rules and stay on top of your bar (association’s) publications.
“If you’re in admin(istration), make sure that the lawyers you work with also keep you apprised and that you get hold of the bar news in your state. We all need to be aware.”
Miller says many young attorneys are naïve about not only knowing how to handle trust funds, “but also of the significance and the importance of doing it—of being accountable for other people’s money. That is a fiduciary responsibility that you have to your clients.”
Jenkins says a small law firm or solo enterprise can probably find a law firm bookkeeper who is knowledgeable about trust fund accounting rules and can perform monthly reconciliations for as little as $500 per month.
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