Have your Trust Accounts Been Audited by the State Bar? What’s Next?

Having your trust account(s) audited by the North Carolina State Bar can be a scary experience for most lawyers. Even the most diligent lawyers, whose trust accounts are being audited, can be put on edge.  Your livelihood can be on the line, and your concerns are justified.

Will you pass the audit?

So, what do you do once you receive the letter from the N.C. State Bar stating you have been selected for random audit?  Hopefully, you know exactly where to go to pull the reports required for the audit.  If you do not, it is important to act fast.  If the trust bank account has not been reconciled, then your first course of action is to gather all of the bank statements, deposit slips, and cancelled checks since the most recent reconciliation.  This may require you to order copies from the bank, which will take additional time.  You will also want to hire an accountant with experience in trust accounting, especially one that knows the trust account rules. It is critical during this time to have the right people by your side helping you through this very stressful time.

Unfortunately, you cannot turn back time and reconcile the trust account in a timely manner, as was required, however you want to make every effort possible to have the bank account(s) reconciled before your audit date.  In many cases, the auditor identifies violations of the trust accounting rules. Depending upon the severity of the violations, you may also need to hire an attorney who handles these kinds of matters.

To Delegate or Not?

Proper management and oversight of your clients' trust funds is serious.  The North Carolina Supreme Court ruled which tasks can, and cannot, be performed by someone other than the lawyer.  Trust accounting is typically the last task any lawyer wants to deal with.   That is understandable.  Your dream in life was to be a lawyer and to help people with their legal matters, not to be an accountant. 

However, the NC Supreme Court has ruled that you must maintain your client’s trust accounts and the NC Bar enforces that ruling.  Furthermore, your clients deserve the best service from you which includes protecting their funds.

Daily tasks, such as making deposits and check writing, are tasks that can be delegated to an employee.  However, the trust bank account can only be reconciled by an employee without check signing authority.  Every month the lawyer must review the bank statements, cancelled checks, and reconciliation reports.  Quarterly, the lawyer must perform a random review of at least three transactions to verify the disbursements were properly made.

The Bar Journal Audit Report

Do you ever read the audit report printed in The North Carolina State Bar Journal?  This section is a review of the most recent quarterly audits and their findings, and it is a great way to self-audit.   As you read over the violations ask yourself, “Am I doing this?"  For example, the Audit Report for second quarter of 2017 reported 23% of the lawyers audited had advanced funds from the trust account resulting in negative balances.  How does your trust account reports compare?  Do you have clients with a negative balance?  If you do not know the answer, then you may be looking at several violations.    

Additionally, the quarterly three-way reconciliations were not prepared for 33% of the lawyers audited.  Often times, the trust bank account is reconciled, but it stops there.  Without a three-way reconciliation you have no way of knowing if you have clients with negative balances.  If you conduct a self audit, and you find yourself in violation, or even asking what the violation means, then I urge you to take the next step to avoid being a statistic.

Be Proactive

Even lawyers with the best intentions do not always properly maintain and safeguard their clients' trust funds.  It is not intentional.  You are flooded with forms to file, deadlines to meet, and you are focused on providing the best legal service possible to your clients.  That is understandable.

Having an accountant with trust accounting experience join your team can be the perfect way to lighten the stress, so when audit date is finally scheduled you are able to perform your daily tasks, with the confidence that your trust accounts are current and in compliance.

Originally published in Attorney at Law Magazine. Reprinted with permission.