There are more than 1,700,000 bookkeepers in the United States. The door to entry to offer bookkeeping service is wide open without any requirement of a degree, certification, or special knowledge. Most will attain some level of college education (Associates, Bachelors) and some will obtain certification (certified bookkeeper, CPA, CFE, CA, etc). The truth is no certification or college program incorporates law firm accounting, specifically when it comes to the Attorney Trust Account. Attorneys are soley responsible for maintaining the Attorney Trust Account in compliance with their States rules. However, Attorneys rarely obtain a degree of familiarity that leads them to be comfortable and confident in the requirements they are responsible for, in particular, Three-Way Reconciliations of the Attorney Trust Account.

It is easy to understand why an attorney would hire someone or will delegate the task of recordkeeping of the Attorney Trust Account. You are trying to build a practice, focused on client work, or just do not care for accounting, after all you went to law school to become a lawyer not an accountant. You may think that you could just hire anyone to handle the accounting for the Trust Account because you know exactly what is happening in the account because it corresponds to your work. This is where lawyer after lawyer fails and finds out too late, they were wrong.

Hiring the wrong accountant for your Attorney Trust Account

It is easy to hire the wrong accountant for your law practice when it comes to the Attorney Trust Account. The stakes are high. If the accountant is unaware of the rules regarding the Attorney Trust Account, any error is you, the Attorneys, to own. Most accountants are familiar with business/corporate accounting where reconciliations are much simpler and when the numbers do not add up adjustments are made. However, Trust Accounting does not allow for adjustments. Every cent that enters your Trust Account must be properly recorded as belonging to someone. You cannot simply make the account work when a sum of money does not reconcile back. Adjustments in Trust Accounting start a timer for a problem down the road. Let us pause and show an example here.

John Lawyer hires a local accountant, Frank Debits, who handles accounting for many businesses in the local area and has a great reputation. Frank is a competent accountant who’s been in business for 20+ years and gladly accepts the business. Frank creates a check register for the Attorney Trust Account and performs bank reconciliations monthly. He is unaware of the rules for Attorney Trust Account and the need for client ledger cards. All seems well the bank reconciles monthly and a few times client deposits were returned with $25.00 fee being assessed each time. Frank notifies John that the deposits were returned, who then obtains new payments for deposit into the account. However, the new deposits do not cover the accessed fees. Frank writes off the amounts of the returned deposit fees, as he would for his non-attorney clients. John, believing Frank is knowledgeable thinks nothing of it. The trust account is used for client money not John’s, by not replacing the $25.00 fees the account is now short (unless John had funds in the account to cover bank fees), the money is now impacting other clients and causing a negligent misappropriation of funds. John now has ethics exposure if he were to be audited or investigated for something unrelated. Further, if this practice continues, John runs the risk of over drafting the account, causing embarrassment and the likelihood of spending significant time figuring out what happened and explanation to Ethics Authorities. Something so innocent seeming can create a severe headache and quickly cause you to go off track.

More serious are the situations where the Attorney becomes too comfortable with his accountant/bookkeeper assigned to the Attorney Trust Account. Maybe, you hired a family friend as an office manager with one of the duties to perform the bookkeeping for the Attorney Trust Account. Or it’s an office manager who’s been with you so long it feels like they are part of the family. You go on auto pilot. They know what they are doing, so you think. They give you reconciliations that match up time after time. But the bank statements do not contain copies of the cancelled image checks. You do not even notice or question it. Time goes on and still you do not notice. You may be a sitting duck and not even know it. I have seen it too many times before. They could have gained access to your checkbook and are paying for lavish vacations on your clients’ dime without your knowledge. Covering it up by entering seemingly reasonable disbursements on the client ledgers all the while the check images tell a darker story. Before you know it, client checks are not clearing, and they want answers and investigators are approaching and you are on the hook not your bookkeeper. Your exposure is whatever the theft is and it needs to be replenished immediately. I have seen Attorneys having to take out mortgages, life savings, retirements and even college funds set aside for their kids. It could easily turn your whole world upside down.

(If you happen to be the bookkeeper doing this – it is in your best interest coming clean now, while your employment will be ending soon the story in the newspaper may be avoided based on how you handle the situation and whatever empathy your employer may have).

The more simply reason is that most bookkeepers and accountants do not know the intricacies of your requirements. What the account should be designated, what information to include, how to fix simple issues, how to perform a three-way reconciliation all of which will lead to your records being out of compliance and could create exposure.

Maybe you handle the recordkeeping yourself and have created your own system that while it does not comply with the rule, you understand it enough so that should be good. Wrong. Good enough is to the rule. If you were to disappear tomorrow a reasonable person should be able to come in read the rule and look at your records with minimal questions. There should be no question of who’s funds are in the account at any given time.

It is exceedingly rare for an attorney to have records that are in complete compliance. This does not mean you should not aim for it though! Some things are outside your control but remain your duty to correct such as a bank that changes the images of your checks to contain to many per page for your state rules. In this example, you would be required to notify the bank you need the checks to appear in the correct form per the rule, it cannot be left to the bank to figure out (although I feel for you on these). Or the reading of the rule did not spell out that reasonable amount of funds for bank fees is x amount, yet your state’s ethics committee has established a threshold of $XXX. Again, this may lead to a deficiency if you have $5,000.00 in your account because you are afraid that something could happen, so you left a buffer. However, the buffer is not allowed. Spending time on the accounting portion could be prohibitive to driving new revenue in via obtaining new clients. Consider finding someone who can do it for you but also can explain what they are doing, why they are doing it and can point to the rule.

CHEAP isn’t all it may seem. There are so many programs and services that want your business. Remember they take your money but not your exposure for errors. Some of the services may state they know the rules, it is important that they know your rules as in your state. They could have no idea that contingency fee percentages vary by state or that three-way reconciliations are required in your state. At the end of the day you are responsible.  Cheap could also mean fast. Speed may end up missing the intricate nature or use program that may classify things incorrectly with no review. Again, you are responsible for the ethics implications. You cannot hide behind the fact that you hired someone.

In closing, carefully consider who you are hiring. If you have concerns about your current records, have a knowledgeable person take a second look. A reputable person/service should be able to objectively review the work of someone else without thinking about stealing you to be their client. It should be your decision based simply off facts, findings, and comfortability. You should not be embarrassed to ask for help, Attorney Trust Accounting is not easy, and a reputable person/service would not be judging you.

Hiring the right Accountant/Bookkeeper for your Attorney Trust Account

They are knowledgeable on the rules. They are not afraid to question/pushback on entries. They understand the significance and implications of your exposure. They can answer questions on the fly and in emergent situations. They understand how to properly resolve issues. They offer thoughtful solutions and take the time to explain the reconciliation. All work is open, and nothing is hidden from you. They welcome review from a third party. They take pride in their work product. They stay up to date on developing changes and rulings that have implications of your work.

Feel free to reach out to us for a conversation. There is always a path forward. We take great pride in our work and have worked on both sides of the Ethics process.

Will Colangelo CFE

WMC Accounting Services LLC