Some background:

Sometime in the year 1981, the New Jersey Supreme Court started a program now known as the Random Audit Program (RAP) of attorneys record-keeping practices. The focus of the program is to ensure compliance with New Jersey’s record-keeping rule for attorneys R.1:21-6 and ethics rule RPC 1.15. The program by existence is a natural deterrent to some attorneys and in a small percentage of cases results in discipline.

For some perspective, RAP conducted 2,817 audits during a 5-year period per the OAE’s annual reports. Broken down by year: 582 audits in year 2018, 653 audits in year 2017, 730 audits in year 2016, 463 audits in year 2015 and 389 audits in year 2014.

As of 2018, the attorney population contained 37,006 attorneys in private practice in New Jersey accounted for 14,821 law firms (11,113 one person firms, 1,623 two person firms, 1,177 firms containing 3 to 5 members, 449 firms containing 6 to 10 members, 189 firms containing 11 to 19 members, 114 firms containing 20 to 49 members and 148 firms containing 50 or more members) per the OAE’s 2018 annual report.

Based on the numbers, a firm has a 19% chance (approximately) of being the lucky recipient of an audit notice, in a 5 year period (2,817 divided by 14,821). However, this is not factoring in that a practice may have multiple locations with different phone numbers. For example, if a practice has 10 locations each with its own phone number and records are maintained at one main location, there would be nothing to audit at the other 9 locations. Conversely, if each of those 10 locations maintained location specific accounting records, any selection would be audited.

How are you selected for a random audit?

As mentioned above, the phone number. The selection is made by law firm phone numbers reported via attorney registration. The RAP uses an algorithm to ensure randomness. You may have heard of some attorneys being the lucky recipient of multiple random audit letters while others have never been lucky enough to received one. How could that be? That is above my capacity. But, don’t count on luck.

What is the process?

Step 1: You get a letter that includes a date in which an auditor will be appearing at your location (typically 2 weeks from the date of the letter). You panic, or you don’t. If you panic, you start googling and maybe find this article or maybe you find cases that resulted in discipline. You may call around and find out other attorneys’ experiences.

Step 2: If you do not get an extension (sometimes given for compelling reasons), an auditor shows up at your location. You likely are not excited for this visit and have either slept terribly since the letter or are a saint. The auditor is aware you are nervous, ITS NORMAL and you are likely there 8th audit in a two-week period.

Step 3: The auditor will sit down with you and ask you general questions to gain an understanding of your practice, the type of records you have and how you are maintaining your records. A lot of compliance issues are discovered upfront based on the questions asked by the auditor and disclosures given by the attorney, this can be helpful. For example: the auditor asks the attorney are you doing three-way reconciliations? The attorney responds, what are those? This automatically alerts the auditor, that they likely have their work cut out for them.

Step 4: The auditor will begin a review of your Attorney Trust Account and Attorney Business Account records for the most current 2-year period (if its October 2019, the audit period would be September 2019 back to October 2017). They will make sure you have all records listed in R.1:21-6. If you’re not performing three-way reconciliation of your Attorney Trust Account, the auditor will work on conducting their own to determine if your account is in trust, if you are performing them, the auditor will work on verifying the accuracy. The auditor may ask for client files and question transactions. While the review is concentrated on R.1:21-6 compliance, RPC 1.15 does play a role and if a client ledger card has questionable transactions, the auditor may wish to review HUD statements (In re Fortunato) and personal injury statements to ensure proper calculations, among other records.

Step 5: If the auditor is able to finish the audit, you will sit down with the auditor and discuss any compliance issues (you will be given a checklist), if there is a bigger issue, you will likely be made aware at this time. Feel free to ask questions and get an understanding of what is required to gain compliance. If the auditor is unable to finish the audit, they will schedule an additional date to return.

Step 6: You will receive a letter laying out areas of deficiencies that you must acknowledge and respond to. You will be required to respond to each deficiency and provide what you will do/have done to maintain compliance going forward.

Note: If a misappropriation or other serious misconduct is uncovered the auditor can refer the matter to the director of OAE for investigation. If you’ve been audited, a record of deficiencies is maintained and may be used against you in future audits or investigations.

What if I assigned record-keeping to a lay employee?

Unfortunately, you are on the hook for any mistakes made by your employee regarding your records. You may not pass on your obligation under R.1:21-6 and RPC 1.15 to a lay person. If an employee of the firm steals from the Attorney Trust Account and you do not uncover it (timely), you may face discipline. However, if you do uncover it and take proactive measures, you may lessen the blow of discipline or prospect of it (on a case by case basis, contact legal counsel for advice).

Be Proactive!

Please feel free to reach out to me for a confidential phone call should you have any questions.

-Will