by Sheila Blackford ©2014 There is nothing worse for a lawyer than finding out there is less money in the trust account than is expected. This is money belonging to clients entrusted into the lawyer’s safekeeping. What happened?!
1. Have you been doing monthly Three-Way Reconciliations? This reconciles the sum of all client trust account balances with the trust account deposits and disbursements journal or check book register with the reconciled trust account bank statement. The PLF has a handy form you can use for this.
2. If you haven’t been doing monthly Three-Way Reconciliations, you will want to begin doing them as they can help you spot something wrong before it becomes a major meltdown.
1. Lawyer control trust account check book but relies on eyeballing online trust account statement. Amount seems to be right. Lawyer writes $1,000 trust check to take fees earned on both Client A matter and Client B matter. Lawyer writes another $130 client trust account check for Client C’s court filing fees. Assistant brings billing statements to lawyer prior to mailing. Lawyer notices Client A’s billing statement shows that Client A has $370 withdrawal for fees leaving $1,130 balance. Client B’s billing statement show that Client B has been requested to remit $1,130 for $630 fees and $500 trust account replenishment. Assistant asks if lawyer want to send a second retainer agreement to Client C because it has not been returned with retainer. Lawyer writes check refunding Client A $1,130 because matter has been concluded. Today, Tuesday, the lawyer receives notice of overdraft in the trust account of $22,130. Lawyer sees that on Friday, a $15,000 deposit was made to the trust account and a $6,000 $6,000 transfer was made from the trust account to the general account. On Monday, trust account checks for $6,000 and $9,000 were cashed and the $15,000 settlement proceeds amount was reversed from the trust account. Client A was refunded the proper amount $1,130. Client B has not sent the $1,130 but the law firm already took $630 fees owed. Client C has not sent in the requested $1,000 retainer but his filing fee for $130 was paid from the trust account. Lawyer sees that the firm’s portion of Client D’s settlement proceeds $6,000 was taken by transfer and by check. Client D’s portion of the settlement proceeds $9,000 cashed. Client D’s settlement check was refused at the issuing bank because of an endorsement error so trust account bank reversed the deposit of $15,000.
How could you keep that all straight in your head?
2. Lawyer is multitasking at desk, doing banking and calling clients and answering questions from support staff. Lawyer asks bookkeeper how much Client A, Client B, and Client C are being billed in order to transfer money from the trust account to the general account. Bookkeeper says $1,000 for Client A and $1,500 for Client B, $1,550 for Client C and $2,000 for Client D to replenish trust balance and pay accounts receivable of $500. Bookkeeper uses intercom to tell Lawyer she made a mistake and that Client C owes $1,550 but only has $50 available in trust account. Lawyer returns to desk with coffee and picks up ringing phone to talk with opposing counsel. Lawyer doodles over legal pad and reads two numbers $6,050 and $500 so transfers $6,550 from the trust account to the general account. Lawyer picks up client statements to drop into mail on way home. The next month, bookkeeper notices bank says different amount in trust account than is shown in computer program. Lawyer says he doesn’t like how confusing the computer program shows transactions but says to go by what the bank shows. Bookkeeper says not enough money in general to pay payroll and rent. Lawyer asks what Client C owes. Bookkeeper says due to additional hours, Client C now owes $3,500. Lawyer does quick balance transfer of $3,500 which just covers payroll and rent payments and tells bookkeeper to process payroll checks and mail rent payment. Lawyer is shocked to come into office Monday to find that trust account is overdrawn $7,500 and that general account has $0 balance.
Client C had balance in Account Receivable (AR) of $1,500 after applying the $50 balance in Client C’s trust account balance. Lawyer took $1,550 because did not hear message from bookkeeper about this over the intercom while away from desk getting coffee. The next month lawyer misunderstands bookkeeper and assumes Client C owes an additional $3,500 and so transfers that amount. As a result, $5,000 was withdrawn from trust account when Client C only had $50 in trust account. Lawyer misunderstood that Client D was being billed $2,000 and had $500 AR balance. Lawyer misread numbers on legal pad and interprets that $500 is in addition to the $6,050. Lawyer has to quickly replenish $7,500 but doesn’t have that amount in the general account or the lawyer’s personal account. New client coming in with $8,000 retainer paid by credit card should save the day eliminating any overdraft.
How did they goof so badly?
3. Lawyer busy with litigating cases. Had a legal assistant to help with billing and document preparation. After a number of months, let the legal assistant go. Hired a different assistant. This legal assistant said the former legal assistant didn’t update any billing records so didn’t know how much any client had in the trust account. Lawyer looked at trust account balance online and saw there was enough money on hand. Lawyer didn’t understand online banking records for trust account or general account so just relied on whatever the balance was shown. Soon there was a big overdraft of $8,000 in the trust account. When an accountant tried to figure out both accounts, it was discovered that the earlier employee had wrongfully been taking money from both accounts. The complete amount of money embezzled is not known because a client has come forward to complain that her monthly statements haven’t shown three cash payments being made. The lawyer has needed to let go the second legal assistant because cannot afford to pay her now that the shortages are needing to be covered. The police is not hopeful that the prior legal assistant will be found or will be able to make restitution.
How can the mess in these two accounts ever be fixed?
1. Account for every penny coming into the trust account and paid out from the trust account. Use a Trust Account Receipts and Disbursement Journal form available on the PLF website in the Practice Aids and Form category titled Trust Accounting or your trust account checkbook register.
2. Print out a report for each client showing amounts received and amounts paid out of the trust account or use a Client Ledger Card form available on the PLF website in the Practice Aids and Form category titled Trust Accounting to fully track money held in trust on a monthly basis.
3. Open your trust account statement or review the statement online every month to catch any irregularities.
4. Promptly review and reconcile your monthly trust account statement to adjust for deposits made but not credited by the statement cut-off date and checks written but not yet cashed by the statement cut-off date.
5. Use the Trust Account Reconciliation form available on the PLF website in the Practice Aids and Form category titled Trust Accounting.
6. Remember that you are ultimately responsible for the trust account even if you have a bookkeeper and accountant. You need to review the accounting carefully– especially if you aren’t “good at math.”
7. If any confusion or concerns exist about your lawyer trust account, contact one of your Practice Management Advisors at the PLF 503-639-6911 or toll free in Oregon 1-800-452-1639, Dee Crocker, Beverly Michaelis or myself, Sheila Blackford. We are confidential and are here to help.