(c) Not removing earned fees or reimbursements from the trust account. Calloway says she has seen some attorneys who used their trust account as a rainy day savings account. Rather than remove all of the fees after they have been earned, the attorney delays removing the money from trust to reduce the risk of spending it. Calloway says this is both a bad business practice as well as an ethics violation. While the state IOLTA fund may benefit from the extra interest earnings, the lawyer should actually be moving that money to the business operating account or some kind of savings fund.
3. Failing to properly track client funds.
The third major way that attorneys screw up their trust accounts is by failing to keep detailed records of each client's trust account transactions. There are several ways that attorneys make this mistake.
(a) Not putting the client name on trust account checks. While most attorneys are good about keeping copies of their trust account checks, not all remember that they should notate the client's name or file number on each check when it is issued. While it may be easy to remember why a check was written a month ago, it may be difficult to remember why it was written a year from now.
Attorneys who think that they would never have a problem figuring out what is in their trust accounts should consider the impact of catastrophic events or natural disasters. While it doesn't happen that often, sometimes law offices and all of their records get destroyed. A fire can incinerate those paper files pretty quickly, as well as destroy the computer hard drive. A hurricane or a tornado can scatter billing records for miles. These things happen to lawyers. If a lawyer needs to reconstruct a firm's trust account records using bank statements and copies of old checks ordered from the bank, the task will be virtually impossible unless those checks indicate whose money was being used in the transaction.
(b) Not keeping an individual ledger for each client.
Sometimes attorneys think they can keep track of every client's account balance in their heads. At some point, they can't. And even if they can, what happens to those client accounts if something happens to the attorney?
Calloway described a situation she encountered where an attorney kept two trust accounts. He would use one trust account for one month, and switch to the other trust account the next month. His belief was that by letting each account reach a zero balance during the month it was used, he would not have to keep individual trust ledgers on the money that remained in the account. He was mistaken. Ethics rules require keeping a balance sheet on each client so that specific client funds can be identified.
In order to be in compliance with bar association requirements, the attorneys must keep records showing how much money every client has in trust at any given time. Deposits and disbursements must be clearly tracked in some way that makes it easy to determine each client's trust account balance. Otherwise, it would be quite easy for one client's money to get spent on another client's case.
(c) Not balancing the individual client balances against the overall account. Attorneys should not just make sure their overall trust account is balanced at the end of the month, nor should they only make sure that each individual client account is balanced. Compare the two together and balance them against each other. Comparing the overall balances will sometimes reveal an accounting error made on an individual account, where a check or a deposit was overlooked. This simple step will sometimes catch errors that could have resulted in a bounced trust account check.
Getting help
Some attorneys realize their trust accounts are screwed up, but they don't know how to fix the problem. One solution is to contact a law practice management advisor. Many state bar associations now offer free law practice management advice to their bar association members, and a number of private law practice management advisors also offer their services for a fee.
Some lawyers may be afraid of discussing their trust account situation with any attorney, especially with a lawyer working for the state bar association, because of the mandatory reporting requirements for ethics violations. However, in many states the rules of professional conduct now specifically exclude their law practice management consultants from reporting such problems to their ethics board. Nerino J. Petro, the Practice Management Advisor for the Law Office Management Assistance program of the State Bar of Wisconsin, notes that while rules vary from state to state, some states like Wisconsin have implemented rules granting confidentiality to attorneys seeking help from the state bar's law office management assistance program (LOMAP).
Properly managing a trust account can be a hassle, but losing a law license over sloppy record-keeping would be even worse. Lawyers who are having trouble managing their trust accounts should promptly address the problem by getting help from a qualified accountant or from a law practice management consultant.