In my line of work, we have reason to review the trust accounts of real estate practitioners.
We have learned over time that most lawyers have great intentions when it comes to trust accounting. Most put proper procedures in place in their offices and put a smart, hardworking staff person in charge of the daily and monthly work. Most employ trust accounting software related to their closing software. Most review reports each month to make sure the work has been done. Many use the services of a company that reconciles trust accounts daily. Many use positive pay, an automated fraud detection tool that matches the account number, check number and dollar amount of each check presented for payment against a list of checks previously authorized and issued by the law firm.
But life happens.
Here are some examples we have witnessed over the years:
- The person in charge of reconciliations gets sick or has a baby or changes jobs and no one picks up the slack in her absence.
- The wife of a partner is in charge of reconciliations, and she gets busy at home over the holidays.
- Something goes out of whack one month and, when the problem can’t be resolved easily, it gets put off month after month until it becomes an impossible task.
- A trust account has to be closed for some reason and the transition to the new account with trust accounting software becomes a daunting task.
- A lender’s wire is missed and no one noticed.
- A staff person makes himself a vendor in the closing software and pays a small fee to himself from each closing…so small that no one catches it…until a check bounces. That staff person is probably a long-time trusted employee who believes he is correcting the fact that he is underpaid.
- The office just gets too busy handling closings to manage the work that doesn’t bring in fees.
In November, The South Carolina Supreme Court reminded lawyers that reconciling trust accounts is not optional.* In a disciplinary case, the lawyer’s bank reported a bounced check. The lawyer explained he forgot to tell his office manager to make a deposit to the account while the lawyer was out of town, resulting in a disbursement before the deposit. (Life happened.) When the Office of Disciplinary Counsel investigated, the lawyer was unable to provide reconciliation reports.
During the investigation, the lawyer retained the services of a bookkeeper and a certified public accountant and also implemented electronic accounting software. Because he took those precautions, the Supreme Court gave him a public reprimand only. The lawyer was also required to complete Legal Ethics and Practice Program Trust Account School and Law Office Management School. And for a period of two years, the lawyer is required to submit his monthly reconciliations for review.
We should all take this reminder seriously. When life happens, continue to reconcile your trust accounts to avoid finding yourself in the Advance Sheets!
*In the Matter of Pyatt, South Carolina Supreme Court Opinion 27846 (November 14, 2018).