Here’s an alarming fact: last quarter, the NC Bar found that 67% of the 139 attorneys’ trust accounts they randomly audited failed to properly reconcile their trust accounts on a quarterly basis. This is something you want to avoid.
Clients bestow a tremendous amount of trust in their attorney who serves as a fiduciary over the clients’ funds. With this responsibility come simple but strict obligations. The attorney must abide by these rules when acting in this fiduciary role. The NC State Bar’s Lawyer’s Trust Account Handbook was revised in May 2011. I strongly recommend that every attorney become very familiar with this updated version. I will not attempt to condense its 99 pages into a 600-word article, but I’d like to focus on the quarterly reconciliation process and the revised policy regarding exemption from random audits.
What does the 67% mean for you? What should you do to avoid this problem? Your trust account needs to be reconciled down to each individual client’s balance on a quarterly basis. Per Rule 1.15-3(d)(1), each quarter “the individual client balances shown on the ledger of a general trust account must be totaled and reconciled with the current bank statement balance for the trust account.” This seems simple, yet a majority of audited attorneys failed to follow through this far.
One way to avoid this problem is to create a standard procedure to reconcile every client’s trust balance monthly with the bank statement. Possessing timely, accurate records of your individual client’s trust balances is too important to put off until the end of a quarter. If you make this part of your routine monthly accounting process, this avoids becoming an overwhelming task at the end of a quarter. This is a recommended best practice and actually makes it easier and safer in the long run.
Most attorneys dread being faced with a random audit. But did you know that the NC Bar has a policy where an attorney’s trust account can be exempt for a fifteen month period? The exemption is not new, but the NC Bar has recently made significant revisions to this program. These revisions arose from the collaboration between the NC Bar and the NC Board of CPA Examiners. These revisions offer clearer guidance for an attorney seeking an exemption and for a CPA who helps the attorney avoid the random audit program. According to rule 27 NCAC 1B Rule .0128(b), an attorney may seek exemption from the random audit program:
“by having a CPA or CPA firm perform an examination of his or her trust account pursuant to procedures approved by the council and having the CPA or CPA firm send a report showing compliance to the North Carolina State Bar. The required period covered by the CPA examination is twelve months. Exemptions are good for fifteen months from the date the CPA examination was concluded.”
This “audit-exemption” rule gives an attorney the opportunity to have a CPA trust account review and then have fifteen months of immunity from a random audit. While this audit-exemption rule existed before, many CPAs were uncomfortable providing the service. From their perspective, the prior version did not fit squarely into one of the defined audit or attestation services. The joint effort between the NC Bar and NC Board of CPA Examiners resolved this ambiguity, so CPAs should have greater comfort in working with attorneys.