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LawBiz® TIPS – Week of July 28, 2015

LawBiz(r) newsletter

Accounting for Accounting Records

When it comes to trust accounts, there is no excusable error.

The lawyer is a fiduciary who must keep accurate accounting records of trust account transfers under every state’s rules of professional conduct. This can give rise to ethical issues in very active personal injury or debt collection law practices, in family law practices, and in large firm real estate practices, among others. Often, the trust accounts become so large that the lawyer’s record keeping becomes flawed, and errors result. These may be understandable human errors, but the net result is that the funds’ record keeping is not clear and accurate.

This happens in many ways: lien holders fail to cash checks written against the account, funds subject to a lawyer-client dispute remain long after the controversy is forgotten, funds are held back for a triggering event that never takes place, or a departed staff member has made an incomplete or erroneous record of trust monies that the lawyer can no longer decipher.

There is an axiom in law that says, "Ignorance of the law is no excuse." And when dealing with fiduciary matters, every state imposes a fiduciary duty to properly account for clients’ funds to prevent misappropriation or negligence. Failure to provide accurate accounting records for a state bar inquiry means very bad news for the lawyer.

If an accounting issue does arise, one expensive resolution is to hire an outside accountant to go through every document, check, and ledger to reconcile the account. Another suggestion is to open and operate through a new account with scrupulously "clean" records while allowing depletion of the old account until only the few questionable items remain, with the hope and prayer that no one makes inquiry in the future.

But such alternatives miss the point. To do less than use an effective software accounting program or an outside accountant to reconcile trust and bank account records each month is to invite error, inquiry, and trouble, even putting one’s professional license is at stake.



Accounting for Accounting Records

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