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Vol. 71, No. 6, June 1998
Trust Accounting in Wisconsin: A Primer
What accounting of lawyer trust accounts is required?
The accounting system that documents the trust funds can be as
uncomplicated as the minimal approach described in this manual
or as sophisticated as necessary within an integrated software
program on a computerized accounting package. A lawyer need not
be an accountant to keep proper trust account records. The lawyer
should establish and maintain a system that ensures the lawyer
can document:
- the amount of funds within the trust account at all times;
- the amounts within the trust account belonging to each client
or third party;
- how each transaction was processed (the payor/payee).
A system that incorporates internal controls and properly documents
the activity occurring in the trust account should be adequate
for these recordkeeping requirements. The cash receipts journal
and the cash disbursement journal can be nothing more than regular
checkbook entries that identify the date and amount of funds deposited
and the client on whose behalf the funds were received. While
no specific accounting system is mandated, a lawyer should maintain
all law firm financial records in accordance with generally accepted
accounting practices.
Lawyer trust account checkbook. Each deposit transaction should show:
- the date;
- source of funds or name of person with an interest in the account,
if different;
- a brief explanation;
- amount of deposit; and
- balance on hand in trust account.
Likewise, each disbursement transaction should show:
- the check number;
- date;
- payee;
- brief explanation of the transaction's purpose; and
- amount of the check and balance on hand in trust account.
This part of the accounting system by itself does not keep track
of individual records as to each client or third party.
WisTAF Can Help Answer Your IOLTA, Trust Account Questions
The Wisconsin Trust Account Foundation (WisTAF) administers the
Interest on Lawyers Trust Account (IOLTA) program and its staff
can answer questions generated by this article. In addition, WisTAF
can provide attorneys:
- an approved Lawyer Trust Account Agreement form that must be executed
by the attorney when establishing an IOLTA account and completed
by the financial institution;
- a list of acceptable service charges and those fees that cannot
be charged to an IOLTA account;
- a list of financial institutions that do not assess service charges
to IOLTA accounts; and
- a list of financial institutions that provide above average interest
rates on IOLTA accounts.
To request these materials or other information, please contact
WisTAF, 825 Williamson St., Suite A, Madison, WI 53703, (608) 257-6845; toll free
877-749-5045.
Or visit WisTAF's Internet site. |
Lawyer individual trust account ledger. Each individual client or third person's account could be maintained
as a separate page in the lawyer's individual trust account ledger.
This ledger sheet documents the chronological activity for each
person's account. Entries on this sheet are posted from the activity
originating in the checkbook register with the balances kept up
to date so an accurate accounting of trust funds can be provided
immediately upon request of the client or the third party involved
simply by making a copy of the lawyer individual trust account
ledger sheet and providing it to the client or third party.
At a minimum, each individual trust account ledger sheet should
reflect:
- the date funds were received or dispersed;
- description of each transaction including whom the funds were
received from or paid to;
- check number;
- amount of funds received or paid out; and
- balance of account at end of transaction.
How often must a reconciliation be made?
The trust account must be reconciled monthly with the bank statement.
If needed, your banker or accountant can assist you in reconciling
your account. A document similar to the Lawyer Trust Account Reconciliation
Sheet (included) may be used to make the necessary reconciliations.
When should lawyers make
an accounting to clients or third parties?
Periodically, the lawyer should advise each person whose funds
are held of the status of those funds. An adequate description
should be provided indicating what receipts and disbursements
have occurred and any unexpended balance. If there is objection
to any proposed disbursement, such as for earned fees, those funds
must remain in the trust account pending resolution of the dispute.
What are some methods of safeguarding client funds?
The security of a trust account can be measured by the interest/attention
the attorney devotes to operating the account. The following safeguards
are suggested:
- Someone other than the bookkeeper should perform the monthly reconciliation
and trial balances.
- An attorney should not hastily sign checks to be disbursed or
deposited.
- Use prenumbered checks and periodically examine the sequential
order of blank, void, and canceled checks, and question any unexplained
break in numbers. For this reason, voided checks should be retained.
- Keep blank checks under someone's control during the day and secured
at night, and ensure the checks are all accounted for when someone
resigns or is terminated, to help reduce theft.
- When clients indicate they have paid in cash, ask if a receipt
was provided. The receipt book can be examined periodically to
determine if any copies of the receipts have been removed or voided,
which should be questioned.
- Posting, depositing, and disbursing trust account funds should
be done by different personnel in the office. If this is not possible
due to limited staff, an attorney may want to audit the trust
account periodically or have an independent party do so. Do not
sign blank checks and do not make a check out to cash or bearer.
Every client file should contain a copy of that client's trust
account ledger. Check to see if the client's file contains documentation
supporting disbursements.
- Ensure deposits are made in a timely manner, daily if possible.
Control who opens bank statements and correspondence regarding
the trust account and review periodically.
- Estate accounting should be reviewed monthly. Old or inactive
estates become a prime target for embezzlement.
- Require supporting documentation of accounting reports/reconciliations
(bank statements, canceled checks, deposit slips, correspondence,
and so on). Check periodically to determine if only designated
personnel in the office have had access to office mail.
- Prohibit or at least restrict removal of trust account records
from the office. Question lifestyle changes of individuals with
access to the trust account (increase of social activities/travel,
new wardrobe, new car, and so on). Examine signature(s) on trust
account checks to discover forgery attempts.
- Never transmit money without written communication. A voucher
or other documentation for receipt and instruction should be prepared
by the attorney instructing the person performing the bookkeeping
function to deposit the funds into the trust fund account on behalf
of the person or entity named in the voucher or receipt. Written
communication avoids later arguments regarding deposit instructions
and provides a needed audit trail.
- Each firm should decide the proper person(s) to sign trust checks.
Generally, the person who prepares the checks should not have
sole signatory authority. Good internal control dictates that
access to the trust account checkbook be limited to authorized
signatories, and that two signatures be required if practical
on all trust account checks. Regardless, no individual should
sign a check unless presented with written documentation that
the disbursement is proper, along with notice that the original
receipted funds have cleared the banking process and are available
for disbursement. The lawyer's individual trust account ledger
should reflect the availability of the trust funds. Disbursement
procedures should be stated clearly in established rules for the
firm.
Practical pointers
- Funds that cannot be traced to a client, after diligent inquiry, due to uncashed checks, unrounded cents, errors in management of the account, and so on, should be forwarded to the State of Wisconsin - Unclaimed Property Section (608) 267-7977.
- The attorney is ultimately responsible for properly managing the
trust account.
- If you become aware of purposeful mismanagement of, or theft from,
trust accounts, you should notify the managing attorney immediately.
If that is impossible, then notify the Board of Attorneys Professional
Responsibility.
- Your checkbook register can be used as the cash receipts and disbursement
journals.
- Withdrawals from a lawyer trust account should be made to named
payees, not to cash.
- The checks and deposit slips should be imprinted with the heading
"Trust Account" or "Client's Account." This helps segregate those
funds from the attorney's office and personal funds.
- A lawyer needs at least one business account as a depository for
legal fees and to pay operating expenses. The checks on these
accounts should designate the account, "Jones & Smith Business
Account," or "Jones & Smith Professional Account," or "Jones &
Smith Office Account," and so on, whereas the trust account should
be designated as "Jones & Smith Client Trust Account." Also consider
establishing trust account(s) at an institution other than where
the lawyer's or law firm's operating account is located and selecting
checks of a different color and/or size from those of the lawyer's
operating account.
- Make sure that the institution has collected the money from the
deposited checks before writing any check on those funds. It is
important to know the financial institution's rules of when funds
can be withdrawn. The time it takes for funds to become available
after deposit can vary between a day and several weeks depending
upon the form in which the money is deposited and the source of
the funds. You should check with the financial institution to
determine when it credits deposits to the account. Many banks
have automated account information systems which will give the
activity on an account.
Do not write a check to a client for settlement proceeds before
the settlement check has cleared on the theory that there is other
money in the trust account. This would put other clients' funds
at risk.
- Under no circumstances should the lawyer ever disburse more funds
than received in a matter, or use any trust funds for personal
purposes; otherwise a wrongful taking of other client trust funds
occurs, which could result in both civil and disciplinary liability.
At the end of the representation involved there should not be
any monies left on the individual trust account ledger.
- Avoid ATM deposits; the lawyer has a duty to account for how the
trust property was handled. Writing a check from the trust account
creates an automatic audit trail that makes it easy to trace who
the money came from and where it went. With an ATM withdrawal,
there is nothing that shows whose money was withdrawn, who withdrew
it, or to whom the money was paid.
- Real Estate Transactions:Real estate lawyers who act as the closing agents for real estate
transactions often want or need to immediately issue checks from
the trust account on funds that have not even been deposited,
much less cleared the banking process. The issue is whether there
is a practical way to protect other clients' funds held in the
trust account while writing checks against the account before
the deposit covering those checks has been made and credited.
Ethics advisory opinions from a few other states would allow the
practice if the lawyer accepts and makes disbursements of only
certified or cashier's checks, where the risk of noncollectibility
is minimal.3 However, certified and cashier's checks can be dishonored, and
if they are, the lawyer remains responsible, civilly and ethically,
for any losses incurred by any other party whose funds were used
to pay checks written in reliance upon the dishonored deposits.4
- The individual trust account ledger sheets can be organized alphabetically
in two three-ring binders. The first binder would be labeled as
the "Open Account" ledger, where all the separate individual trust
account ledger sheets should be filed and maintained. The second
binder would be labeled as the "Closed Account" ledger, where
all individual trust account ledger sheets on closed matters should
be kept.
- Good internal control dictates that access to the trust account
checkbook be limited to only the authorized signatories.
- The individual signing the check should review the individual
trust account ledger sheet before authorizing disbursement of
trust funds.
- There are computer software accounting packages that easily meet
the minimum accounting standards outlined here.
- In addition to records previously mentioned, every lawyer must
maintain for six years after terminating representation or possession
of funds, the original or copies of all client retainer and fee
agreements; statements to clients showing disbursements of funds;
receipts; bills rendered to clients; records showing payments
to other lawyers or nonemployees for services rendered; and retainer,
settlement, and closing statements. SCR 20:1.15(e). In the event
of a law firm dissolution, appropriate arrangements must be made
for maintaining the firm's records, either by a former partner
or the successor law firm.
- The IOLTA program does not pay for the cost of printing checks,
deposit slips, wire transfer fees, special accounting services,
and other selected charges. A list of these fees that a financial
institution cannot charge to an IOLTA account is available from
WisTAF.
Before unilaterally withdrawing client funds as legal fees it
is advised to get the client's written consent. Three items must
be met: a) the right to look to that particular client for payment;
b) an agreement as to amount due; and c) an agreement that the
lawyer should be paid at that time. Review Disciplinary Proceedings Against Marine for further information.5
- Disputed fees are to be left in the trust account until the dispute
is resolved. If the attorney has erroneously withdrawn funds from
the trust account and then learns of the dispute, the attorney
should immediately redeposit those funds into the trust account.
Endnotes
1 ABA Formal Opinion 346, "Placing Client's Funds at Interest,"
July 23, 1982 (the IOLTA opinion).
259 Wis. B. Bull. 32 (Sept. 1986).
3See N.C. Ethics Ops. RPC 232 (April 11, 1996) and RPC 191 (Oct. 20, 1995); Va. State Bar Legal Ethics Op. 183 (April 1, 1996); N.J. Ethics Op. 454, 11, 4 N.J.L.J. I 10 (Aug. 2, 1984); see also Fla. Bar Rule 5-1.1(g) (Disbursement against uncollected funds) and N.C. Gen. Stat. ch. 25-4-211 ("Good Settlement Funds Act").
4See N.C. Ethics Op. RPC 191, at 3.
5 82 Wis. 2d 602, at 610 (1978).
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