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Trust Accounting Pitfalls

by Stanley I. Foodman on Categories: trust accounting

Trust Accounting Pitfalls
Lawyers are a busy group of people. They may not always have time available to familiarize themselves with all of The Florida Bar rules governing the practice of law in Florida. 

The Florida Bar rules 5-1.1 and 5-1.2 govern the maintenance and management of funds and property of attorney clients. Although these rules seem crystal clear, a number of lawyers are periodically disciplined for failures in observing them. 

When Florida lawyers take the oath of admission, they obligate themselves to uphold the law and to abide by The rules regulating the Florida Bar, as established by the Florida Supreme Court. The Florida Bar regulates more than 95,000 lawyers. According to discipline statistics published by The Florida Bar, for the fiscal year 2013-2014, 61 lawyers were disbarred, 129 were suspended, 61 received public reprimands, 40 received disciplinary revocations, 44 were admonished and 51 were placed on probation. 

According to The Florida Bar, the two most common reasons for attorney discipline in Florida involve violations of standards of attorney-client communications and violations of the rules involving trust accounting. This article focuses on trust accounting.

Because trust accounting violations are among the two most frequent reasons for attorney discipline, The Florida Bar amended its rule 5-1.2(c) to require all lawyers with more than one attorney in a firm to have a written trust account plan in place for each of the firm’s trust accounts and to distribute the plan to each lawyer in the firm: 

“(1) Every law firm with more than 1 lawyer must have a written plan in place for supervision and compliance with this rule for each of the firm’s trust account(s), which plan must be disseminated to each lawyer in the firm. The written plan must include the name(s) of the lawyer(s) who sign trust account checks for the law firm, the name(s) of the lawyer(s) who are responsible for reconciliation of the law firm’s trust account(s) monthly and annually and the name(s) of the lawyer(s) who are responsible for answering any questions that lawyers in the firm may have about the firm’s trust account(s). This written plan must be updated and re-issued to each lawyer in the firm whenever there are material changes to the plan, such as a change in the lawyer(s) signing trust account checks and/or reconciliation of the firm’s trust account(s).

(2) Every lawyer is responsible for that lawyer’s own actions regarding trust account funds subject to the requirements of chapter 4 of these rules. Any lawyer who has actual knowledge that the firm’s trust account(s) or trust accounting procedures are not in compliance with chapter 5 may report the noncompliance to the managing partner or shareholder of the lawyer’s firm. If the noncompliance is not corrected within a reasonable time, the lawyer must report the noncompliance to staff counsel for the Bar if required to do so pursuant to the reporting requirements of chapter 4.”

RULE 4-8.3 REPORTING PROFESSIONAL MISCONDUCT

(a) Reporting Misconduct of Other Lawyers. A lawyer having knowledge that another lawyer has committed a violation of the Rules of Professional Conduct that raises a substantial question as to that lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects shall inform the appropriate professional authority.

Florida lawyers annually renewing their memberships in The Florida Bar certify that they have read the rules applicable to lawyer trust accounts in chapter 5 of the rules regulating The Florida Bar and that:

  • “I am required to maintain a trust account and I am in compliance with the trust account and property safekeeping rules.”
  • “I am not required to maintain a trust account because I do not receive or hold funds or property from clients or third parties in connection with legal representation.”
  • “I am not in compliance with the trust and property safekeeping rules. Attached is an explanation of the way in which I did not comply with the trust and property safekeeping rules.” 

In the attorney defense part of my forensic accounting practice, I have not reviewed a Florida Bar annual membership fee statement in which a lawyer admitted non-compliance with the trust and asset safekeeping rules nor had been provided with a copy of a written trust account plan.

In my experience, sole practitioner lawyers and lawyers in small law firms (no more than two or three lawyers) do not always have the time or accounting training to accurately manage a client trust account under Florida Bar Rules 5-1.1 and 5-1.2. Nor have the lawyers whom I have represented been able to provide me with a written plan for supervision and compliance with this rule for each of the firm’s trust account(s); creating unknowing inaccuracies regarding trust account certification in an application for The Florida Bar membership. These are disciplinary pitfalls. 

Even if a lawyer accurately manages and electronically maintains a trust account, if a lawyer is a member of a multi-lawyer firm and comes under disciplinary investigation, absence of a written plan for supervision and compliance with this rule for each of the firm’s trust account(s) has potential for opening otherwise unforeseen Florida Bar disciplinary proceedings. Furthermore, during a trust account management investigation by The Florida Bar, uncovered inaccuracies in a membership application can compound other disciplinary findings leading to unanticipated consequences. 

To avoid these pitfalls, it is recommended that all Florida law firms:

  • Create and disseminate a written trust account plan for supervision and compliance with rule 5-1.2(c) for each of the firm’s trust account(s),
  • Reconcile trust accounts at least monthly. This includes an analysis of each client’s matter sub-accounts, elimination of negative balances caused by misclassification of payments out of the account and reconciling the total of the sub-account balances with the trust account bank reconciliation, and/or 
  • Bring trust account delinquent reconciliations and client records up to date either within the law firm or through the services of an outside licensed Florida CPA. 

Stanley I. Foodman is CEO of Foodman CPAs & Advisors and a recognized forensic accountant and litigation support practitioner. Specializing in complex domestic and international tax matters, Foodman has served as an expert witness and forensic accountant for some of the nation’s most challenging, high-profile economic crime cases. Foodman and his team of accountants also assist clients with a full range of accounting matters including compliance, voluntary disclosure, corporate and individual taxation, family law litigation, estate and trust tax and wealth planning. Consistently ranked as one of the top accounting firms in South Florida, Foodman CPAs & Advisors assists clients locally, nationally and internationally. (305) 365-1111 www.foodmanpa.com

South Florida Legal Guide Midyear 2015 Edition


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