Common Deficiencies That Are Often Picked
Up During a NJ Attorney Trust Account Audit
What should an attorney do to prepare for a random audit by the NJ Office of Attorney Ethics? What sort of deficiencies does the auditor normally pick up?
Common Deficiencies That Are Often Picked Up During a NJ Attorney Trust Account Audit
What exactly is a New Jersey random audit of an attorney trust account like? While there is no single formula, there are some patterns that emerge when we handle this sort of representation. For example, the audit generally takes between half a day to a full day; is handled by a single auditor from the Office of Attorney Ethics; and results in the creation of an audit deficiency form that is handed to the attorney or their counsel by the auditor. As to the latter, if the deficiencies are mild and correctable, all that is generally needed is to verify that the corrections have been made. If it is more serious, the audit may continue on another date or possibly even lead to an ethics grievance.
Here are some of the more common deficiency findings:
1. The bank statement and the law firm’s internal records do not match.
Often, this results from the fact that the attorney is not performing a reconciliation between the two each month. Indeed, even doing so would not be sufficient in and of itself. Trust accounts must be subject to a rigorous three-way reconciliation. That reconciliation will pick up such items as whether disbursements from the subaccount of one client were used to pay checks issued for a different client.
2. The attorney has deposited funds in his or her trust account unrelated to a client matter.
While a small amount of the attorney’s own money may be kept in their trust account, the general rule is that the only funds that should be maintained in a trust account are those that are being held by the attorney in trust for a client.
3. The attorney has left funds in the trust account that are no longer being held in trust for the client.
This is actually more common than one might expect. For example, if a settlement involves certain monies being designated by the settling parties as attorney’s fees, that sum should be moved out of trust reasonably quickly. Leaving the funds in the trust account is inappropriate because the monies do not belong to the client; in other words, this would actually be an example of maintaining the attorney’s own money in that attorney’s trust account.
4. All trust monies were not deposited in the trust account as quickly as reasonably possible.
If a check is provided to the attorney as payment of a settlement for the benefit of that attorney’s client, it should be deposited at once into the trust account. If the check is not deposited for a significant period of time and the check goes stale, that might effectively mean that monies that were meant to be held in escrow are no longer available for deposit.
5. The source of funds in the trust account is not clear.
If the records are not clear, that may inhibit the attorney from being able to reconcile each sub-account from his or her respective clients. This is a necessary aspect of the three-way reconciliation.
6. The client subaccounts are not being separately reconciled.
This can lead to one client’s funds being used to cover the obligations of another client for the simple reason that checks clear at different points in the month. Therefore, even if checks for different clients are deposited on the same day, a withdrawal will only be able to utilize funds from those respective checks that have both cleared and finally settled. Therefore, reconciling the account to ensure that money from one client has not inadvertently been used with respect to another is critical. Indeed, the more immediate safeguard is to insist that the bank provide proof that a client’s deposit has cleared and settled before a check is issued for that client. The reconciliation is merely a follow-up redundant procedure to ascertain whether, even with that precaution, something still went wrong.
7. Client funds are being used to pay the law firm’s bank account charges.
As stated above, attorneys may keep a small amount of money in their trust account which can help prevent this. Moreover, the banking institutions that are approved to offer IOLTA trust accounts often will make advance arrangements to obtain any bank charges from another account that the attorney designates. It also should be noted that IOLTA accounts are normally not set up to earn interest on the money being held for that client. Instead, such interest is remitted to the New Jersey Lawyers’ Fund for Client Protection (which represents a source from which clients who have been defrauded by their attorneys can receive compensation under certain circumstances, R. 1:28). Nevertheless, an escrow account can be specially set up to earn interest for the client. In such circumstances, the attorney will need to forward the appropriate tax documentation to the client with respect to any such interest earned. Of course, the attorney themselves may not earn any interest on money being held for the client.
8. Fees must have been actually been earned before retainer money is withdrawn.
This is also an important aspect of trust account reconciliation. When an attorney requires a retainer from a client, the attorney cannot withdraw any of their fees until they are certain that the retainer check has cleared.
9. The trust account should not be used for the law firm’s operating funds.
The concept that an attorney should have a professional account into which the law firm’s general funds should be deposited is fairly obvious. However, there are situations in which one might inadvertently blur the lines, such as for example, if litigation disbursements (filing fees, search fees, etc.) are being advanced for the client from the operating account. Sometimes, when the amount of the disbursement reaches a significant level, the attorney will request a retainer for disbursements. It is important that the attorney keep in mind that the retainer agreement may contain language indicating that disbursements shall only be advanced from operating funds, and therefore, a change in that procedure would need to be incorporated in a retainer addendum. Likewise, if a retainer for disbursements is held in trust, the nature of the disbursements needs to be clearly defined. If the client arguably assumes that certain charges will be advanced from the attorney’s operating funds and other disbursements will be drawn from the retainer, that understanding has to be identical to that of the law firm.
The rules governing attorney trust accounts are meant to preserve the public trust that money given to an attorney to be held for the client will be held inviolate. All in all, every attorney should be familiar with the trust account rules before an audit takes place. See e.g., R. 1:21-6. Many of those requirements are intuitive, but some are not. For that reason, it may make sense to have a self-audit done by an outside law firm before receiving a random audit from the Office of Attorney Ethics.
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