Attorney Trust and Business Accounting Co-Sponsored by the Law Office Management Committee

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1 2015 NJSBA Annual Meeting Law Office Management Track Attorney Trust and Business Accounting Co-Sponsored by the Law Office Management Committee Speakers: Mimi Lakind, Esq., Trenton

2 Trust and Business Accounting for Attorneys Presented By The of the Supreme Court of New Jersey OAE

3 New Jersey Supreme Court RANDOM AUDIT PROGRAM OAE

4 Trust and Business Accounting for Attorneys Can be obtained from ICLE Written by David E. Johnson Jr., Director, Written in common language not accounting All attorneys admitted since 1987 have received this publication as part of the skills training required by ICLE OAE

5 Outline Of NJ Court Rule 1:21-6 The Recordkeeping Rule Example of one type of system (manual) that complies with the Court Rule Many other systems can also comply: a) One Write Systems b) Computerized OAE

6 Many Reasons to Maintain Proper Records To comply with Court Rules To properly account for and safeguard clients funds FOR YOUR OWN PROTECTION YOU CAN BE RIPPED OFF BY YOUR OWN EMPLOYEES OAE

7 Trust Account Mechanics Sources of Authority New Jersey Court Rule 1:21-6 Rule of Professional Conduct 1.15 Accounting Model Double Entry Bookkeeping Generally Accepted Accounting Practice OAE

8 Required Trust Accounting Records Trust Checkbook Trust Receipts Book Trust Disbursements Book Clients Trust Ledger OAE

9 Trust Checkbook Stub/Register Checks General Running Balance John A. Lawyer, Esq. ATTORNEY TRUST ACCOUNT Pay to the order of OAE

10 Trust Receipts/Disbursements Books Chronological Listing of All Entries Duplicate Recording Required Information Amount Date For Disbursements» Payee and Purpose For Deposits» Source and Description OAE

11 Trust Disbursement Sample Attorney: John A. Lawyer Check Client File Date Number Payee Purpose Name Number Amount 3/12/94 #1190 Tax Collector Taxes - 1st Qtr Mendez RE $1, /13/94 #1191 John A. Lawyer Legal Fee Raptura PI $ /14/94 #1192 James Dodd Sale Proceeds Dodd RE $18, /16/94 Debit United Jersey Bk Wire Transfer Johnson CO $150, /19/94 #1193 Smart Investigator Accident Review Wang PI $ /20/94 #1194 Clerk. Mercer Cty Recording Fee Astori RE $ /23/94 #1195 Clerk, Mercer Cty Transfer Fee Astori RE $ /25/94 #1196 Haines Police Dpt Police Report Zadusky M U- 115 $ /27/94 #1197 Sec. of State Recording Fee Johnson CO $ /30/94 Debit United Jersey Bk Service Charge Lawyer $25.50 Total Monthly Disbursements $172, OAE

12 Clients Trust Ledger Mini Bank Account Individual Running Balance Required Information Client s Name Amount Date For Disbursements» Payee and Purpose For Deposits» Source and Description OAE

13 Clients Ledger Sample Client : Janice L. Breen File No. PI-1425 Check Deposits Withdrawals Running Date Number Payee/Source Description (Add) (Subtract) Balance 5/15/94 Janice L.Breen Advanced Costs $900 $900 5/20/94 #1473 Trenton PD Police Report $25 $875 9/12/94 #1535 Smart Invest. Invest. Report $500 $375 4/22/95 XYZ Ins. Co. Ins. Settlement $12,000 $12,375 4/30/95 #2243 Janice L. Breen Client's Proceeds $8,375 $4,000 4/30/95 #2244 John A. Lawyer Legal Fee/Costs $4,000 $0 OAE

14 Trust Reconciliations Step 1: Normal Bank Reconciliation Bank Statement Balance = Adjusted Checkbook Balance Step 2: Reconcile All Clients Ledgers Individual Client Ledger Balances Step 3: Final Double Check = Checkbook Running Balance Receipt/Disbursement = Checkbook Control Sheet Balance Running Balance OAE

15 Key Concepts In Trust Accounting Help You to Understand the Theory Help You to Understand the Process Preliminary Rules That Must Always Be Followed Record Contemporaneously» Within 24 Hours Record All Figures Exactly» No Rounding Allowed OAE

16 Key Concept No. 1 Separate Clients Are Separate Accounts $2,000 $1,500 $1,000 $500 $0 Client A Client B Client C Client D Client E OAE

17 Key Concept No. 2 You Can t Spend What You Don t Have Uncollected Funds Doctrine Availability of Funds Schedule» Electronic Transfers = Same Day» Cashier/Certified/Bank Checks = One - Two Days» Other Types of Checks = Three or More Days In re Moras, 131 N.J. 164 (1993) Real Estate Exception to the Doctrine Supreme Court Advisory Opinion 454 Title Closings» Personal Property (Sale of Business)» Real Estate OAE

18 Key Concept No. 3 Timing Is Everything Know Your Bank s Closing Times Be Aware of the Consequences of After Hours Deposits Deposits In Person Speed Up the Accounting Process Increase Accuracy Deposits By Mail Slow Things Down Decrease Timeliness OAE

19 Key Concept No. 4 Always Maintain An Audit Trail Descriptiveness Deposit Slips Aggregating Deposits» Indicating Client/File on all deposits Disbursements Memoing Checks» Indicating Purpose OAE

20 Key Concept No. 5 Trust Accounting Is Zero- Based Accounting The Goal Is to Zero-Out the Account In = Out Resolve Small Inactive Balances Hinder the Reconciliation Process Pay Yourself or Your Client What is Due OAE

21 Key Concept No. 6 There Is No Such Thing As A Negative Balance In re Wilson, 81 N.J. 451 (1979) $2,000 $1,500 $1,000 $500 $0 ($500) ($1,000) Client A Client B Client C Client D Client E OAE

22 Key Concept No. 7 You Can t Play the Game Unless You Know the Score General Trust Account Running Balance Found in Trust Checkbook Individual Client Running Balance Found on Client Trust Ledger Check the Running Balances First General Running Balance = Sum of Individual Running Balances OAE

23 MISAPPROPRIATION DEFINED (A)ny unauthorized use by the lawyer of clients funds entrusted to him, including not only stealing, but also unauthorized temporary use for the lawyer s own purpose, whether or not he derives any personal gain or benefit therefrom. In re Wilson, 81 N.J. 451 n.1 (1979) OAE

24 Knowing Misappropriation The misappropriation that will trigger automatic disbarment under In re Wilson consists simply of a lawyer taking a clients money entrusted to him, knowing that it is the client s money and knowing that the client has not authorized the taking. In re Noonan, 102 N.J. 157 (1986) OAE

25 Random Audit Program Began in July of 1981 Have conducted approximately 10,000 audits to date Largest Program of its type in the nation 8 other states currently have Random Audit Programs (Iowa, Delaware, Washington, New Hampshire, North Carolina, Vermont, Hawaii and Kansas) OAE

26 Random Audit Personnel Five full-time Auditors Significant accounting experience Minimum Education Accounting Degree Most auditors have advance degrees or certifications J.D. CPA CFE OAE

27 Random Audit Objectives Check compliance with the NJ Court Rules and Educate attorneys as to proper recordkeeping methods -received numerous testimonials Provide a deterrent effect Detect misappropriation of client funds OAE

28 Random Audit Selection Number one question Is the selection really random? Computer Selection is made by main law office telephone number Theory solo practice 1 main number 200 person firm 1 main number Conduct approximately 400 audits per year OAE

29 Random Audit Process Audits scheduled and law firm notified approximately 2 weeks in advance No surprise audits Less disruption for the attorney and staff Sufficient time to gather requested records Several attorneys confessed and turned themselves in after receiving contact letter OAE

30 Random Audit Review 2 years records for both the business and trust accounts Primary focus on the Trust Account Business Account reviewed for Unusual transactions (Large deposits, payments to clients etc. Verify that all fees are deposited Not reviewed for profit, loss or payroll OAE

31 Random Audit Process Initial conference with attorney to obtain background information about law firm Type of practice Amount of activity Type of records OAE

32 Random Audit Processcont d Review of records Bank statements Cancelled checks Client ledger cards Checkbook stubs Receipts and disbursements journals Bank records Client case files as necessary OAE

33 Random Audit Post Conference with Attorney Copy of Audit Deficiency Checklist provided all deficiencies discussed Attorney subsequently receives a letter identifying the deficiencies discussed and providing the attorney with 45 days to respond to the OAE that all problems were corrected 98% of RAP audits closed in this manner OAE

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