Chapter 6 Client Trust Funds & Law Office Accounting Law Office Accounting.

Chapter 6Chapter 6Client Trust Funds Client Trust Funds

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Law Office AccountingLaw Office Accounting

Client FundsClient FundsTrust/Escrow AccountsTrust/Escrow Accounts

►Trust/Escrow account is a bank account Trust/Escrow account is a bank account that is separate from a law office’s or that is separate from a law office’s or attorney’s business or operating attorney’s business or operating account. account.

►Unearned client funds are deposited Unearned client funds are deposited here. here.

►Checks/ deposit slips will have a Checks/ deposit slips will have a designation of “client trust account” or designation of “client trust account” or something similar.something similar.

How is a trust account used?How is a trust account used?

►Sometimes clients pay cash advances Sometimes clients pay cash advances on retainers and this money must be on retainers and this money must be kept somewhere until it has been kept somewhere until it has been earned. earned.

►Can also act as a source of settlement Can also act as a source of settlement on behalf of the client. on behalf of the client.

Commingling of $ & EthicsCommingling of $ & Ethics

►Bottom line: Trust funds and operating Bottom line: Trust funds and operating accounts can not be mixed together. accounts can not be mixed together.

►Read & interpret: Rule 1.5 of the Read & interpret: Rule 1.5 of the Model Model RulesRules

Commingling continued…Commingling continued…

► This is a very This is a very common problem. common problem. Attorneys are Attorneys are disbarred on this disbarred on this matter every year. matter every year.

YES:YES:

►Client Client FundsFunds►* 3* 3rdrd Party Party FundsFunds►*Settlem*Settlement Fundsent Funds►*Retainer*Retainers for legal s for legal services services that are that are unearned unearned

NO:NO:►Personal Personal funds of funds of the the attorney or attorney or staff. staff. ►Business Business funds of funds of the law the law firmfirm►InvestmeInvestment fundsnt funds►Earned Earned fee fee paymentspayments

Bonding?Bonding?

Dishonesty bondDishonesty bond: a surety bond that : a surety bond that covers employers from losses from covers employers from losses from dishonest and/or negligent actions of dishonest and/or negligent actions of their employees. Dishonesty Bonds their employees. Dishonesty Bonds reimburse employers for losses from reimburse employers for losses from employee fraud, theft, forgery, and employee fraud, theft, forgery, and embezzlement of company's cash and embezzlement of company's cash and other assets. other assets.

Ethics: continuedEthics: continued

► Trust Accounts can not be used to pay Trust Accounts can not be used to pay law office/personal expenses. law office/personal expenses. No No borrowing monies from the trust account. borrowing monies from the trust account. However, trust checks can be written to cover However, trust checks can be written to cover client expenses. For instance, if a client had client expenses. For instance, if a client had monies in trust and the firm needed to issue a monies in trust and the firm needed to issue a check to a court report to pay for a deposition check to a court report to pay for a deposition transcript for the case, the office would write transcript for the case, the office would write a check from the trust account. This is a check from the trust account. This is perfectly acceptable as long as the expense is perfectly acceptable as long as the expense is for the client’s case. for the client’s case.


►One Trust Account Acceptable for One Trust Account Acceptable for all client funds. all client funds. Law offices may Law offices may have one trust account where all have one trust account where all clients’ funds are deposited. Law clients’ funds are deposited. Law offices do not have to have a separate offices do not have to have a separate bank account for each client, as long bank account for each client, as long as there are proper records as there are proper records maintained showing how much each maintained showing how much each client has in the account.client has in the account.


►Attorney must promptly deliver Attorney must promptly deliver client funds back to the client. client funds back to the client. Attorneys have an ethical Attorneys have an ethical responsibility to immediately turn over responsibility to immediately turn over to clients any funds to which they are to clients any funds to which they are entitled. entitled.

IOLTAIOLTA

► Interest on Lawyer’s Trust Account : an Interest on Lawyer’s Trust Account : an interest bearing account set up interest bearing account set up specifically to hold trust funds. The specifically to hold trust funds. The interest that accrues on an IOLTA interest that accrues on an IOLTA account is given to a state bar account is given to a state bar foundation or other non profit legal foundation or other non profit legal organization for the good of the public.organization for the good of the public.

10 Rules for Good Trust Account10 Rules for Good Trust AccountManagementManagement

1.1. Have a trust account & use it for all client monies.Have a trust account & use it for all client monies.2.2. Only a managing partner should sign on the account.Only a managing partner should sign on the account.3.3. Follow the IOLTA Rules for your state. Follow the IOLTA Rules for your state. 4.4. Notify the client in writing at least on a monthly basis Notify the client in writing at least on a monthly basis

regarding all deposits and withdrawals from the client’s regarding all deposits and withdrawals from the client’s account balance.account balance.

5.5. Unearned fees and unexpended costs belong in the trust Unearned fees and unexpended costs belong in the trust account until earned or spent. account until earned or spent.

6.6. Do not commingle attorney or firm funds w/ the trust account.Do not commingle attorney or firm funds w/ the trust account.7.7. Reconcile the trust account monthly and maintain a written Reconcile the trust account monthly and maintain a written

record of the reconciliation. record of the reconciliation. 8.8. Review individual client balances and don’t delay in refunds.Review individual client balances and don’t delay in refunds.9.9. Maintain written detailed records justifying every deposit and Maintain written detailed records justifying every deposit and

every withdrawal in the trust account, including a detailed every withdrawal in the trust account, including a detailed journal or ledger. journal or ledger.

10.10. Retain trust records even after the matter is closed.Retain trust records even after the matter is closed.

BudgetingBudgeting

►A budget is a projected plan of income A budget is a projected plan of income and expenses for a set period of time, and expenses for a set period of time, usually a year. usually a year.

►Budgets are a planning tool that allow Budgets are a planning tool that allow the firm to plan for the future, to the firm to plan for the future, to anticipate problems, needs and goals. anticipate problems, needs and goals.

Steps in a Budget Process:Steps in a Budget Process:STEP 1STEP 1

►Prepare an income budget. An income Prepare an income budget. An income budget estimates how many partners, budget estimates how many partners, associates, paralegals and others will associates, paralegals and others will bill for their time, what the rate or bill for their time, what the rate or hourly charge will be, and the number hourly charge will be, and the number of billable hours each timekeeper will of billable hours each timekeeper will be responsible for billing. be responsible for billing.


►The time-to-billing percentage adjusts The time-to-billing percentage adjusts downward the actual number of hours downward the actual number of hours the office will bill to clients, taking into the office will bill to clients, taking into account the fact that timekeepers are account the fact that timekeepers are not always able to bill at their not always able to bill at their budgeted levels due to sickness and budgeted levels due to sickness and unforeseen events. unforeseen events.


►Realization: what a firm actually Realization: what a firm actually receives in income as opposed to the receives in income as opposed to the amount it bills. amount it bills.


►Prepare a staffing plan. A staffing plan Prepare a staffing plan. A staffing plan estimates how many employees will estimates how many employees will be hired or funded by the firm, in what be hired or funded by the firm, in what positions or capacities they will serve, positions or capacities they will serve, what positions will need to be added what positions will need to be added or deleted, and how much the or deleted, and how much the compensation will be. compensation will be.


►Estimate overhead expenses. The law Estimate overhead expenses. The law office must make a budget of all office must make a budget of all expected overhead expenses such as expected overhead expenses such as rent, utilities, equipment and other rent, utilities, equipment and other expenses. expenses.


►Set a profit margin. The last step is to Set a profit margin. The last step is to set a target profit margin the firm set a target profit margin the firm would like to achive. would like to achive.

Budgeting Tips:Budgeting Tips:

► Budgets should be communicated to Budgets should be communicated to everyone involved. everyone involved.

► Budgets must be tracked year-round. Budgets must be tracked year-round. ►Document budget assumptions.Document budget assumptions.► Use zero-based budgeting. A zero-based Use zero-based budgeting. A zero-based

budget means last year’s budget or actual budget means last year’s budget or actual expenses are not used in figuring the expenses are not used in figuring the coming year’s budget. Each year, the coming year’s budget. Each year, the budget figures stand on their own merit and budget figures stand on their own merit and must be justified. must be justified.

CollectionCollection

►Collection and income are closely tied Collection and income are closely tied together. together. Why? Why?

►Collecting money that has been billed to Collecting money that has been billed to clients IS how you make your money!clients IS how you make your money!

►It’s easy to bill, but harder to get paid!It’s easy to bill, but harder to get paid!

Collection Strategies:Collection Strategies:

►1. Get your $ up front!1. Get your $ up front!►2. Send invoices frequently!2. Send invoices frequently!►3. Be selective in the cases you take 3. Be selective in the cases you take

on!on!►4. Last resort: sue the client for the 4. Last resort: sue the client for the

fee. fee.

When can an attorney get When can an attorney get out?out?

► The withdrawal can be done w/out negatively The withdrawal can be done w/out negatively affecting the interests of the client; affecting the interests of the client;

► The attorney believes that the client’s conduct is The attorney believes that the client’s conduct is criminal or fraudulent, or that the client has used criminal or fraudulent, or that the client has used the attorney’s services to commit a crime or fraud; the attorney’s services to commit a crime or fraud;

► The client persists in a course of conduct with which The client persists in a course of conduct with which the lawyer fundamentally disagrees;the lawyer fundamentally disagrees;

► The client has not completed the obligation to the The client has not completed the obligation to the attorney regarding the attorney’s services; attorney regarding the attorney’s services;

► The representation of the client is causing an The representation of the client is causing an unreasonable financial burden on the attorney;unreasonable financial burden on the attorney;

► The client is unreasonably difficult to work with;The client is unreasonably difficult to work with;► ““other good cause”…..other good cause”…..

HOW does the attorney get HOW does the attorney get out?out?

► In most courts, the attorney must ask In most courts, the attorney must ask for permission to withdraw. for permission to withdraw.

► If the attorney is permitted to If the attorney is permitted to withdraw from a case, the attorney withdraw from a case, the attorney must act prudently to protect the must act prudently to protect the client’s interests; such as giving the client’s interests; such as giving the client reasonable notice, providing the client reasonable notice, providing the client with his or her file, and client with his or her file, and refunding unearned monies. refunding unearned monies.

Internal ControlsInternal Controls

►This refers to procedures that an This refers to procedures that an organization establishes to set up organization establishes to set up checks and balances so that no one checks and balances so that no one individual in the organization has individual in the organization has exclusive control over any part of the exclusive control over any part of the accounting system. accounting system.

►Good internal controls prevent (or Good internal controls prevent (or make it harder) for employees to make it harder) for employees to embezzle money. embezzle money.

Internal Control Procedures: Internal Control Procedures:

1.1. Never allow a bookkeeper or person preparing checks to Never allow a bookkeeper or person preparing checks to sign checks or to sign on an amount. sign checks or to sign on an amount.

2.2. Have careful, unannounced, routine examination of the Have careful, unannounced, routine examination of the books. books.

3.3. All documents must routinely be read and examined- no All documents must routinely be read and examined- no exceptions. exceptions.

4.4. All checks should be stored in a locked cabinet. All checks should be stored in a locked cabinet. 5.5. Never let the person signing the checks reconcile the Never let the person signing the checks reconcile the

checks. checks. 6.6. Use check request forms.Use check request forms.7.7. Establish guidelines for how the mail should be opened. Establish guidelines for how the mail should be opened. 8.8. Use non-accounting personnel to help with internal controls.Use non-accounting personnel to help with internal controls.9.9. Require two signatures on checks over $10,000. Require two signatures on checks over $10,000. 10.10. Stamp invoices “CANCELED”Stamp invoices “CANCELED”11.11. Have an audit done once a year or hire a CPA to help you Have an audit done once a year or hire a CPA to help you

set up internal controls. set up internal controls.

ACTIVITY:ACTIVITY:Practicing with check requests. Practicing with check requests.

Chapter 6 Client Trust Funds & Law Office Accounting Law Office Accounting.

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Transcript of Chapter 6 Client Trust Funds & Law Office Accounting Law Office Accounting.