It’s the Simple things that are really effective. Try to remember that. -Theodore Sturgeon
I’ve never enjoyed the business side of business. Still don’t. The idea of putting down a case I am working on and picking up a bank statement to reconcile makes my butt itch.1
That is why I hired an office administrator. That is one of the reasons I paid for software that managed everything from the calendar to accounting. That is why each month I received reports that showed my clients’ accounting. That is one reason why I didn’t want to practice alone (there is strength in numbers, right?). Even so, I had quit doing one simple thing.
Take four minutes and learn from my experience. Save yourself from being sued, having to respond to bar grievances, paying legal fees, forensic accounting, countless hours investigating, researching, drafting and meetings that are all unbillable.
Attorney Reconciliation Isn’t Just a Rule – It’s The Best Practice
In spite of somewhat sophisticated accounting system supported by law practice management software, there was a weak link. Accounting information entered into law office management software that is not reconciled against the monthly bank statements is worthless.
Yes, I get it, this is boring — everybody knows that! Why, then, in a random audit conducted by the North Carolina State Bar were “60% [of law firms audited] not in compliance with the reconciliation requirements for trust accounts.”?2 This is even more significant when you consider that many states have a general safekeeping of client property rule, whereas North Carolina’s rules of professional conduct actually require trust accounts to be reconciled with bank statements.
For the most part, the lawyers who don’t reconcile their accounts prioritize their duty to protect their clients’ property. They fail to reconcile their accounts because they are strapped with more pressing things to do, there was an implied understanding when they started law school that law did not require a lot of math, and it’s boring. Here are three reasons that might motivate you to reconsider a reconciliation habit in your practice.
Consider Unknown Risk
Even though I received an accounting report each month for funds I was holding on behalf of my clients, I saw myself as self-insuring the funds. For example, if I was holding $50,000 for any one particular client, my liability for that client was limited to $50,000. I paid the client as promptly as possible so my $50,000 liability was short term, worst case scenario a few days. So, if every system failed and my client’s $50,000 was stolen I could replace it, self-report and make whatever claims were necessary to recover my money. I never intended for that to happen, but I was comfortable that if it did, I could handle it.
I did not anticipate what actually happened. Instead of someone stealing money from clients, the office administrator actually put too much money in the account – millions too much. It wasn’t client money and it didn’t show up on the accounting reports (which were managed by the office administrator). The money was wired into the accounts and then wired out so that the ending balance was not a red flag.
Where I based my risk assessment on tens of thousands of dollars, the actual risk was in the millions. Had I considered that risk, my diligence regarding the accounts might have increased accordingly. In the age of identity theft, this is a credible risk. Learn from me, when making your decision about what your habits will be concerning account reconciliation consider unknown risk.
Trust But Verify
When I joined other attorneys and formed a law firm, I maintained my own trust account. Bank statements were mailed to me and I was the only person that opened them. After we installed legal management software at the new firm, we created a shared trust account. The new shared account didn’t come with paper statements – the statements were e-mailed. I could push a couple buttons on my computer and pull up an accounting on any given case file. Why would I need paper? Instead of the statements coming to me (or any other attorney), they went to the office administrator.
At the time, the reasons for this change were rational:
-The breakdown in accountability was subtle. The same information was available with the push of a button or two on my keyboard, why wade through all the paper?
-I wasn’t alone. Just like I was looking at the accounting reports for my clients, there were always other attorneys doing the same thing. If any one of us saw anything out of the ordinary we would share with the others. With all of us looking, who would be stupid enough to misuse the account?
-There was an office administrator whose job it was to make sure the bank accounts were in order.
In retrospect, the problems that arose weren’t from delegating the attorney reconciliation duties. In fact, the data input of banking records is now mostly automated. The problem was delegating without appropriate checks and balances.
Learn from me: trust but verify. I had several options. I could have had the statements emailed directly to me. I could have reconciled the account myself or I could have delegated the reconciliation to someone other than the office administrator, or even to our accountant. Make sure that you or someone other that the person handling the day-to-day firm accounting reconciles your accounts.
Attorney Reconciliation Rules Protect More Than Clients
Implicit in my attitude toward the rules was an “I got this” attitude. The rules were designed to protect clients and I prioritized protecting clients. Everything was good.
But the reconciliation rules really did more. They protected me. They protected other members of the firm. Simply reconciling the bank account would have saved me the embarrassment of not knowing the answers to the questions posed by the state bar. It would have saved the small fortune it cost to review the records forensically. It would have saved being disciplined. It might have saved the stress and cost of being sued.
It is speculative, but I sometimes consider that if the accounts were being reconciled the office administrator might have been less likely to hide funds that he had stolen from his side business there. Not having a place to hide stolen funds, he might not have stolen them. Not having stolen them he wouldn’t be in federal prison today without his wife, children, law license or side-business.
Don’t wait until you get a random audit letter or your office administrator is in prison. Start reconciling your bank accounts today. Don’t know how? Call me at (205)912-8248 and I will give you some awesome, free, resources.