Mistrust Accounting
Regardless of the state that you’re in, your state bar’s disciplinary records and judgments for disbarment are littered with references to attorneys who used, misused, or abused trust funds in a variety of stunningly unethical ways. The sad part of the story is that the majority of these attorney are not inherently bad people. They can more fairly be characterized as lawyers who found themselves in situations that led them to believe they could “fix” their problems by taking “just a little” out of trust. Maybe they had to pay an electric bill, or return funds to a client, or pay for a personal expense. Whatever the case was initially, their situation snowballed and they (and their clients) found themselves deep in the hole when the hammer finally came down.
Attorneys who wind up disbarred almost inevitably ran afoul of one of the following rules:
“Borrowing” Trust Money
I’ve used the word “borrowing” in quotes because the phrase “borrowing trust money” is really an oxymoron. Money in trust doesn’t belong to you, and you can’t borrow something that doesn’t belong to you. The correct word is “steal.” Every time you reach into a trust account to take money that has not previously been earned by you in the course of a legitimate retainer you are stealing from your client. It matters not whether the amount is small or large, or whether this is a “one time thing.” It matters not whether your reasons are noble or ignoble. Theft is theft, and will be looked upon as such by your state bar association when your behavior comes to light.
One of the benefits of having a professional bookkeeper is that you’ll have another set of eyes watching over you to “keep you honest.” It never hurts to have a person available who can hold you accountable to the rules when the temptation to bend them might present itself.
Poor Record-Keeping
Less sinister, but just as dangerous, as misappropriating trust funds is poor trust record-keeping. Without accurate records of client transactions it quickly becomes impossible for a lawyer to know which clients have deposited how much and when. It becomes impossible to know for whom you still hold funds and for whom you have discharged your obligations.
A professional bookkeeper simply doesn’t let this happen. Keeping books in order is their area of expertise (whereas, let’s face it, yours is not) and, in the hands of a professional, your books are safe, organized, and comprehensible.
Trust Deposits As Income
I’ll keep this short. Repeat after me. “A trust deposit is not income.” “A trust deposit is not income.” Many lawyers make the mistake of assuming that, because a client is handing them a cheque to be deposited in trust, that they have “made money.” A good bookkeeper will quickly disabuse you of that notion. You’ve “made money” when you render the service and transfer an amount from trust to your operating accounts. That’s when income is recorded. Until then, the money is a liability you owe to the depositing client. Recording the trust amount as anything other than a liability is a recipe for confusion and disaster.
Tune in next week when we cover a few Trust accounting best practices
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