California’s New Bar Rules: What Every Lawyer Should Prepare For

Welcome to Accountants Law Pod, where accounting professionals and law firms converge. Hosted by Lynda Artesani, Sarah Prevost, and Stephen Libhart.

Welcome back to the podcast, everyone. And we've just been having kind of a fun afternoon doing the recordings. And this one came up because I read an actual newsletter that came from LeanLaw, and I started poking around in it because the last couple of last couple of LeanLaw newsletters are kind of scary. And this one, as soon as I saw it, I sent it to Sarah and I said— I grabbed the link and sent it to Sarah because it has a lot of statistics because they've made a lot of compliance rule changes in California a couple of years ago, I think it's been, right, Sarah? Yeah.

And then this—

now they're starting to really enforce and they kind of ran a test. So we'll go over some of what we learned in the test and give you some statistics on how well the firms that offered to be tested did, and then kind of go through a little bit more of the details. So we're calling this one the Scary Changes in California Bar Rules, which came from a place of we need to fix ourselves because we did not do our job. There's a major famous case. We won't go into all the details of that. It's very famous though. You can Google what was the, like, worst bar infraction in California. I'm sure— I don't know. The names will come up, but that kind of forced this change.

It was the catalyst for all of this, sure.

Yes, yes.

Well, we should add it's new California Bar rules and legal accounting, so the stuff that we've been discussing over the course of these many years of our podcast fall into play with exactly the things that we warn about, we discuss about, we highlight and say, hey, you know, you need to come into compliance with this. And that's the specialty and the long tenure that the three of us here have had in seeing you working in a firm, Steve, and coming out of a— outside and working this way. And we sit in a spot that's a very good spot, I feel, because we have a high-level view of multiple ways of working in multiple jurisdictions. And we've always, I think, worked to what we found is always the hardest parts collectively in different states. Yeah. Florida has a certain criteria that we follow. California has their criteria. In general, collectively, that's the criteria we follow.

Correct.

And so don't—

Yeah.

Please don't, if you're listening to this or watching this, please don't say, oh, it's just California, I don't have to worry about it.

Yes, that's what I was gonna say.

Yeah, yeah. It's coming.

And it might already be there, you don't know it too.

Exactly.

I mean, California's just doing a different level of assessing it with people. There's a higher, regard to, I mean, there's a lot of law firms in California now. They're really looking at, it's a self-assessment, right? It's a self-assessment program. And they did a mandatory program. They're doing a mandatory program, but they did like a beta test with law firms, 100 law firms that raised their hand and said, yeah, we want to be in it. We want to see.

Which is so cool. It's so cool in itself that they did that. I'm sorry, I'm interrupting you.

Yeah, no, no.

That excites me that they actually went out and said, okay, we're the great big Bar Association, but we're going to let you guys be a part of this in beta. Testing and that all these law firms jumped on it. That's so cool. It's amazing.

I mean, incredible, right? Like, it gives it, you know, I mean, it— what it says there is what, 18 firms that voluntarily did this?

Yeah, 21 firms signed up, only 18 finished the process. So let's start with that. So that was the original, right?

So that was— there is that.

Yeah. And then out of the, out of the 18 firms— think about this for a minute— of the 18 firms, only 15 firms had non-compliant trust account journals. So out of the 18, only 3 passed in that regard. So 83% had non-compliant trust account journals. So I'd love to know more details on like what made them not compliant, like what was— because you know you're in—

I'd like to know, yeah.

Right? You think you're doing it right. Obviously you're signing up and going, yeah, I want to be tested, and then all of a sudden, out of all those firms— that's a lot of firms that didn't pass. I mean, it's really—

Yeah, that's a high number.

Yeah.

16 of the firms out of the 18, so only 2 had— they had non-compliant client ledgers.

Hmm.

And I would love to know the answer to that. Like, did they have software? Did they use external software? Because that's kind of, I think, why LeanLaw is kind of sending these scary articles out, is that you need the software to make sure you have these compliant journals. And so— Right. That's only me. Now we're down to 2 that have gotten that far, right?

I think the 3rd one is the one that has my brain—

wow. Out of the 18, only 15 had non— had 15— 15 of the firms had non-compliant monthly 3-way reconciliations. And that's the thing too, because we asked that question and usually the answer is, well, yeah, I'm pretty sure it's reconciled. That's not what we asked.

That's the foundation of all of this, is the 3-way reconciliation. If you don't have that, I mean, you're the whole building's gonna tumble.

I mean, we could have probably guessed the rest of this, right?

Well, you could have a three-way, but it still is not compliant.

Correct.

There could be a multitude of reasons why, which I'm not going to go into because that's not what this episode is. But I can tell you, on the—

on the—

for— we've seen a three-way provided to us, and I was like, what is this? This is just the numbers on a sheet.

Sorry, you can't figure out what, what you're trying to say because you have to tell the stories and it has to equal The source of truth. Yep. And I've had at least one client not notified within 14 days of the receipt of the funds. So the money comes in and nobody's letting the client, there's no entry to let the client know that the funds are there, which is crazy to me because I'm just doing, we have some condos on the beach and I'm just starting to get them rented and doing my thing. And I always let the person know, as foolish as this is, because they have a bank, they can look the check, see the check is cleared, but I'm writing to them, especially if they're mailing a check, like yes, snail mail, got here. I always let them know that the check has arrived and I've deposited in your account, which seems silly, and I don't have to do that, but this is a requirement at the bar level that you have to let the client know. And we've seen it. We've seen dormant accounts, 50 cents, 3 cents, a penny, and you have to keep in touch with the client to let them know that they have this balance. You can't just ignore it. And I think it gets ignored a lot. When we see it, we get a new client and we're like, What are all these small amounts? Oh yeah, I never got around to getting them off the books. What do you mean?

I have a 3-cent one right now. I keep reminding the client, you've got to, you've gotta refund this. You're done.

Yeah. So here's the thing. If you think about it just on the human level, these are, you get to be a busy business on the human level. These are other people's monies that we've been entrusted, and then we're supposed to keep track of it. That's what we're signing up for. And so I always say this, like I was gonna say on the last one, we follow the money. You could put whatever you want in your spreadsheet, you could put whatever you want in your practice management software, that could mean crap to us until we see it in the bank account. And that's when it means something. And then we have to make sure we've identified it correctly and it's been properly handled. So yeah, I mean, this is kind of, I'm grateful for these, sorry for those volunteered.

Yeah, well, no, it's good for them to do it. I mean, that was smart on their part because it's many, So a couple of them must have passed completely out of all of them.

Well, little sidebar here. I mean, not notifying them within the 14 days that you received the funds, that's a missed marketing opportunity as well. Client relations.

Yeah.

That's huge.

Yeah.

That's huge.

You know, the other thing too is like, if you think about it, it's when we're taking these pieces and these firms that have done this, I'm wondering too, size-wise, what are these firms? I'm curious like, at what level, how long did this take for them to go through this process? When you think about this journey, I mean, we've received it from the other side. Lynda and I have. I'm in an audit. I have less than 2 weeks to pull this together. That's what happens. I'm presuming there was a certain length of time. They were probably testing out how much time could someone comply with. I'm curious, like, what more is behind this? Like you're saying, Lynda, like, what is this?

It's interesting, too, that one of the stats is that the people didn't move the money. We see it, they bill, they let the client know— Yeah. We've now moved the funds and then they don't make the transfer. And so you're leaving the funds in limbo, you're not recording it as income and in a timely fashion. And we see this and there's actually in here, there's like a little compliance, which I think is great, a self-assessment of compliance. And you kind of have to click through, do you have a separate bank account? Yes. Do you have the amount, the accounts? Set up with separate ledgers in a separate trust account, liability account, which you don't see. We see that a lot of times people don't have. And then the next question, well, the fourth question was, do you deposit advanced fees in a client trust account? This question could have a different answer depending on where you reside and where you're practicing law. So, so what do you think, Steve? Do you deposit advanced fees in a client trust account? What would the answer be, yes or no?

Simple.

Oh yeah.

All right, I'm gonna hit, yeah. Great job, Steve. It literally says that. It says great job.

I mean, I'm like, yeah.

And it tells you like the ethical, it says the ethical implications and it says the compliance tips. It actually gives you all of this. So if you're unsure of how this all works, you'll be able to kind of follow along and then check your own firm out. Do you segregate your clients, your firm's funds from your client funds by not depositing any firm, any firm funds, that never happens, into the client trust account other than nominal amounts of funds required to cover bank charges.

So yeah.

I see a big sore thumb on this original list here too. 72%, so roughly 3/4, had deficient attorney supervision. Right there, you know, that path causes all these other problems.

Mm-hmm.

Can be a direct hit on all these other percentages. If you're not training your staff and everybody's embracing the procedures. And, you know, you have a lot of younger attorneys that you're bringing in out of the law schools and, you know, working their way up in the firms and things like that. And if you're not training them, instead of just saying you've got to bang out, you know, 3,000 hours this year or whatever it is, if they don't understand the trust requirements, they're just out there getting that client to make their hours. That's going to cause a lot of these other problems.

Yeah, clearly there's contingency firms in this because 6 of the firms had at least one— Right. —for an attorney, firm fees was incorrectly calculated. To your point where you're using a spreadsheet and you're doing this work. I get it.

Or AI.

I get it. You're using the spreadsheet. I've seen it all the time. But then what, like in one instance, what we do is we double-check the spreadsheet. The spreadsheet's not produced by us, but when asked if you want it part of the workflow, we will go in and validate that spreadsheet to go back into the accounting to see, Okay, what was recorded? Is this accurate? Do we see everything that you said you see? And this is the problem with a lot of firms that are on contingency. The money walks in— before even the money walks in, you are so hot to trot to disburse for multiple reasons.

Yeah. Oh, that's one of my pet peeves.

You've got to give yourself time.

You have to slow them down. You can't do that.

And so I'm not— I'm honestly not surprised at this. The, the two combined, the 13 and the 6, um, because you're one firm owner to many, let's say.

Mhm.

How do you build that in when you have an extra layer of somebody overseeing it? And we've heard this a lot. Oh, we're fine. We do it internally. We have it this way. Who's validating all of those pieces? Who has all of their Right. Your interest is in the firm, right? Not outside the— like those of us seeing it from the outside see it differently. So it's a very interesting process, which honestly, it's interesting, Steve, you brought this up. What this bar is doing is in relation to what we discussed in another podcast regarding hiring. And you're requesting outside counsel to view it, accredited outside people or outside individuals assisting with this.

And with this bar, you have to pay a certified firm. So this is going to be a very expensive dance for you if you have to do it yourself. You're looking at $10,000 to $20,000 to have them represent you and do the audit, which is expensive. When a client disputes your fees, do you hold the disputed portion of any advance fees in the trust account until the dispute is resolved? That's the question on this thing.

That's a good question.

That's a good question.

Yeah, I would think you're going to have to because it's—

You have to. Yeah, yeah.

Now what if you moved it, let them know about it, and they come back and say, wait a minute, I don't— you didn't spend all this time. I had that happen with a lawyer one time, like, no, you did not. And then you, if you go forward with it and they, and they dispute that amount, are you supposed to move it back?

Well, yes.

You better protect it.

Yeah. You better file a lawsuit.

That could come back and bite you so hard.

Yeah. Yeah, you better.

And you know, let's back up a little bit on that. Document the heck out of that dispute because you don't want to be pinged on the flip side of this for commingling firm funds into the trust account. So really document the heck out of that so that you're protected and the client is protected. Acknowledge it. It's not a bad thing when there's a dispute. Acknowledge that it happened. Explain what you're going to do. And part of that explanation is I'm going to move this $5,000 back over, and that might hurt having to do that.

Yeah, it could hurt if you're trying to make payroll or something.

Exactly. But I'm going to move this back over and then get on top of that dispute and get the thing settled.

To me, if that one instance occurs, it would be like, all right, Let's look at our process to ensure how are we handling this overall. And I know this says California, but overall nationwide, there should be better processes. This is big. Yeah, exactly. Which going back to kind of some of our questions earlier, I just read over this. 300 firms applied to participate in this— Wow. —conferenc— back in April of '24. 21 were selected. Wow., and at various private practice sectors, firm sizes, and trust accounting record methods. So, um, and then voluntarily the reviews began between February 2025 to August 2025. So they did have a time frame. I'm sure they extended it further than probably they will in practice, but they had a time frame of for which that was handled. That's interesting.

It is, and it's even a question here about do you preserve all your records at least 5 years, which in Oregon, different.

Yeah, so the state has a different level and the county jurisdictions also can deem a different level. So the county I'm in, it is a bit longer, but it's not every accounting person knows this. It might be something you might need to start asking given that we have a large body starting to kind of mandate these things.

So I got a certificate for answering all those questions, right? Oh, and you got 100.

That's one to hang on the wall.

Seriously. I mean, there's a whole, like, there's a— that was a 12-question attorney self-assessment tool, but there's a whole other section in here that you can— we'll have Tiara put this in the show notes because I think a lot of people— this is something that even if your state is slightly different, you need to know the differences. But I think it's a great tool to even give to your bookkeeper that's doing your books because it got into 3-way bank reconciliations too, and what exactly that was. And do you have all 3 of those pieces? Because that's another gray area that you find that people are like, well, I was with somebody and they're like, oh, it's just what's my Clio equal to my bank register or whatever. And like, no, that's not your 3— That is your 3-way is those parts. But I mean, you have to include like how the how it's laid out.

And I'm sorry to break the news to you that say, oh, I'm reconciled in Clio on the Manage, Clio Manage side. I'm sorry. No, you're not. That doesn't tell me what's, you know.

No. They think that's the three-way though. A lot of people think that's the three-way.

Yeah. No, thank you.

Yeah. I mean, we saw the one that they have for Clio Accounting and that one needs some help, you know? Yeah. Yeah. The CosmoLex is the only one that I've ever seen that looked very strong Cosmolex 3-way. That is obviously, it's an all-in-one product, so they can produce that.

That one is problematic though internally. There are so many software pieces to that that I do not trust or like. But yes.

And reconciling, reconciling Clio is a thing you can do inside of Clio, but you really got to do that from the get-go. You can't go and start it willy-nilly if you've already been in Clio for 15 years. It's not going to work. And then like even PracticePanther, that's another one that's very weak and it's easily unclicked. It's a click of a little box and then it can be unclicked by the client because everything's all left-sided clicking on that.

I honestly think though that these softwares, if we're thinking about making these softwares where you have— if you look at what the Bar has put out and all the little tutorials and the resources that they've put out for this, that's what you should be following hands down. Regardless of what practice management you're in, we've seen redundant systems, and there's no problem with that because I can't tell you how many times you've moved software and you can't see what you previously had looked at. You don't have the details because somebody just recorded it willy-nilly in the new one. And to us, it's— the cost of being out of compliance and the cost of not knowing. These are people that have paid you in good faith to hold their money for work that you will do. That's your reputation.

That's your reputation. You bet.

And there's even a question here about who's doing the 3-way and is somebody else overseeing it as well, making sure, because it's just like— I remember years ago, some nice tax person said to me, make sure that even if you're If your clients are giving you the keys to the kingdom and saying, here, reconcile. One of the things that I've seen with other firms where they had fraud come into play with the bookkeeper did whatever, it's because they didn't have the bank statement go to their house. And back then you got them in the mail and then you had to sign off on them. There was like a whole procedure that we had in place that at least the owner had eyes on it. And that's when you've ever sat in a situation where the bookkeeper ripped off the client, Usually it's got to do with— there was just— they just trusted 100% everything, and the bookkeeper was able to run the payroll on their own, and they were adding money to their payroll, and then they were paying the bills, but they were throwing their own bills in with it.

You're talking in-house bookkeepers?

Yes.

I just want to clarify this because—

Oh, good call.

But a lot of times they get very, you know, you get complacent. And when I hear these stories, I, I've heard stories over my career, and I'm always like, dumbfounded that somebody— I could see how that could happen because you got somebody sitting in the seat, they know you, they're friendly with you, you don't ever think they'd steal from you. And that's something.

So yeah, I don't want to cast the shadow on all of you that are doing good work, honestly. I mean, these are the ones that we see and it makes our stomach turn.

It's sad.

It's really sad and it's unjust and, you know, ruins our profession.

So in other words, the one thing you can do for compliance is make sure that if you've got a firm doing it, you still check it. You still get eyes on it. You look and say, oh, my balance sheet says this. And, you know, we— I like to take the little picture. We have a great three-way that anybody can pay LifeFlow and use. We created one for LifeFlow, other software. We did it to help others. And it's, it's a great tool.

It is.

If you don't— and it's in Google, but it's a, it's a proper three-way. It's very clear if something's wrong or if you know, it shows if you've got money in transit that's coming in, that's gonna clear the next month. You can see that on there. It's got all the details that if you were audited by the bar, the bar's gonna look at that and go, "Okay, I see this or I see that." Because you deal with compliance even when you have Steve's 5 cents or whatever on the balance sheet.

Mm-hmm.

That has to be dealt with. And a lot of times that gets forgotten and that's part of compliance. You cannot have these really old small balances lingering year after year and nobody even notifies the client, or they can't find the client. They don't notify them. It's part of their compliance is to notify the client that the money's there.

Well, you have to show reasonable effort that you tried to notify them too before you turn it over to the state.

Before you turn it over, there's a whole bunch of steps. Yep. There's steps there.

So in a press release that we'll have in our show notes does stipulate that, that the beginning September 29th through October 31st, "The State Bar will randomly select and notify 100 attorneys representing a cross-section of the attorney population to complete the CTAPP compliance review for reporting year 2024." So I know this is past the dates that have been issued in this release, but that's just the start. So we don't know what's gonna continue on.

Mm-hmm.

And I think that if you're questioning where you stand Maybe take the self-assessment, really review it and look it over. The other thing too, and I might misquote this, but I need to just go back and look at this. If you are adjacent, so you are a firm that does work with California clients, but you hold those funds in your other state bar, you know, the state that you reside in, There is something about that adjacent kind of joining thing that the bar has that can look at your records. And I don't— I don't want to be quoted incorrectly, but I— there's something in the stipulations that Lynda and I both read it. And so I would just say that if you are doing work within the state and you are not following these in your own state bar rule, like your own jurisdictional bar doesn't have the same rules, but you do work with it, you should follow these bar rules as well, just to ensure that you're doing it right.

You know, you can follow them on Twitter and other places, but you can on X, and I'm looking, I just signed up to follow the State Bar on X, and the first thing that came up is they actually show disbarment attorney discipline. They tweet it out.

Oh.

They got the guy's name of La Jolla disbarred for committing acts of moral turpitude. Following failing to support the law. This is like right on X.

Wow.

Incredible. I mean, yeah.

Well, this has gotten scary. I think this is about a good time.

This is really scary episode. You know, I want to, I want to point out that let's remember that one of our most watched episodes on this podcast was about trust accounting. We just reviewed that last week. So go back if you're, if you're, especially if you're newer or if you just want to review, go back and find that episode. It was probably, I don't know, maybe a year or year and a half ago. Find that episode. It's going to give you the basic groundwork of what we're talking about today. And then I'm, I'm encouraged that California has done this, and I'd really like to follow this some more. And, you know, thank you to LeanLaw for doing, you know, for bringing this out in one of their articles, because this is, in my opinion, something that AI is never going to do for us. It's just, it's just too in-depth. It's one of the reasons that people hire us to do law firm accounting. It's the main cornerstone of what we do. And, you know, it's worth all its weight in gold that you have people really watching it for you. But it's how you're watching it. What are you doing with it? Are you following the guidelines and the rules and subscribing to them and keeping your nose clean, per se? I think this is great.

Yeah, I do feel like that Home Alone, like, moment. Yeah, yeah, yeah. It's a lot of stuff.

I'm actually— I'm kind of relieved that this happened. I think this is cool.

It's sad at the cost of who it happened to.

Yeah. But yes.

Yes. The weight—

It gives credibility to it.

To what we've been saying for so long.

Yeah. It's like, here, we're telling you the truth.

Yeah. And I think a lot of times we get a lot of clients via the, my trust is a mess. Can you help us? We have some clients that all we do is trust. They already have a whole bookkeeping thing going on and they just want to offload that one task. So that is something I'm sure, Steve, you would do too. We just do trust for people. You know, it's a service. I think you might have to pay for it, but it's peace of mind. Peace of mind.

I cleaned up a trust account 5 years ago. Huge one. Massive. Uh, took me several months to do it and, you know, they were happy and it was done. And I heard from their bookkeeper about 2 weeks ago and she said, we just had another hiccup. Can you just tell me if, if what we did was right or wrong? You know, and that, that really made me feel good that, you know, 5 years later that she came back and said, okay, we did this, you know, and saved themselves the pain of ending up where they were before. Kudos to her.

Well, and honestly, if you want a simplified method is, you know, the work, the reconciliations and the validation of the work can be done by a third party with the production of a 3-way overseeing the work that's being done in-house.

Mm-hmm.

So that's an opportunity there.

I can tell you that if you're doing it inside, you're doing it all on your own and you're way behind. The bar loves it when you've got an outsourced firm because we're not involved. We have— there's no— we're not in the firm. We're outside. We're like that third party helping you. And we've done that for several clients where they were in an audit and they needed the assistance. It's something that we do. So it's get somebody who knows what they're doing because there is paperwork that's involved and you have to follow the rules. And like Sarah said earlier, you don't have a huge window of time to get this work done. That's why it's good to have the records ready and ready to go the right way so that you don't have to worry about compliance. You know, you're compliant all the time. So if they ask to see June of 2024, you know, June—

Boom, there it is.

You've got it, right? It's there. So that's important.

Yeah, definitely. Okay, well, I'm tired. I want to go back to bed now.

This should have been shown on Halloween, right? Scaring the heck out of everybody.

We could have had like scary background music.

Yeah, yeah, Sierra can do that. She can make a nice like screenshot. No, it's, it's serious. It's a serious topic though.

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So, and it looked like Lynda was just doing some business there saying, nope, that's not the right document, passing it back out the door.

Yeah, no comment.

No comment.

Okay, I was getting a phone call like at the end of this.

I'm like, wait a minute.

Well, thank you, everybody.

That was a good topic. Thank you.