Trust Accounting Best Practices

Welcome to Accountants LawPod, where accounting professionals and law firms converge.

Hosted by Lynda Artesani, Sarah Prevost, and Stephen Libhardt. Welcome back to the podcast, everybody. And today we're Sarah-less, which feels kind of weird. I don't like it. I don't know. Do you like it, Steve?

No, no, I miss Sarah.

We're missing our sidekick, but this week she's traveling. So this week we're going to— we're going to talk about With legal accounting, we want to talk about some real-life scenarios and really the ethical side of legal accounting and why it's so important to have us be in place to help the attorneys do the right thing. And I think we should kick it off, Steve. I don't know if you actually have it open, but Rule 1.15, which is an American Bar Association rule. It's not even a localized rule. It's the rule I like to say it's like their Bible. They have to live by this rule. If they don't, they can get in a lot of trouble. So it's, you, do you have it, Steve, at all that you could?

Yes, I pulled it up. It's not populating by the, it's giving me all the slides separately, but I'm pretty familiar with 1.15, so go ahead.

If you wanna just explain what 1.15 is, because it's a pretty heavy, it's a heavy topic, but it's, important because the main reason, because when they take a retainer, that money is not theirs. So it's really about the client-lawyer relationship when it comes to the money side of things. So—

What I was going to suggest for Rule 1.15 right off the bat is don't be intimidated by it. Actually embrace it. Once you embrace it, you can have this certain amount of pride that you can share the real rule with your clients, because quite often attorneys, they have to test out and get their license and they have to subscribe to 1.15 and they have to take continuing legal education and all of those things. But day to day, they're really requiring on us to keep them compliant with 1.15.

Right.

On the back end side with all of the accounting and bookkeeping functions. And so if you can embrace the rule in the state where your attorneys are practicing. Maybe you're in Wyoming and they're in New Mexico. You really need to, to look at the rules where they're practicing. And also, if I ran into this this morning, there was a question on Facebook and the potential bookkeeper was worried about multistate areas where they practice. And I said, you need to look at Rule 1.15 in all of those states so that you're familiar with it. But the, you know, boiling it back down, if you embrace 1.15 and really learn it, it's fun. I, I'm a geek that way. I just love it. And if every once in a while I don't know an answer and I'll go back and look it up in 1.15 in our state. And the other thing is, if you can get on the mailing list at the Bar Association or the email list or what have you, you'll get updates to 1.15 as they occur.

Right. So in 1.15, a lawyer shall hold property, so usually client funds or retainers of clients or a third person that is in the lawyer's possession in connection to, with a representation separate from the lawyer's own property. Basically, you— the attorney will collect funds, and it has to be put in a special bank account, a trust bank account, sometimes called IOLTA. And one of the things, and this has come up in conversations we've had with attorneys, is if they practice law in, I'm gonna just use Oregon and then Idaho and also Washington, you know, kind of close by states, they have to have an IOLTA in Idaho. They have to have an IOLTA bank in Washington. Any funds collected in those states has to be put in the bank account in that state. They can't be dumping it into the Oregon one if it's a client and they're doing work actually in Washington. They can't be moving the funds in and are just having one bank account. Practice in different states. They have to be licensed and they have to have those bank accounts. The other thing about trust accounts and bank account— trust bank accounts is the bar actually lets the— there's a place where you can look it up on the bar to know what bank accounts are allowed to have trust accounts. Not every bank has them. We had a nice conversation with Relay Bank. We love Relay Bank for paying bills, but they don't have trust bank accounts. So it's a specialized bank account. They usually, like, if it's IOLTA, they collect interest, and that money is used to help people who can't afford representation. That money is used for that, and the interest made on the account is collected and then swept back out again for that purpose. So you—

I know.

That money is put there and tracked there. And this is where our job is critical, because if somebody's not tracking it properly, because it's not just one person's money in a separate bank account, it's a whole bunch of persons' money in this one bank account. We have to track the individual individual portions of it.

And a couple things there. I'm in Colorado and ours is called the Colorado Legal Trust Account Fund, with COLTAF for short. And you actually, we drive people to that website all the time and tell them, look at the preferred banks. So they'll have a list of all the banks that can operate COLTAF accounts and then they'll have the preferred list. And we always drive people to that preferred list. And also one of the things to consider too is let's say you're working with a real estate firm and they have huge transactions, maybe $300,000, $400,000, $500,000 at a time that they're holding, the client, their client actually has a choice if they want that held in a separate trust account and earn the interest themselves. And to Lynda's point, the interest in these regular trust accounts for retainers and all of that, uh, I know in our state here in Colorado, it's divided up per the population percentages in each county in Colorado. and those counties get their share of that interest money and it's worth millions and millions of dollars just to put it in perspective. And that county gets their percentage. And then if there's people in the county who can't afford legal representation, they get a grant, they get money from that fund, which is so cool. And I always love to educate people on that and say, you know, there's a, there's a purpose behind the scene here for all that money, which is awesome.

And when you think about it, does the lawyer's money ever go into that trust account? It can sometimes. Because sometimes they, they're allowed per state. So it depends on the state. They can't keep a bumper crop in there though. Sometimes attorneys are so nervous around the trust account that they'll leave a lot of money in there. And that's not— that you can get in trouble with the bar just for that, not moving the money out when it's earned, because now you're really kind of not showing the income that you've earned. But sometimes attorneys will leave it there because they're afraid of— they really don't know what piece of it's theirs, and they just say, well, I'll just leave it there. And then what they'll do is leave it. It's— and they're allowed to. Usually it's a smaller nominal amount like $250, and that's just for wire fees. So if a wire happens and the bank charges a wire fee, they'll take it out of trust. Well, if it's not your money, you have to have a way to pay that, because really it's the law firm that has to absorb that cost. And usually it's a transfer. We transfer money from operating to trust to cover that. But, and we make a sub-liability for it so we can document it and make it nice and clear on the books. But that also depends on the state. So again, to Steve's point in the very, very beginning, wherever your attorney's working, you need to go to that bar association and really inhale these rules, this Rule 1.15, to really understand it and make sure that you're abiding by it. Because in some states, I think there's some states that are not, they don't really allow that. And then there's some that different varying amounts. So you kind of really need to know that.

Well, and here's a new twist too. A lawyer is responsible for keeping in trust, if you will, sometimes tangible assets of a client. And that's a whole, that's a whole different animal in itself. You know, whether it's a safe deposit box they have to rent and put valuables in or whatever, they can't just stick it in a file cabinet in their office. They've got to protect that property on behalf of the client. So, and that follows— falls, excuse me, under 1.15 as well. And the other thing with that is it doesn't hurt you as an accountant or bookkeeper for a lawyer to actually ask to see each client contract as they sign on new clients and read the documentation in that contract as to what they're representing to the client. And an example would be maybe it's staged billing, if you will, where at certain points during the case they can take money from the trust when certain things happen or certain triggers happen. And to Lynda's point, if they don't do that, then they are violating their contract with their client and they are considered to be commingling funds now because they earned the money at that stage in the process and now they're not taking it. And so they're commingling the money. So they're very—

Interesting.

If you're thinking about doing this, don't let it intimidate you, but learn the heck out of it so you can understand what's going on. What's really fun is to look at those contracts and see what's going on. Obviously you have to keep it confidential, but to see what's going on and to address it at that point, if they don't take the money, some, you know, if I see a really complex contract, I'll go ahead and tickle it out on the calendar or whatever software we're using to track things. And if I don't see it happen, then I can ping the attorney and say, hey, you need to take $5,000. You just earned it. Or have you changed the, the focus of the contract and we don't know about it? that's an extra value-added service, which really backs up the money that we're charging to do this type of work.

Right, exactly. Because your generic bookkeeper might not even go that deep. And, and with this also, Stephen, I've, we've seen it so many times. We'll say, why didn't you move? We found money here that you need to move out. Why didn't you move it? Well, I knew my trust was such a mess. I didn't want to overstate any of the accounts, so I just didn't transfer it. I just figured leave it in as a cushion, or we've heard other terms that they call it that. So you really want to make sure because you really are combing wrangling funds if you leave it behind. Another thing, Steve, that to consider, when is it okay for an attorney to move funds outta trust into their operating account?

When they've earned it.

Correct.

When they've earned it. Do I get 10 points there?

Yeah, you get 50 points for that one because it's so true, right? So it's a timing thing. We've had that conversation with attorneys because they'll see the money hit inside of Gravity Legal or Clio and they'll say, "Oh, it came in, the payment's transacted," but it's not there yet. And it might take a few days. And we're just like, just don't move the funds until the funds are actually in your possession. They're in that account. Don't go moving 'em out. I mean, it's a timing thing. Or even with a personal injury case or matter when they get a big windfall, you have to calm them down and tell 'em to take some days for that money to come in. And we've seen it where checks have bounced from insurance companies that are pretty known, well known, and you don't think the check's going to bounce, but they do. So you really want to be careful there that you don't start—

Here's my 50-pointer for you. So here, here we go.

Uh-huh.

The attorney gets a settlement from ABC Insurance Company on behalf of the client. It comes in, it's $200,000, goes into the bank account. In the scenario where you're saying you have to slow them down and make sure that the fund's really clear, And my disclaimer there is always talk to your bank officer, not just customer service. Talk to your bank officer, have the relationship with them. But I'm digressing a little there. The money's in the bank. It arrived yesterday. Can they loan money out of their operating account to the client and then make it up later from the money that was deposited, deposited in the settlement?

I have seen law firms loan the money. I would say it must be state regulated because I know in some states it's a no-no, and some states— I actually know that Georgia allows for the loaning of money. So I just don't like the practice of it. I've seen it loaned before the matter has been finished. So what if you don't win? Then not only have you lost the case and you've lost all the expenses, but now you've probably lost the loan, right? I mean, Yeah, I, that's my answer. I don't know if that's a 50-pointer or not, but I have seen it done and I looked up the law to see it's allowed in a specific state. You really need to know these different state rules. I mean, that's the big caveat here is you really need to go and look at whatever state your attorney's practicing in to understand it because I've seen it as well where some attorneys, I'm thinking Texas, they actually pay the client expenses depending on the type of law out of the, from the client's retainer. Where in some states you can't do that. It has to come outta the operating and it has to be rebuilt back to the client. So there's a lot of rules.

There's a lot of rules. And to that point, you know, if you're new to this, but it really intrigues you, then just take on clients in your state and become the end-all know-all for your state and what the rule is. And then branch out from there once you've got your confidence.

True, true.

So— I'll give you a couple scenarios here if I could. We had one attorney end up in an audit over a penny. We had another attorney end up in review because they took cash over a weekend and put it in their operating account. And the reason that they did it, they said, was because they didn't have a debit card to put it through an ATM into the COLTAP or the trust account.

Did they instantly transfer it?

No. To which I responded to her, because at that point she said, well, I earned it. And I'm like, well, no, you, you didn't.

Because we have to document the path, right? Because we want to, so we document the path. And I mean, it happens. I, every day an attorney does an oopsie and puts a retainer into the wrong bank account. I swear it seems like every day that I see them putting it in the wrong bank account. Like, you clearly, it's a retainer. And I've seen law firms where they don't have law pay set up properly. And so it's flooding into the operating and then they're transferring it right away. And it's just—

And mistakes happen.

And so messy because if you mess it up or, or they're using the other one I've seen is Intuit Merchant Services. So they know they can't connect it to a trust account. So they connect to the operating account and then they're doing the same thing, moving it over, moving over. And it's hard for us to book all that in because we have to tell the story, right? They get audited. We have to explain the story. And in that case, if you start to see something like that, that's when you say stop and look at them and say, look, Intuit Merchant Services should not be connected to— especially we've seen it, people do it to a trust account. But if it is to operating and you're collecting trust funds, it should really be you should have like Gravity Legal and have that take care of the trust side. Any accounts receivable type of transactions can be held and processed through merchant services, but you shouldn't, you should just keep it pristine and clean. I've had that discussion with attorneys that do like a bulk transfer.

Yeah.

I, I have one, I adore him. He's like, I just do one-off. I, I get the money, it goes over for each individual client. If we find something was, you know, we're doing a cleanup and we found some different mistakes and we see that this one and this one and this one, he never paid himself. Up for, he's going to make those transfers individually and we're going to put a lot of notes in there because 5 years from now if we get audited for this year, I want to be able to explain what happened.

You know? Well, you know, in cleanups, that's where we find a huge amount of the errors being made is when they're doing those bulk transfers.

Yes.

Let's say $50,000, which is broken down amongst 20 different clients. Inevitably, almost every time there's errors in there and you have to train them as painful as it is. Individual client-by-client transfers to keep it clean. It's what makes us the expert. It's what makes us valuable to these clients when we are educating them on it. And I always like to say to them, I'll go back to your example of putting a padding in the trust account or leaving money in there. I have, I have one now, or we have one now that is talking to us about doing a cleanup of their trust account. And you get lots of those. And he wanted to put a huge amount of money over into the trust account to protect it while we were doing the audit. And I said, well, what I want to talk to you about is if you're in a scenario where you're in that much trouble because it was a huge amount, perhaps you need to either self-report that you've got this issue and let them know that you've hired us to clean it up and see what they say, which they'll probably leave you alone and give you a period of time for us to do the work and report back, or you need to think about it's easier to tell us about all your skeletons in the closet than it is the regulatory folks. So we're on your side here, so don't hide anything from us.

Right, exactly.

And I see a sigh coming out of you.

Well, I just, just thinking of some of the things I've seen. And, and you know, one of the other things too is how long do you keep the records? How long do you hang onto the records? And, You know, we have a rule, 7 years, sometimes forever. 7 years could mean more than that because you have to kind of gauge the overlap here. And it's the same thing with like keeping your other records, but depends on your state for estate requirements. But also I think it's just kind of hang on to that stuff and bank statements too. I think a lot of times if you've ever closed a bank, oh my goodness, closing a bank and opening up a new bank, don't close the original bank even if it's just a dollar in it. Hang on to that because you lose all access to the downloading when you close it. And And that's where we can, unless it's perfectly done, you want to make sure you've got all the statements out. Otherwise, it costs you a lot of money to go back in and get that stuff.

Lynda, what do you guys do when you discover that it may go back further than they think and they've already switched banks and they tell you, I no longer have access to the bank statements. What, and I'm sure you guys run into this, what do you do in that scenario when you're like, well, you know, we see that this might be going back to 2015. Where's the cutoff? Where's the pain point? What do we do with the folks at the regulatory agency?

Well, you know, one of the things that we do is we, especially if there's been tax returns processed on this data, right? So you've got this data, you know, it's not correct. You want us to go in and figure out your trust account. And the best we can determine, 'cause we open up the balance sheet, we pull it out for all years, we total it by year, find a year that it balanced and then expand the next year to figure out when it started to get messy. And I think we just had one, 2015 is where it went messy. And then you have to have the talk with the client about, uh, well, how do you want us to approach this? Do you want this cleaned up? The right way is to go all the way back to 2015. Now I can't really do that in the QuickBooks file, figure that out, because that would involve me unraveling bank reconciliations, making adjustments in— I can't make adjustments in years where the tax return's already been processed because you've already told the government, this is what I did, this is what I made. So what we'll do is we actually take the bank statements, we put them into Excel format, and then we figure out the trust month over month in a pretty much old-fashioned spreadsheet where we gave the client this body of work. So they've got an actual record of every trust account Every tab will have all the names on it per year.

That's what we do.

And then wherever it went wrong, which guaranteed somewhere along the line you took too much income or you didn't get enough income, and it may have happened in 2017, we have to make the adjustment in the current year with lots of notes to explain this is how we trued up what we just discovered as we unraveled and fixed and rebalanced. Now, if they can't get the bank statements, I have not had that happen. I've had it happen where the client says, I'm not going back that far, I'll take my chances. Get that in writing so that you've now—

Exactly.

Yes. And as the bookkeeper or accountant, you've informed them. It's their decision that they don't want to spend this chunk of change to undo it because it's expensive to go in the route of going back to 2015 and unraveling and rebalancing.

Well, quite often it costs them more for us to clean it up than what the actual error is.

A lot more. Oh, totally. And then you're just mitigating the chance of a, really the chance of an audit that might or might not happen. So it's really, they have to weigh it on their end and they have to make the decision. If they make the decision, I want the decision in writing so that I've informed them. Now my duty's done. I've told you that this is what we see, this is what we find, and you know, this is where we're going. And sometimes they'll say, can you, where is it as close as it gets? So if you can get it to like under $100 where it's off, and you can't quite determine it, that might be where your line in the sand is, where you go forward from. Really, it's a decision that's made, I think, between the attorney and us. And it's really a personal— a personal decision between the law firm and us, whether they want to go all the way back. We've had some that have gone all the way back. Sarah did one that was done on ledger paper, that they wrote all these names on ledger paper and handwritten, and she had to figure it out. And I don't— that one was pretty difficult because it was all handwritten. But it was there and they rebalanced it. But the problem is, is when they change banks and when they go down the road of they've changed a bank because they think that's going to fix it for some reason. I don't understand the logic behind that.

Yeah.

I close it and reopen it. But if you didn't know what was here and you're reopening it, moving all those funds over here, well, you still don't know what's wrong, what was in it. That doesn't fix anything. And a lot of times there's really, real big mess happens because they don't know how to they either leave that bank account ongoing even though it was Bank of America and now it's PNC, or they completely shut it down and start it up. But nobody ever does it the right way where they book in the individual amounts and then the individual amounts over here as you move it over. That's the right way to do it, is to journal.

Well, and quite often we've seen people tell us, well, I want to go ahead, this is in the front end of the project, I want to go ahead and just switch banks now and start all over. And you have to put the brakes on, say no, no, no. Don't do that. Just leave it alone. Let us do our work. You know, quite often I've seen this more than once where an attorney will say, oh, you can have probably have this done in 2 or 3 weeks and, you know, for $1,000 and we're done. And it's like, no, we don't know what we don't know until we get into it. And, you know, then I really, I really sometimes make the scenario a little more— I add a little more beef to it, if you will. On the front end saying, these are some of the experiences we've had because we're the experts and we've been doing these a long time. These are some of the experiences we've had, and I can answer that, or I can challenge them on that. It's not going to take 3 weeks. I can tell you right now. Again, we don't know till we get into it, and we're going to keep you informed. Always keep them informed.

One of the things we do too is we'll, uh, when we're looking at the body of work, we're going to look at— because sometimes in the beginning there's not as many clients, and as they get further and deeper into the years, there's more, more activity. So when we're trying to price this out for a client, we're going to look at the most recent year's transactions and kind of to figure out pricing, because a lot of times people do this hourly. And I don't know how— that's such a pain in the neck to do. I don't like to do anything hourly, but we'll—

It is.

Yeah, we kind of look at what it— we would charge for that one year and kind of gauge percentage-wise. Like, this is what I know would take— if it's gonna take me this much to unravel a month, multiply that by 12. Here's your job. And then if I look at it, I can kind of gauge it back to go back, going back. And we've won on some and we've lost on some. But I can tell you that when we, if the bookkeeper remains the constant where the issue ran in the prior bookkeeper, you find the issue, you start to see patterns. So it's like, oh, here's where she did this again, or oh, here's where he did this again. And this is, oh, that's his pattern. And then once you start to see the patterns, you figure it out. So when you see it, you know that, oh, they booked this this money came into operating and they booked it to a trust account or vice versa. They went into the money, came into trust and they booked it to a P&L account.

Well, that's wrong. Right.

So you have to really look at that and it has to do wire fees, the deposits going into the wrong bank. There's many reasons why this stuff gets messy, but this is kind of our job security because this is definitely, I mean, last year California really enforced a rule with the accounting of it. And they really strengthened— it was always there, but they really strengthened that rule about reporting and having this documentation. And we had a flurry of calls from clients in California for their compliance piece because they were solos that just really weren't— they weren't paying attention to it. They start out in a spreadsheet and then they just kind of let it go and keep— they're working, they don't want to do this. And the next thing you know, they haven't kept up with it and then they're behind and they realize they need to take care of it. So we did have that happen last year. And, uh—

Don't they have to sign a document in California now on an annual basis that says they're Compliance. Yep. I'd love to get my hands on that document and see what it says.

We could pull that up because we have that link.

Yeah.

Don't forget we have that link to all the bar associations, which maybe we could add that to here. So if anybody's looking to find the compliance rules for each state, the folks at MyCase put this beautiful map of the United States together.

You did.

To all of them except for Florida. Florida doesn't work, I think. But we're always going to be the stubborn state. But yeah. And you know, and a lot of this, this is really all compliance stuff, and it's really, you know, 3-way bank reconciliation, not an easy task. We want to get these pieces done. Ask if you're an attorney listening today, ask your bookkeeper for that 3-way or 2-way bank reconciliation depending on if you have the external software. If you don't even know what that is, we had someone ask us the other day, well, what's the third part? I don't understand what the third part is, you know. And when you If they don't know what that is, or you haven't been presented with that, because it really— unless you're using like a CosmoLex software, an all-in-one, or in my case, all-in-one software, it can't be produced in the software. It has to be an external document. And you really want something that tells the story again of these transactions were in transit, expected to clear in the next month. And that's the other part too, is you want to— and I don't know when this show will land, but if it lands in January or December, you want to make sure that you go through the list with your client and go through all the uncleared transactions for 2023, the ones back, anything from 2022, 2021, you really have to address if it's in trust and hasn't been cleared. Absolutely. This is part of their compliance. This is part of what they have to do. And if they're not looking at that and they're just leaving it and they're like, ah, the person didn't cash the check, who cares? You have to care. And especially Massachusetts is another state that really is stepping forward and saying you can't just ignore the fact that— and it's hard if somebody's got 30 cents in their trust account, and you sent out a 30-cent check, and the client doesn't cash it. You have to exhaust all efforts, and pretty much each bar will give you the guidelines and the rules on this, and you have to follow those rules. And if you don't know them, look them up, because it's important.

We have one right now with a personal injury firm where there was $30-some-odd and change left. And I argued and argued and argued with them and they were like, well, just put it to revenue. And I'm like, no, it's not your money. You didn't earn it. We're not going to get rid of it that easy. So they sent the check to the client. The client cashed it, but the bank cashed it for the wrong amount. And now we have $0.02 remaining in the trust account. And I have to go back to them and say, now you have $0.02 that you have to deal with. Oh, you know, it's, it's that scenario. If something's gonna go wrong, this client's gonna have everything go wrong, you know?

Yep. And it's true. You have, I've seen it. I can't tell you how many times I've seen a penny on the, on the list where there's a penny left. And how, what do you do with that penny? It costs you more to get that penny to the client if they cash.

But you have to show reasonable effort.

How, how high is the probability of somebody cashing a check for a penny?

Right.

But they have to do it. So that's the other part of this is going through those lists, going through it. Also go through your trust list and start to inactivate ones that are not active anymore. Clean up your lists at the end of the year.

It's a good— Well, you know what, going back to that penny or the 2-cent example that I gave, again, being a trusted advisor to your client, the attorney, you know, go ahead and create a ledger, you know, print the report out of QuickBooks, title it this client's ledger, so on, whatever. Pretty it up, offer to write the letter for the attorney. They would sign it, but you know, this is what happened. We're required, you know, you do need to cash this check, blah, blah, blah, blah, blah, and help them. And they're going to think you're a hero. It'll take you 5, 10 minutes to write that letter as opposed to every month looking at that penny and arguing with them about it.

Yeah, I mean, that's so true. And that's really where you're going to shine and step yourself forward as that trusted, trusted person that is really caring and watching out for your client. So those are the little tips I think really are important. Um, we've got a couple of scenarios, Steve, you want to— we'll just discuss very— these are actual cases that happen to attorneys. I'm just going to— I, I got to go to the Florida one.

Um, there's the state that doesn't, doesn't comply, right? Yeah.

So maybe don't hire the walking red flag. So this was in a smokeball presentation that Sarah found through somebody. I thought this was pretty cool. So here's the facts of the case. An attorney knowingly hired an employee who was convicted of 11 counts of wire fraud and sentenced to 41 months imprisonment and 5 years probation and restitution of $7.9 million. Right there, what were you thinking? Were you that desperate to hire somebody?

Yeah, what's the rest of the story?

Oh, the employee was hired despite the federal probation officer warned this attorney that it was inappropriate to hire a person previously convicted of fraud and embezzlement. 5 months into the employment with this person, the employee stole and forged the owner's signature. First of all, don't ever have a stamp. Don't stamp your signature. Don't get lazy, sign your checks. Next, second of all, don't have checks, right? Don't have checks. End the checks. But yeah, so they signed it and spent money, $20,000, $20,950 on cosmetic surgery for their girlfriend.

Oh no.

The attorney was terminated. The attorney terminated this employee and was given back full rein over their real estate and closings. It was a real estate attorney. So the employee ultimately stole $4,750,000 plus plus. That's a lot of money that they stole. So maybe don't hire the walking red flag. The attorney failed to supervise the staff due to lack of meaningful post-closing supervision and follow-up employee action. And one of the things we tell our attorneys, look, you control your bank statements, you should be looking at them. As part of— and it's boring. Nobody wants to go looking through a really long bank statement. But in the old days, and I don't know if this will maybe resonate with you, Steve, they used to— I used to have a process where they would review them. They would be mailed to their home. They never were mailed to the office. And the firm owner would sign it so I knew they had seen it and looked at it. That was my compliance in the old days of paper, right?

Right.

But I think you should have eyes on it and look at what's going on there because that's how you're going to spot fraud. It's part of your due diligence. This attorney was disbarred and rightfully so.

Here's the flip side to the signature example that you gave where they used to sign off on the bank statements. I used to put that rule in place. You know, I want you to sign this bank statement and send me a copy every month that you saw it. Now what we create is a report for them that shows what their billing software says. What the bank says and what the bookkeeping system QuickBooks says. And then we show the variances like checks not cleared or things like that to, to show them whether they're in balance or not. And they can get that document from us every month. And so we have a trail and they have a trail that we all had, we all had eyes on it.

And when you're, if you're sitting in an audit, Sarah and I've been through some audits with attorneys, they really like it that a law firm has an outside person doing the books. That's not somebody—

They do.

From the firm. And it's somebody outside that they can trust. And sometimes we have to write a letter and say that we agree that this is balanced, we have done the work, it's completed, and, you know, this is our three-way and all the records are correct. And that's another part of making sure that you— just compliance and complete transparency really is what you're looking at. I like this one. So this is one. This one is titled, I'm a Lawyer, Not an Accountant. So this attorney, small low-income firm, had 6 bank accounts. Oh, 6 bank account thing.

Oh boy.

But could not afford a sophisticated accounting system. So no accounting system was used to track the funds. So no QuickBooks, no Xero, no paper, nothing, no Excel spreadsheet. So the attorney left enough extra funds in the trust account to make sure the client's funds will never be used. So, you know, that whole padding issue. And so it was never was misused and compensating for a previous mistake. So he, they, he did this because he had had a problem where somebody had made an error and he never wanted that to happen. So he just left extra in there. So the attorney also deposited an insurance check into IOLTA for reimbursement related to property damage. The attorney did not withdraw any earned fees in a timely manner. And I think sometimes attorneys don't think that this is a thing, that leaving it in there is not a big deal. They don't think of it like, hey, I'm not taking too much, so I'm cool, I'm good, right? Even if I leave it there, it's okay. But you can't leave it there because money you've earned and now you're not showing what you earned. It's just like hiding funds if you're a contractor getting paid in cash, right? That's hiding income. And the government doesn't look too happily on anybody who hides their income. So didn't have accounting. So his whole— excuse, or I would say behind all of this is, hey, I'm an attorney, I'm not an accountant. So what are you gonna do to me? I, I, I'm not a bookkeeper, right? I'm not a bookkeeper.

But you as the attorney are, you're the, you are the end of the line. You are responsible no matter what happens in your business.

Yep. And he failed to acknowledge wrongful misconduct either. He just like, I didn't do anything wrong. I just left the money there. Um, investigate, investigation failed to conclude that the funds had remained intact and were not expended on operating expenses or commingled with any other funds, his discipline was a 30-day suspension. So he did get suspended from practicing law for 30 days.

So— We, we just had this morning one surface where we saw that the check was written out of the trust account to the firm, but never deposited in the firm.

Wow.

Okay. So we started digging. They happen to use Clio. So we started digging into the Ledger and Clio to go backwards and see what happened. And everything looked good there. Everything looks good in the QuickBooks file, but it's never been deposited. It's from a past year. So we have had to reach out today to the client and say, where did this money go? Because it's not reported as firm income yet. It's made out to the firm. It's not posted to a client reimbursement account because it's made out to the firm, but we can't find it there. So to your point, What'd you do with it? You know, and so we find these scenarios all the time. They're real folks. They happen. And this is part— if you like puzzles, if you like to sit down on a Saturday night and do a big jigsaw puzzle, this is good work for you to get into. Do you have another example? I mean, these— I just love these.

I know. I'm sure we could dig more case matter up, but this one, there's one more that's an attorney that had hired an independent bookkeeper. So kind of hiring like we are outside the firm. They oversaw— this person oversaw the trust account using Quicken. And after 5 years, that bookkeeper quit the firm and the attorney discovered that the trust account had not been reconciled for 6 months.

Okay.

6 months, he probably paid for it and it never was reconciled. So the attorney hired a CPA to audit the IOLTA. And after a 5-year period, it was overseen that the bookkeeper and overseen by the 5-year period, it was overseen by that bookkeeper that the firm's IOLTA was just the management practices were not in place. So what was discovered? $75,000 in stale checks related to real estate transactions payable to the firm for insurance commissions was found. And there was $32,000 balance in the attorney fees as unearned. So the attorney had commingled business funds and client funds because they had it all in that trust account, not showing as revenue again. Mm-hmm. They failed to safeguard the funds that were in place, didn't maintain accurate records, did not reconcile in a timely fashion. So that's the thing. There's a deadline on a lot of these states. I think the only, the only state I think that I think of that's quarterly is like North Carolina, the other states. And that might not even be the same thing at the time. It was when I looked at it, I was like, wow.

I think it, I think it is.

Yeah. But most of them are monthly. So you have to, you have a duty to get that reconciled monthly. And the attorney claimed he was unaware of the requirements. So saying he didn't know about the law, the law. That's kind of a tough one. Just, you're an attorney, you don't know the law around your own job, right?

Well, you know, this just brought something to mind that I really want to share as a very valuable piece of advice that I use every once in a while. Within each state bar, there usually is a subchapter, if you will, of a counseling arm of the bar for attorneys if they have drug abuse or alcohol abuse or marital problems or financial problems, which these fall under, it's a confidential way for them to get some help. And they'll probably get the advice to self-report to the, to the actual regulatory agency. And that's not a bad thing. If you're self-reporting, you're telling them, hey, I know I've got a problem, and they're going to give you a little bit of wiggle room to figure it out before they would launch an official audit, unless it's such a giant mess that they have to jump in right away. But generally, I mean, they're good people. They're usually attorneys themselves.

Right.

They understand. And if you self-report, you're giving yourself some grace to get this project cleaned up. And that's where we come in. That's where we as experts can say, okay, we're going to fix this. We're going to help you figure it out. And the thing I want to really emphasize is document every single step everything. If you have, as an example, in the QuickBooks file, I don't know if Xero is this way and I apologize Sarah's not here to correct us today because she's such a zero.

No.

But in QuickBooks, we actually will attach PDFs of the emails, the conversations, the documents, the bank statements, whatever we need on each transaction. To your point from a while ago, you know, it could be something you're dealing with from way back when. And you're not gonna remember it in 6 months, 8 months. Heck, I can't remember tomorrow, today, or the next day or whatever. You know what I'm trying to say? But, you know, really document as much as you can. And in our scenario, we're still charging, we retainer, we charge retainers for cleanups, but we're still in the hourly scenario. I like that hourly scenario until I really know what I'm dealing with. And then it's not uncommon at the end for us to give a courtesy discount back to the client. So that scenario works well for us too. Mm-hmm. Because again, we don't know upfront. I mean, you, you seem to be a wizard at that, but I'm not quite at that safety place with myself after all these years. I just, that's one of the few places where we charge an hourly fee.

Well, you know, it's funny, we started out that way, like one year would be this and depending, right, go back. But, and I don't know, Sarah and I just wanna just, and we'll, we actually, when we're pricing it, we look at it and we don't always get it right. There's times that we probably didn't make money and sometimes that we made more money than we probably should have, but we just, we just cruise through it and we didn't think we were going to, or however it worked. But for the most part, we're pretty close to what it should be. But you know, that's how it's a balancing act with pricing as it is anyway, even with hourly, even with like a regular month.

Right, right.

But I think it's a, I want the attorney to know what it's gonna cost. I want the firm to understand what it's going to cost, that it's not inexpensive to dig out of a mess. And you want an expert that knows what they're doing that will rebalance it. And we've got a whole team that's all they do is these cleanups and they do the trust rebalancing and that's their specialty. They're very good at it and they figure things out. Sometimes I'm like, we're like, Sarah and I like high five. I mean, how the hell did you figure that out? I look at it and I'm like, I don't know how you figured out what the person was thinking. And they're really good at it. They like puzzles. But a lot of times A lot of times we're just like looking at it, trying to figure out what it's going to take, and the attorneys appreciate it. And sometimes it's a big nut to— we could charge upwards to, you know, $40,000. It might be if it's a big firm with a lot of accounting over multiple years, big. And we might not just say, here, we're going to charge you $40,000. We might charge you, you know, $10,000 at the beginning and $10,000 2 weeks later.

We might—

Exactly. But, um, we always get paid up front. We don't ever want to not get paid up front, and we want them to understand what it's going to cost. It's not inexpensive to fix this stuff. It's better to go even in the beginning. And we've had a few attorneys this year that we've picked up that were brand new. They worked at a big firm, they're starting on their own. It's kind of fun. It's like a startup. And they just said they wanna do it right from the beginning. They wanna have the right chart of accounts, they wanna have everything correct in place, and they know they're gonna grow and they don't wanna let it get outta hand. And I appreciate that they're already that mindful about— Mm-hmm. Where they are and they're not kind of organically growing, then all of a sudden, poof, they've got 20 or 30 employees that they want to start with us in the beginning. And it's kind of fun. That was one of the things I was afraid I would lose when I went to specialize with law firms. I don't know why it didn't occur to me that, yeah, you could get startups in legal too. But I was like, I love working with startups and seeing like innovative—

I love the excitement.

Yeah, it's fun and it's fun to guide them, right? So you're the person with the experience guiding them through. But yeah, you still get that if you're niching your practice, you still get variety. That was the other thing I was worried about. I was like, am I going to be bored just doing law firm work? But there's such a variety in the practice areas that you're not bored.

Exactly.

I just love working with them because they're just— they understand the pain of getting documents. They get you your documents, they answer your responses because they understand the pain of not hearing back from their clients. So they're really good. Niche to specialize in. But I think this part of the work that we do is such a value because I don't know how much of that is taught to them in school. And I think that sometimes even if they had this in school and they've been in business for a while, it's good to recommit them to the rules. You know, don't commingle your funds. And commingling means that not only does it mean that you don't go and use your trust account to pay your payroll, but it also means you don't leave the money in there that's yours because you want to leave a cushion, that's still commingling. You cannot lose fact of that, that you can't, you can't leave it there. That's just as much of an egregious action than, you know, maybe not as much because you're not using somebody else's funds, but in the eyes of the auditor, it's still bad. So you can't just leave it there.

Well, let's, let's give an example here. This is the one that I use all the time, and I've seen it happen. Had an attorney maybe 10 years ago now, that was— the IRS came in and seized his bank accounts and he had trust money in his operating account and they took it and he lost. He was disbarred for a while. You know, it's, it's, it's that simple. I mean, that simple of a thing can happen and it does happen. You have to be careful.

When you have multiple partners and multiple attorneys and they're all putting the money into the bank for you and they put it in the wrong bank account, just that one thing happening makes a boatload of transactions for us to properly report it so that the story is told, you know. So that's important too. And I think to your point, Steve, about making sure that when you're tracking this stuff, if there's emails, oh, this is, oh, you know, I see this $10,000 came in. Who is it for? Oh, that's a retainer for so-and-so. And then, you know, we've got the Lysio message. Well, Is it a retainer? Should it have been put in trust? Oh darn, it should have been put in trust. Yes, please move Mrs. So-and-so's money into the trust. I'll move it in the trust account. Please notate that in the records. Take that picture, snip it, and stick it right in that transaction.

Yep.

The record of it so that if you go back and the attorney goes, why is that there? I never put— then you've got the story that you've told. And if it's audited, you've got the story that's told. I think that an auditor looking at that understands life happens. And I've seen it where attorneys have transferred money out by accident and transferred into their personal instead of moving it to operating because everything's all on one page, not meaning to, they mean to move it to operating and then move it into their personal as a distribution, but they bypass that step and by accident. And that's another problem that like, oh, you know, well, I understand what you were going to do, but you can't do it the way you did it. You can't just transfer it out of IOLTA to your personal. That's a no-no, and I've seen that happen as well. So you have to deposit the checks in a timely manner. We're getting to that time of the year, and I don't know when, like, this show will land, but you're gonna have that time of the year where they're like, I might deposit it in January instead of in December, even though I've got it sitting here on my desk. No, you have to deposit the funds. And if it's, if it's for, not for retainer, obviously the retainer is going to own the trust account, won't be a factor in your numbers. But if it's accounts receivable and it's going to go right into operating as legal income earned, You can't hold onto that. You gotta put it in and, you know, it's earned, it's earned. You gotta, you gotta have it there. And—

Well, the IRS will ding you if they ever audit you and find out that you were holding checks at the end of the year.

So— That used to be a game contractors played when I worked for contractors a long time ago.

Yeah.

How much—

A story I'd like to share. We're working with a firm that's going to go, this right now we're recording right before Thanksgiving in November and we have a firm that's going to go online February 1st. So we're really lucky that they're going to come on after the end of the year, but they found us through a State Bar Association class that I did. And we've had the luxury of working with them all these months ahead of time and doing a few things that helps educate them and educate our team, which is really cool in that we said, okay, these are the software programs we work with and that we recommend, and we'd like to sit in on presentations with both of these vendors and you. So we did that, and then they selected the one that they wanted to use. So now we know ahead of time what we're using and we currently have them working on putting in all of their clients in this billing software. Once that's set up, then we're going to be working on their chart of accounts over in QuickBooks and setting up the clients over there with the retainers and all that. But the luxury— and where I'm going with this— the luxury that we have right now is we have this period of time to train them on their trust accounting. So that when we hit the ground running in February, they've got it, they understand it, they know what has to be done. And I love this account for that. I just wanted to share that story because you get, you get all kinds of different scenarios.

You do, you really do. And I think one of the takeaways from this discussion is definitely if you're new to this kind of work, being a bookkeeper for a law firm, learn your bar rules, memorize your bar rules, have them somewhere handy so you can refer back to it. And sometimes if you have to educate the attorney, you might have to turn around and give them a copy of that. And we just had to do that with the 1099 stuff. So, you know, you want to make sure that they understand this is the rule. And actually, even with advanced client costs, there's a whole paragraph about that. Know those rules so you can stand in— you know, I'm not making this up, this is what your bar says. Reconcile every month for sure. And if you have an outside firm, make sure you're still active in it. Don't just kind of say, oh, they're handling it, because you could see from that case where the person was assuming it was reconciled. If you're not getting the records every month, then probably an issue. And sometimes that comes from, you know, you hire a company that's doing it really inexpensively and they're just after-the-fact bookkeeper and they're not keeping up with the work, which you can get away with that in most industries, not in the legal industry, not at all.

Well, and you know, look at your bank feeds every day.

Yes.

Your bank transactions that are coming into that trust account and things that are going out are going to tell you a lot and you're going to nip a lot of things in the bud right away. Every law firm client, I think, should have their bank feeds looked at at least every 2 or 3 times a week at the minimum. We like to do it every day when possible, just to catch—

Not to the point, we have one attorney that likes to look at them and wants to know why is QuickBooks different and gets very upset when the numbers don't align perfectly. It's like, well, they won't if we've got checks that are outstanding or deposits.

Right.

And, but he like gets obsessively compulsive over the bank feed. So yes, keep an eye on the bank feed. Look at your bank statement, look online in your banking. Stay, keep eyes on it because it is important. It is your fiduciary duty to maintain these records and to take care of these records. That's not your money, and you have an obligation to make sure that it stays properly accounted for. I think that's probably the biggest thing that Biggest takeaway is make sure you keep yourself involved in this. And yeah, I think that that's probably the best advice. Do you have anything else you want to add, Steve?

I don't think so. Well, yeah, there is. And I know you're going to mention this in the close.

Yes.

But I'd like to talk, if we could, and speak to the newbies here that are listening today. Tell us a little bit about the Law Lab.

Oh, the Law Lab. So our Law Lab is a special group of people. We meet every Friday, not this Friday 'cause it's Thanksgiving, like you said, but I don't know when this show will land. Um, but we meet every Friday and we talk about topics like this. We talk about how to fix a trust account which is broken and how to go through the steps to figure that out. We talk about pricing, we talk about marketing, we talk— we have a lot of topics. Uh, we've had some pretty interesting topics, don't you think, along the way?

Absolutely.

Open to— we're going to be talking about KPIs again because we had some requests. We go into practice areas, so what are the nuances of different practice areas and what you should know and working with specific ones.

Well, you know, the Law Lab is, is a safe environment.

It's where you can bring your concerns, your questions, your fears.

You know, you're in a group of like-minded people. Some of them are new, some of them have been around for a long time. It's a great platform to really share and learn. And number 2, if you have a really specific challenge with a certain set of legal books, we will stop the recording and we'll, we'll actually look at the books and help you fix them.

Yeah, and that's probably one of the most beneficial pieces of it because I think that when I've had people reach out, they're like, I really am interested in your Law Lab, but I don't have an attorney-client, but I really want to, and I wanted to know if it's There you go. Yes, you can. I only have one attorney client. Will that be valuable for me? Yes, it is. Because it's not just about working with the attorneys too. It's also about business growth and staying on top of technology. And I mean, we just came out of QuickBooks Connect talking about technology in the legal industry. So I mean—

That was amazing.

It was amazing. So we've had a lot of different topics. And if you have a topic you want, you can just ask for it and we'll throw it together. And we have a lot of great guests too.

We stay on top of it. Talk about the Facebook group. Where can they find us there?

Yes, we have a Facebook group that's also called the Accountants Law Lab. It will be in the show notes. So the Facebook group is free, obviously. Dive in. I share a lot of content there. We answer questions there and everybody in the group answers questions. So I try to kind of stay out of it, but keep eyes on it, make sure that people are answering questions in a nice polite way and properly. But, and you do too, I know you do, stay on top of the people that are in there and kind of offer our advice. Steve and I have been doing this for a very long time. Gosh, what if we combined all the years we've been doing this, Steve? It'd be a lot of years. I think we'd hit the ceiling.

We'd be retired. Why aren't we retired?

I know. Because that kid who's not here is making us keep doing it.

I love what I do. We love what we do.

That's it. That's it. So on that note, if you enjoyed the podcast and you'd like to hear more content like this, we'd love to hear from you. So be sure to subscribe to the podcast and to our YouTube channel if you want to see our lovely faces. And just search Accountants Law Pod, P-O-D, and follow the links, or just follow links in the show notes. In the show notes that our beautiful Tiara will be putting in. If you have any questions or topic requests or guest suggestions, you can email us. If you want to even be on the podcast, come on in, just email us.

Come on in.

Yeah, come on in, info@accountantslawpod.com. Send a message to our website. We have a website, accountantslawpod.com as well. So yeah, basically that is it on lessons from real life world scenarios and a little bit of an ethics lesson about how to have best practices when working with law firms.

So I think we did it. And thank you for allowing us to be part of your world.

Yes, with much gratitude. We really appreciate all of our listeners. And until next week, we'll see you all then.

Bye now.

Thank you.