Upholding Compliance in the Legal Industry - What Bookkeepers Should Know

Welcome to Accountants LawPod, where accounting professionals and law firms converge. Hosted by Lynda Artesani, Sarah Prevost, and Stephen Libhardt.

Hey Sarah, how's it going? Welcome back everybody. How is it? We managed to get through a weekend after being away at a conference.

Yeah.

Is your laundry done?

Not all of it, but it's hotter than heck here too. It's like it's been in the 90s, which is great. And I got—

That would feel cool to me right about now.

Little guy. This little guy. So I was missed, I could tell.

Yes.

Yeah.

And I have the wrestling match happening behind me with the cat and the dog. By the way, that's a cat and a dog fighting and play fighting, but they're really cute.

Yeah.

Yeah, no, I did not all laundry, but you know, it's been a tricky weekend with all kinds of stuff, getting all kinds of things done. I have school rounding out too, like our son's first year of college, so that's interesting.

Yeah, I actually had a really good weekend. I kind of worked out in the mornings. We didn't work out much when we were gone and then came in and then worked for like 5 uninterrupted hours and I had a ton of stuff done. I went through all those emails that I starred along the way. I was like, yay.

Yeah, that's great.

I feel like I got something accomplished anyway, at least organized in my brain, which is good because this topic's kind of heavy.

Yeah.

So the topic this week is going to be Upholding Compliance in the Legal Industry: What Bookkeepers Should Know. I think the first thing they should know, which I found kind of shocking, is Somebody along the way had said to me, you know, the lawyers are responsible. So if the trust becomes out of compliance, it's all on the lawyers. Bookkeepers skate through without a problem. Then we met with somebody who was a professional witness in court and she told us, no, that's not true. And that was kind of shocking. Oh, I got trouble back there.

Yeah, yeah.

That was kind of shocking to know that we do have culpability in upholding compliance, which makes sense when you think about it, but always thinking that we didn't.

It, you know, ultimately, yes, we've seen it. We've been on the side where we've had people come to us because they are going through an audit or they need a standard of records. They need to work. They've been told they have to work with an outside company because their record keeping is not in a place and there needs to be details that monthly that are submitted on behalf of that. So we've seen it in there. I believe that for us, when we think about it, we honor what is the transaction, which is— I'll just use simple numbers. I'm giving you $5,000. The engagement that you asked me to sign as a client on behalf of the law firm states that you're going to put that money into trust. And you will show me when you're doing your billings and the intervals and all the things that surround it.

Mm-hmm.

And clients of law firms have done this where they'll pay the money in the wrong account, that they put it in the operating account. That's not the trust account. They wanted more convenient way to pay so they're not having to wire fees in and all that kind of stuff. Well, Ultimately, yes, the law firm that receives the money is the one responsible for ensuring that it goes to what is agreed upon or what's required. And we have to be that conduit of information if we're doing the work. We have to be able to tell the firm in a timely fashion what we're seeing, or we're the second set of eyes to catch it, is what I see.

Yes, exactly.

It didn't surprise me It shocked me a bit, yes, like you, but it didn't surprise me that, you know, we're seeing the data, we're constructing the data, and we want to uphold it in the right way, whether it be something we don't have the control of it coming in, but we have the ability to assist in making sure it goes where it's supposed to go.

I mean, it's funny though, because we see it I mean, out of compliance can be a few things. I mean, you could see impropriety. You could see that they're moving money out to pay rent or payroll or whatever. That would be one egregious thing that you could see where ethically we are bound to— I guess you could bring it to— you'd bring it to the client first to say, hey, this happened maybe by mistake.

Yeah.

And then if it's not addressed and not corrected, and then you see it that it's probably an issue, then you're going to have to do something. But what about people who just don't transfer the money out and leave it in the trust because they don't want to move money to get paid taxes on it in the fiscal year it was earned? Like, what about that?

That's a problem. That's an equal problem, right?

Yeah. I mean, we've had to let a client go for that. So, you know, bring it up, you bring it up, you bring it up, no actions taken, and flat out they just say, I don't, I don't feel comfortable moving that. I want to leave it there. And then, you know, they're out of compliance. But then what do you do? Do you turn them into the bar? I mean, it's really almost an IRS problem, right? Because they're not reporting their income properly.

It's kind of twofold. It's both complaints.

Yeah, it hits both sides of it. So it's not as bad toward the client though. Like, it's not as bad toward the client. The client doesn't know that they haven't transferred the money out. So they know that it's been applied and it's in the transactions have happened, but it never physically moved out of the bank. So according to the paperwork, it looks like they've got paid, but it's not happening. Like, you've got all these uncleared deposits that you're sitting looking at, and we see that a lot. And I don't think it's mostly— mostly because a client will say, I know my trust is a mess, I just am fearful of moving the money because I don't know what's in here and what's real or not. And then you're like, okay, well, we'll figure this out because this is what we do. But yeah, I mean—

I think at that point you want to— to me, it stems from the beginning where you want whoever's providing you the information, you have the transparency, and you also want the ability to— you may want another second set of eyes on it, um, because it does happen. I mean, you see it sequentially, uh, very easily that checks will get printed out of an account, and we've seen it before where it's all the wrong numbers with all the wrong information. What's coming through the bank account says contrary to what was recorded in the register, which then ties back to the practice management.

Yeah.

All of this stuff and it quickly can go sideways and you don't, that's not your intention obviously as a firm owner or someone who's responsible for ensuring that that trust account is supposed to be the way it is.

And as a bookkeeper, you get a new client and you don't know a lot about legal, join the Law Lab, listen to our podcast, but also so you come into this going, how hard can it be? And then you start looking at it And first thing you gotta do is go to the bar and look at the rules for that state that that client is working because they're different. It could be vastly different between like California to New York. They're all different. So you need to know those rules to make sure that the rules are being upheld. And then, I mean, you don't just assume the attorney knows the rules. They change. We know this 'cause California just changed a couple years ago and that, you know, all of a sudden we're getting all these calls and we're like, "Oh, why, why are so many calls from California?" Well, it was a lot of people who weren't weren't following the rules to begin with, and they started to really enforce the rules, and then they changed it to be really nailed down specific. And then the clients were like, I gotta fix this, this is— mine's not right. And then when you go to fix it for a client, how do you fix it? Well, you got to open up that balance sheet, blow it up all the way, all dates, total it by the year, collapse it down so you get all the trust accounts. It's sometimes like— we just did one the other day, and the trusts were all intermixed with all the operating accounts. And then you're like, oh, I can't even— I want a total. I want to see the total of what's in trust. I want to see the total that you've got in the liability account. They got to equal.

And that's even if you have a liability account. Sometimes I forget to call that.

Yeah, you're right. You're right.

Correlating liability. But how hard could it be, Lynda?

Yeah, I just did a blog post that's going to be coming out in a few weeks and it's called Trust Account. It's Easy, Right? That's the name of the title because it's not easy. There's a lot to it. That was kind of a tongue-in-cheek title, but I mean, it's not easy.

It's a tongue-in-cheek situation, per se.

It is because it's not easy. It's easy as it simple as it sounds. And for all attorneys, especially when they're just starting out, they grab their little spreadsheet and it's like, it's so easy, a tab for every person and they have an overview sheet and it looks so simple and then it grows into a monster because all of a sudden they have explosive growth and it gets left behind. Nobody's tracking it and keeping track of it. And then all of a sudden you've got a mess and it just takes one deposit going to the wrong bank and then, oh gosh, now what do I do? And went into the operating, you know, The person in the office put it in the operating instead of the trust. Yikes. And then they put a transfer, and then in QuickBooks they just do a transfer.

I brought up earlier, the client paid in the wrong account inadvertently because the link was sent incorrectly, or they updated the website and the website had an old link. And you don't intend on that happening because this is a business. You're— Yeah.

Business.

Yeah.

And we've always found you get in hot, hot water faster when you're like, oh, this paralegal/admin can do the work.

That's my bookkeeper. She was the admin. She was the best admin we had, and she's the bookkeeper, but she has no clue about how things are booked in or even accounting overall. And then you're now adding a task onto somebody that doesn't have that background, and they need to learn it on the fly. I mean, some people do pick it up and they get it, and sometimes they don't, and then it becomes a giant mess, and it's just a bunch of transfers because QuickBooks says it's a transfer, or QuickBooks said it goes in uncategorized income. Okay, that's where it goes. And then you— we get the records. We're like, oh my, look at this, look at this, you know, and then we're sitting there trying to help fix it. And those are the things. And I think if you look at records, first thing I think is the biggest red flag is to look at the totals and see if they match. We just saw one not too long ago that had multiple trust liability accounts. They had one trust bank account, they had multiple, and they were kind of sitting in different places and I don't know what caused it. Maybe the software created it and then they already had one in place. I don't know. We have people who serially change theirs. We call them serial changers of their software. Every year they decide, ah, this one doesn't do it, so I'm going to go to this one, and this one doesn't do it. And every year they're changing software, which can make a really big mess.

It can make a horrible mess. And I also feel like there is an area which isn't discussed enough in the accounting world. Um, and the bookkeeping world in general is we have to know how software works with the ledger system. So if you're in Xero, if you're in QuickBooks as the main ledger, you have to know how the software that you're working with as the practice management software works with that particular piece. And, and then on top of that, be able to troubleshoot it. On top of that, the multiple payment plans and multiple payment options that are offered. One big thing that we see that is a huge no-no is you should not have a merchant provider that is not allowed to really do trust. So we do see that—

Like QuickBooks.

That will be one. I was trying not to name them, but that's one.

No, I mean, that's one. And people do it and then it gets discovered. Intuit will find it and then say, whoa, this shouldn't be. And then it'll shut you off. And then it shuts you off. Not only does it shut you off because you think you're getting around something, not only does it shut you off, or maybe you just don't even know, not only does it shut you off, it also will lockstep hold, it'll hold anything that happened in transit when it was starting to do it, and then you gotta fight to get that money out. If it's trust money, Moya, you're in big trouble, and we've seen that happen where they've just, nope, shut it down. You really wanna have good software for that. You wanna have, like, Confido is a great example of great software that can, money goes in this account if it's this, money goes in this account if it's that, and it keeps it separated. And that's so important. I mean, we start with somebody who had law pay and they had it connected to the wrong bank account. So it was dropping in. I don't know what happened there. It was dropping into the operating and then they were making all these transfers.

Causing more work for themselves, unfortunately.

And a mess. It was a mess. Yeah.

And to track it, because as we know, a lot of times this will happen depending on the type of law you have. The bill will be presented, but maybe somebody else is paying the bill. So that doesn't correlate with the name that's associated with the trust account. There's so many levels of different things that go on in just accounting in general. So when we're talking about, you know, the upholding the compliance piece in the nicest way, we're doing our best to be like the— as much as we can, the guardians to support the business for the information to ensure that it's in an accurate place. We also have to understand your type of billing, the multitude of things that you're doing. If you're going to add a new practice area, there might be specialties to that practice area, right? I mean, I don't know, Lynda, there's, there's a, there's like a whole list of things that go. It's— but sure, it's easy, right? It's simple.

So what do you do if you have a client that you see didn't have money for payroll, moved the money over from trust and said, oh, this is temporary, I'm going to pay it back. When money comes in, what do you do as the bookkeeper? Do you—

Not okay. You need to just rely back on what are the rules and understand what's the cash flow, because maybe it's a cash flow thing. Maybe we need to have a different conversation of, okay, let's look at your engagement of services. Are you actually doing the work, like, at the time?

Are you actually billing at the right time? That's another topic of clients is, are they looking at the trust account balance and saying, oh, this $600 here, and then they bill $600, but they didn't really do the work for $600. And that's a hard one for us to see. But we've seen it where people just clear out the trust balances every single month. And it's like, how can that possibly be that you're billing the exact amount of money that's in that trust account?

Mm-hmm.

Zero. And you have to wonder when you see that. I mean, it—

Yeah.

And if you have something happening like that and you bring it to the attorney and you say, this is not allowed, this is— You're out of compliance when you do this. You have to have a very serious conversation. And they do it anyway. And then they pay it back and it happens again because they get in another cash flow. What do you do? I mean, you've now called them out.

You have to make a ethical decision yourself too, for one. That's something that you have to decide as a firm. Is this something that you want to be associated with and continue with? And it has to be in writing. Mm-hmm.

Everything should be in writing. We tell people that all the time. I mean, even in a cleanup, you have a cleanup and you go to the client and say, look, this goes back to 2012. I'm gonna have to clean up 'cause that's where the problem started. And the client says to you, you know, I don't wanna pay for that, so I'll take my chances. And then you have to do an adjustment, but you want all that in writing 'cause that's not correct.

Yeah, yeah.

You have to fix it. Yeah, it's such an interesting world that we live in. But when you do that, I mean, we know we've had a colleague that actually had to go to the bar because the person was doing it egregiously. He brought it to your attention.

Well, and this was the more egregious act, unfortunately, was that the money was shown it was billed or requested and it was going into a personal bank account. And being told it was marked as paid. And the question came up of where's the funds?

Mm-hmm.

And it wasn't the first instance and it was repetitive. I also think another red flag moment or something to think about in discussion is how quickly does money go into trust and when does, how long does it sit before it goes out? We have seen truly, and nothing negative about this in a, way that's just saying, like, you can't trust anything. But we have seen an insurance wire come in and get pulled right back out, an insurance check come in and get pulled right back out, and for whatever reason. And so you cannot guarantee that those funds are in there. So if you don't adhere to what are the rules of making sure the money sits for 24, you know, 3 days, whatever the rules are for you. Right. That's another thing, because you automatic— you bounce something in an IOLTA or an IOLA account, whichever side of the country you're on, that's an automatic red flag to the bar from the bank. So you gotta— you really have to watch yourself. You have to be diligent about these compliance moments.

For sure.

How it is hard to have the conversations. I mean, how do you have them? To be honest with you, I totally agree. I think like what we were just talking about, the documentation, the repetitiveness, and then it comes down to your own ethics as well. And from there, then it has to come down to your own decision-making too. Obviously, we're in business to do business with—

Right. We don't want to have an issue with earned that we're, you know, a lot of this is ethics, right? This is truly just ethical. What do you feel? I mean, I, you know, that money doesn't belong to them till they've earned it. So ethically, if it doesn't sit well with you, yes, you can disengage.

Yeah.

That's the easiest way out. Um, when it comes to reporting them, that's a big step, but you'd obviously exit and then report. Uh, you wanna not be part of the situation, but it's really hard. And I mean, we've seen that big case in California that changed all the rules. There were a lot of people involved in that that had knowledge of what was going on. And that's crazy to me that that was going on for so long and nobody ever— oh, it looks like it was just inside of the Bar Association itself. So the fact that that never was addressed for so many years, and there was a lot of people that got ripped off there. And that's the whole point of the trust and the retainers and all of that is that they have have, uh, it's, it's protected. That money's protected till earned. Yeah, for something.

That's partly why I was saying earlier, we're kind of like guardians of it for both sides, really. Yeah, the way, like, it's, it's a code of ethics in a, in a silent way sometimes, and you, you just really want to do the right thing. Yeah.

And when it comes down to, like, anything to do with upholding compliance, I mean, this is pretty much our job. The word compliance is a scary word. Yes. Attorneys, 99.9% of the attorneys you're gonna work with, they are all like, they want it to be right, they want it to be perfect, and if it isn't, they know it, they're trying to get you to help them to get it to be right. So it's, that's more the majority of the attorneys. They're not like, most attorneys are not in the realm of trying to do, take anything from their clients. They mostly, more attorneys are really caring about their clients than anything else. I think it's pretty rare. You probably could have a whole career career doing this work and never run into it. Um, I, I really believe that with attorneys. I don't think that—

Yeah.

Majority, you're not going to find that.

No.

But you do run into that case, how do you handle it? And I think that that's the key, is knowing what to say. It's so easy not to— it's so easy to ignore it, and when it's under your nose and pretend you don't see it, or— and it's very hard because ethically, your ethics should step in front of all of that, and it should be look, I can't— and a very honest conversation with them to say, look, I can't work with you anymore based on this behavior. And this is reportable, a reportable offense. So ball's in your court, but we're not going to work with each other anymore. And do that so that they have it, and have it in writing to protect yourself. We always say put everything in writing. When the deposit happens in the wrong bank account and you get that message from the staff, oh, it went into the wrong bank account, you know, we copy and put the notes in so that the notes are there in case of an audit, because audits happen and you want to have good, pristine records. That's important when it comes to working with lawyers. You want to have those records that—

I think that sometimes it's just so unintentional. It's just so—

Yeah, mostly.

I mean, if you have multiple trust accounts too, because of different state jurisdictions, honestly, That's the other thing. I mean, it's a lot of times, to your point at the beginning, Lynda, when you're saying this, it's, it's a very unintentional moment and you just want to make sure that your records actually support that instance of what occurred. So that's why the notes are really good.

I mean, it can happen where the bookkeeper, if the person's in the office and there's cash around, you have an opportunity for someone taking the cash, whether it's the bookkeeper or the admin or whatever. It's not even your fault. But if you don't have have the proper procedures in place for cash transactions, and some firms deal with cash transactions, you have to have a really tight workflow where there's multiple checkoff systems in place that nobody's ever like able to steal. I think that that's a big place that you could have a problem, and then it's not really the attorney doing it, but they're responsible.

Well, the other problem to that is fraud. Right. That's the other sad part. It's not the firm's fault, but fraud has occurred due to XY. We had this happen. Checks were stolen out of a mailbox.

Yeah.

Firm and, or, and going out of the firm, like vice versa. And it's shocking to think like that still can happen. That was several years ago. And then all the fraud that occurred, we've had multiple clients that have repetitive fraud, having to close, open a new bank account, open it. Your record's better be pristine, let me tell you that.

That is a place that you really want to be careful. If you're closing a trust account and opening another, you really want to make sure that you have everything in place because one missed outstanding check that gets cashed on something that's closed, there's your audit because it's coming real quick because that's the trigger. If a trust accounts upside down. So yeah.

Oh yeah, there's so many little moments that, like you were saying, you have to figure out how you're going to have the conversation, obviously in the most professional way as possible. You never— the idea is not to burn a bridge, but it is to disclose what you need to disclose. And it isn't a very often occurrence. It really truly isn't. There is more on the right side of it than there are on the unfortunate side of it. If you do have somebody that's on the unfortunate side and you can tell they— okay, I need some help, I need more support— you might have to add other services to support them to help understand what is the nature of what's going on. And like I was mentioning earlier, you're gonna have to dig a little deeper to find out, okay, what is your billing cycle? Actually, had you earned this money at the time you even— like, the retainer came in— we need to talk about what that looks like because maybe there's a different way of billing. We have such a visible view for so many firms, right? We can help in a way.

And cash flow. I mean, if it's a cash flow problem that's causing you that you're going to need to move this money out, I mean, you can look at— address the cash flow issue with your bookkeeper or your accounting staff because that can be fixed by alternate billing or maybe billing more frequently, like a couple of times a month instead of the traditional model of the beginning of the month. Those are ways to get the money flowing in a little bit better. I just think that it's earned, you need to get it over, but I just can see that that's another place that you just don't think about, that the money's sitting and it hasn't been transferred. That happens a lot. I'm always surprised at how much that there's money sitting there, and a lot of that comes from a trust cleanup where we find it and we're like, it's kind of nice to tell them, like, hey, you've earned this and you never moved it. Uh, and then they end up like getting money that is like found money, even though they've earned it and it should have been moved back when it was, but it didn't happen. And It's just sitting there like, I never moved that money. Nope, I can't find it anywhere that you've moved it. So yeah, I mean, that's more— but that's not truly like when you're— I mean, it's upholding compliance, but I think for bookkeepers, there's so many places that you just don't think about because you think of the one bad place where they were actually moving money to pay the payroll or something or putting it in their own pocket. If you've seen it, sometimes attorneys, they have all their banks on one bank account and they've moved it into the wrong bank account. That happens. Yeah. Write a lot of notes. Just make sure it's not happening a lot because it shouldn't be going right into their personal account. We've had that talk with somebody that they were like, well, I was going to get my personal account as a distribution. Can't you just write it that way? And we just tell them, nope, put it back, move it into the operating, pay yourself. We need that pattern. We need to prove that pattern in an audit. And they'll do it. They don't like it, but they'll do it. I mean, in the end of the day, the money's back where it was, but you got to have that paper trail to show no malintent. And that's the big piece of it. And yeah, it's just the way it is.

And if you have multiple checking accounts that are IELTS accounts or, you know, regular checking accounts, you really want to— if you are printing checks still, you want to have a difference of the number sequence. You want a color coding. You, you want to be able to clearly identify so you don't have that mishap, which it does happen. I feel like ultimately what we're discussing is really internal and external compliance needs and items that you should do. And if you do feel that you just need another set of eyes, that's— there's never any harm in that.

Not at all.

Site of—

all right, well, in fact, the auditors like it that we're an outside firm, that we don't sit in the room, we're not affiliated with the firm other than they're a client. And they really like that this outside set of eyes are looking at the records, the compliance of it.

And we, you know, make sure that we have our own set of liability protections for ourselves, have keys to the kingdom, as we like to call it. We make sure that we have approval processes and a whole series of things. And that would be a great tip for a bookkeeping firm or an accounting firm that does this, to make sure that you have your own oversight. So that was a meaty Monday topic.

Yeah, that's a heavy one. Welcome back, Sarah.

Upholding compliance.

Wow.

Yeah.

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We forgot to mention Steve again. We're going to make him wait till the end, but you know what? I wish he was here because he's been doing this for a long time and he's a— knowledge on this particular topic. So it was too bad he wasn't here.

He has such good questions and comments and tips, and he's been around a lot of lawyers.

He teaches at the bar. So yeah, he would have been a good one on this topic. So maybe we'll revisit it again. But yeah, this was a good topic for sure.

I don't know if I want to, but yes, I know.

Me either. We'll let Steve do that on his own.

Hello.

All right, bye, everybody. Bye-bye.

Bye.