Holding the Weight of Someone Else’s Compliance on Your Shoulders

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

Welcome back to the podcast, everybody. And how was everybody's weekend? I know we're doing this on a Monday, so did everybody have a good weekend?

Went fast.

Yeah. They go fast. Yeah. And it's super hot. We're recording in the summer and it's hot here.

Is it? Oh, we had a cold one. Well, we have—

I'm going to Rhode Island. Hopefully, you know, like to travel out of Florida in the summer. Going to Rhode Island next week, and it's gonna be 103 degrees in Rhode Island.

In Rhode Island?

Great. There's no escaping the heat for me then, apparently. Wow.

Yeah.

Oh my gosh. It'll be a little bit of heat.

Yeah.

It'll be— it won't be— that won't be the same. Won't be as humid, at least.

Yeah. Yeah.

It won't probably feel any different to me. But was kind of hoping for—

It'll probably be warmer. It'll probably, like, stay nice and warm.

70s and 80s was what I was hoping for, not 100.

Really?

Yeah.

Oh, wow. I'm surprised.

Yeah, but it's gonna be raining, of course, because it's Rhode Island. But, um, that'll be coming in the end of the week. But yeah, so, um, I'm surprised I got the one picked for this one because of the, uh, the title, uh, holding the weight of someone else's compliance on your shoulders. Since I only have one shoulder that's actually working right now, why did I get this topic?

You lucked out then.

Well, the weight of your one shoulder. Oh man, yeah, it's, it's a tough one, that, that emotional spot that you sit in. I know, Steve, you had quite the experience and we all emotionally felt it with you.

I know that was a tough one. You know, when you have an attorney that, that you really love and respect and you're happy to work with them, but they didn't take your advice on the trust account, and, you know, that kind of creates some sticky situations. And I'm glad we're doing this subject because a lot of times we have to say no. And we have to say no, we have to approach no in a very careful way, you know, to let them know that, hey, you know, I need your attention here and I'm gonna have to say no on this one because— and then sell it to them. And, you know, usually they'll slow down and listen.

It's funny, we, we had a similar experience years ago with an attorney. It was not the same kind of a thing They weren't blatantly doing something— well, they were actually doing something blatantly incorrect by not transferring funds, but it was done out of fear because they didn't feel confident in what each balance was.

And they had already earned it, right?

They had earned it, but they were afraid to move it because they didn't want to make a mistake. So they felt more comfortable leaving it inside the trust account, bank account, and not transferring it and recognizing it as income. And that is also a compliance issue. Because you have to move the funds as you earn it. And you can't record it like it's earned and then not move it over. Because if the funds don't hit the bank, it, it hasn't happened. So you haven't earned anything. There's no money movement. So, you know, whatever you put in Clio doesn't matter, or LeanLaw or whatever program.

Yeah.

If you don't recognize it, it's never going to align. And that was an issue. And we kept bringing it up because, yes, it was a messy bank account when we got there. It was messy and wrong and the amounts weren't correct. But once we fixed and corrected the accounts, The money still didn't move, and the money still didn't move. And every month—

Oh.

On it, on it, and saying, you've got to move this money. And I mean, I could see the fear in this person's face that they were afraid to move it. And it went on and on and on for— oh, how long did we give her grace, Sarah? It was a long time. And then we just parted ways because we don't want to work with people that can't follow the compliance. Because how do we— like, if they get audited, how do you Even try to help them with that. Like, we want to have great books so when the audit comes, if the audit comes, we're able to just—

what dates?

Here you go. Here's what the amount in the bank was, and this is what it was.

Good point. Yeah.

You know, we can't prove that. I mean, I, I know we can't hold it higher than the attorney does though, right? So as much as you can talk to that person, if their anxiety is there, there's not a lot we can do to Shift that. We're not psychiatrists, so sometimes we feel like it.

But for me, it's always down to that simple, like, thought process of— and I understand there's a lot of weight in, in all sides of it, like you're saying, Linda. For the attorney, it was probably a misguided moment that happened previously, and so there's this fear-based— or watched a former firm owner that they worked with and saw the The, you know, other side of what that looks like. The simplistic side is, is like, obviously you want to make sure you're paid for what you've earned, right? And then, but it's also that just the pure moment of what it's called, it's trust. You're held, you're holding funds in trust for someone on their behalf for multiple things, whatever is going on. And so that, that part here to me makes sense when All of us were presenting information, we're calling out, hey, we see that these funds never moved. I would, you know, want the attorney to affirm in their own workflows, because we all know they have their own workflows. Did that actually happen? Do I see it the same way as you? And so there's that challenging moment that should happen the other way, not in a defensive way, in a way of like collaboration. Hey, did We see, you know, we see it all the time. Check numbers come through the bank account with the wrong sequence. So a payout— this happens a lot— a settlement comes in, a payout happens, 4 people cash their check, 1 person doesn't. But, you know, all the wrong check numbers were in sequence order.

Mm-hmm.

So now do we have the right information? Who do you track down? And so it's that supportive dialogue of like, How do you make this move? But then at the same moment, and Steve, you brought this up, is you don't want to say no to say like, you're not— no, that's it. No, I'm right.

Wrong.

But you want to, like, like Lynda's saying, you want to be able to say like, hey, look, we, we have got to make sure we're moving this in the, the code of ethics or in the compliance requirements that are happening. And we're your sounding board a lot of times too, or vice versa.

Right.

We want to make sure we're a partnership in how you work with your trust. And I think that's the hardest part. I feel like is it feels like, well, I got to validate what you're telling me. And I'm like, okay, that's fine. I'm okay with that. I have no problem with that. If you have a problem with that, then, or if your internal bookkeeper has a problem with that, then there is a problem right there. You, you shouldn't be— every check or every transfer should have some sort of validation behind it. Whether it goes to the client or to the, you know, firm itself. So—

Well, you know, kind of a flip side to that too, and we've talked about this before, but when settlements come in, you know, personal injury firm or, you know, somebody suing somebody and the settlement comes in, kind of putting the brakes on and explaining to the client that you need to kind of sit tight on this money. And, you know, I'm, I'm so So anal about it. It's like I tell them, please call your bank officer, not a customer service rep, but the actual bank officer. Make sure that you find out from them when they say this $25,000 or $50,000 or whatever is going to clear the bank, actually clear the bank.

Mm-hmm.

Because especially nowadays with all the fraud that's going on out there, attorneys are great targets for fraud and You know, sometimes things aren't the way they look. And so, you know, they, they can avoid a lot of pain if they don't disburse that money right away, which they want to. They want to take care of their customer, their client.

One time where they didn't do it the right way and they hurried it, and then the bounce comes and they're out the money, and then they're really—

right.

So that's the most important thing. But I think too, it comes down to— and maybe we didn't do a good job of this, Sarah, I don't know. I, I remembered having the conversations, but maybe it's I think a lot of times people think of money being out of trust, being handled, misappropriating the money is more like, oh, they used it for payroll, or they used it for the rent. And they don't think of it as just, all right, I earned it, but I'm going to leave it as a cushion over here. And I don't think they think of that as being out of compliance, and it 100% is.

Yeah.

So I think that we have to convey that to them in some fashion. In a nice, kind way that we, you know, this has to happen. And I don't know if maybe we could have done a better job with the communication part, because I know we got frustrated in a lot of other areas too, because we weren't able to validate. You know, when you're not able to get the information, keep it going, and things are falling behind, that can also cause a problem with the client. But for us, I think it was maybe we could have done a better job. I don't know. You know, you learn as you go through these things, but And then we've done certainly enough of our share of audits.

Yeah.

To understand exactly what different bars want.

Yeah.

And I think that that education helps us too, you know, and it's a scary time if they get an audit. And I think that's the thing about most attorneys, if you talk to them, if they can figure out a way not to have trust accounts and just to have a way to get paid after they do the work, they would be very happy because that whole heaviness of the bar and the rules and the compliance Weighs deeply on them. And to have to be able to not use that, that if they can figure out a way to do that, they would. Although they need to have it because the people that are giving them a retainer are securing their time ahead of time to use the best attorney for whatever purpose. So I think sometimes that, that can happen. And I just think maybe we could have done a better job. I always think that way. Whenever a client ends up moving on to a different person, I always think sometimes you're relieved and sometimes you're like, wow, what could we have done better? We probably always do that no matter what. when somebody leaves, we're like, oh, what did we do wrong? Or what could we have done better? And sometimes communication is the thing.

Sometimes I just feel like it's the style of the person. If they're not willing to listen or hear, that's one thing. I mean, obviously I can't own that and I can't help you. But ultimately, I do feel like the ones that— it's very small, it's incremental. Example is you write a check and the person who wrote the check and you're going to sign it, Transposed a number. It's 10 cents difference. Let's use that as an example. It's so small. But if you have good records and you're keeping it along and your intention is to, to do not just for compliance sake, but to do right by your client, that's one thing. We have clients that do right by their clients. And like, if there's any, any contested moment, the attorney, the managing attorney will take a minute, review everything that's in front of them. And if it makes sense, it's like, Yes, we just have to move money from operating over to trust because this makes sense what I've been presented. And those things happen unless there's a way that we can all agree.

Mm-hmm.

There is a record. And that's the big thing is just having the records in place. When Lynda, you're mentioning the bar, the different bar things, it purely comes down to the records. Like you have a pooled account with a whole bunch of people's money in it. You just have to make sure that those individual records amount to that exactly, and all of that movement that happens meets the criteria of all the different— it's one thing to manage to the bank account, it's a whole bunch of other subset of rules which I'm not going to get into because those of us that know, we know what it is. It's just a subset of rules that we have to comply to. It's the approach I feel like is ultimately what it is.

Mm-hmm.

It's the approach of how honest and ethical you have to be with that. And if you are a fraidy cat of it, okay, let's talk about what we need to do to get there to make sure that you're making sure you're— you earned the money, you should be taking out the money, right?

You—

the client gets their funds. What's left over? Have we balanced it back? Did our external spreadsheet actually make sense? Did we distribute correctly all the funds? These are all the things that you need a third party to help with. You can't just rest on one, sadly, one person's shoulders, Lynda.

Well, you know, a really important—

You need another set of eyes.

Another document I want to add is, you know, having the client sign off on a settlement agreement.

Yeah.

That's huge because that, you know, that helps get rid of that imposter syndrome. You know, the client agrees to it. The accounting people agree to it. Go ahead and take the money. You earned it. Be compliant. Get it, get it moved over.

Depends on the practice of law that you're doing, right? Not everything. If you're in civil, I mean, you're not— that's not the case. That's not happening, right?

Right.

Depends on the type of compensation and, and, and rewards that are going to happen from that settlement. Not every settlement works like that, but You could be in a review, not a bar review, in a review with, let's say, your defense, and you've got a group that you work with. You have an external company, a third-party corporation that needs to come in and review because you have this agreement with them. That's not bar. That's a whole other thing. And you have to show proof of how you've dispersed funds. And There's no telling how far back they want to go. You have to show, did you disburse to them correctly? Did you disburse to their clients correctly? There's like that whole subset that we don't even really talk about, depending on the practice of law that you're doing, that you really need to make sure you're doing accurately. So I, I goes to me, goes back to the fundamentals, is just how you treat the trust account and how you engage with it is the important factors. And then we unfortunately have people, we've seen them in the news that don't treat it right and use it as a piggy bank. And that ethically is a problem. That's why California sits where they sit.

Yeah, that's what, that's what kind of—

Good point. I'm glad you brought that up.

We had a big case on that. So, and it does come down to, I think, too, with the attorneys, it's their relationship with their client, right? So it's their relationship. That's where it starts. It starts with their engagement letter that as a bookkeeping firm, you need to know those.

Mm-hmm.

Depending on the practice area, you have settlements for personal injury, but what about other types of law? You need to know because it comes down to timing. A lot of this is timing-based, timing of when the payment gets moved over to the operating, when the, when the work is performed, and it's very time-sensitive. If you have a client who pays you on Friday by credit card, you're not moving that money on Friday because you don't have that money on Friday.

Yeah.

Perfect world. I understand it. I've seen it where they are like, oh, money came in. I saw it. I want to move it over because I've earned it. Yeah. No, you can't. You have to wait till the money actually is in your bank. And I think too, um, when we work with the California Bar too, with them, they have, um, their rules, their bar rules, because we work with clients in California. Their bar rules say that if there's an impropriety or a mistake that happens, so somebody gets a retainer, they put it in the operating account. When that mistake is discovered, it's only like 48 hours and then they have to move that money over when they know it. it happen, there's not a lot of time. You can't go, I'll do it Friday because that's when I make my deposits or when I do my banking. You can't do that. Then you're out of compliance. So there's a lot of little nuances, different states, different bar rules. And I think you really have to know them, especially as a bookkeeping firm. You need to know them down pat that where your person is practicing law, where your attorney's practicing law, you need to know them. You need to know the rules. Florida, you got to do both sides copies of the check and put them somewhere, put it somewhere. As an attorney, that's on them. But if you're working with that attorney in Florida, maybe You help them with that when you go into the banking, download those images, attach it in QuickBooks. So if you ever need to demonstrate when the check came in, when it got deposited— I think that's another one too, isn't it, Sarah, with the retainer? When it comes in, you can't just hold on to it for a long time and not cash it.

Yeah, there's some guidance around there. I have a question for both of you. I know Lynda's answer to this. When you're working, you're the experienced firm that does the work, right? You're the outside firm that does the work and presenting it. Sends it over to a tax firm, let's say, and they want to balance it to the penny, the bank account to the statement, or we've inherited work from a firm that's not used to doing this style of work and it's an accounting-tax combination firm and they're just, oh, we just journal off the pennies. How do you guys feel about that?

I'm fighting a penny right now with a client.

It's so hard, right? Because who's going to cash a check for a penny? Nobody.

Right.

So, but that's why it'd be nice to wire it in. Then you get rid of it. Here's your penny. Yeah.

I mean, I just thought of it, Linda, as you were talking, because we talk about all of these things, and if you know the rules, you know what you're working to, or if you don't know, you look them up and make sure you understand them. But I just wanted to throw that out there.

Well, you know, when it's a third, a third, and a third, and the penny just happens to be there at the end of the day, you gotta make sure you're paying attention to how you divvy that money out at the Because end of the day. that's where you see the pennies the most in personal injury attorney ones, right?

Or weird stuff. Sprinkle some humor into this because it is so crazy.

Damn penny.

You want me to have nightmares over the penny again tonight?

I'm sorry.

I'm sorry.

But then it is like what you're saying, Lynda. There's like certain guidance points and certain things, and when you should and should not distribute funds, how quickly you do them. There's like a whole—

And then if you find out a client is doing something inappropriate, you see the money move over to pay payroll. Or something, then what do you do, right? Where—

yeah, yeah, what do you do?

What do you do? You have to bring it to their attention. I think it's the best way to do it is to bring it to the attention. This must be an honest mistake because we've seen it where a client pulled money instead of putting it into the operating, they put in their personal. They didn't mean to. We have to make them back and then move it the right way to show the story. But if you see it and you've been working with a client long enough to kind of know like, oh, this is— they didn't have money for payroll and they did this whoopsie. And you have to bring it to attention, get it in writing, document it to protect yourself. Because I don't know how much, how much ownership would come onto the bookkeeping firm doing the books. It's on the attorney really the most. But if you're aware of it, you're, you have a responsibility. I think ethically you do. And, you know, if you start to see—

That's the word.

Yeah, you start to see the writing on the wall. What do you do? I mean, you're gonna have to disengage, right? And then do you go to the bar?

Yeah, Steve knows from his own experience and also being an adjunct. I mean, you do teach on stuff like that.

Yeah. But still, I mean, can you sleep? I don't know. We're here to help attorneys sleep at night. The flip side of it is we can't lose sleep over this stuff either. And if it's something like that weighing on you, and I remember when you went through it, Steve, I mean, that weighs on you, right? I mean, it bugs you.

I really liked this person a lot. You know, I had warned her and, you know, it just came down to I had to, I had to take some action because she wasn't going to be compliant. And I didn't like doing it, but—

No, because, you know, it's other people's money. It's all— at the end of the day, it's other people's money. You can't mess with that. That's why the rules are in place.

So, well, people make mistakes naturally, like you're saying, Lynda, that you put money in the operating account quite accidentally because you're moving too fast. The settlement came in, it was supposed to go to this, maybe Maybe someone in the firm— I don't want to call out just a type of person, but someone in the firm was helping you out and it just made a mistake. Wrong slips. I mean, if you have multiple trust accounts, multiple operating accounts, just the moment of moving funds from the wrong bank account to the wrong bank account.

Yeah, it can happen.

You have 2 trust accounts, you moved them incorrectly, or you moved between operating accounts to a trust. Like, things can happen. It's human nature. It's just the response to it and how you correct it. And how you have another layer of eyes. And that's where that benefit of that outside layer of eyes can say, okay, but we've seen some sad things and it's unfortunate. And I hate that, that it happens, but it does, unfortunately. It's the nature of that.

But 99.999% of the people we work with do the right thing in there.

They don't—

absolutely, they want it right. And that's the— that comes down to the end of the day. Most everybody you talk to them, you have a conversation with them in the beginning when their trust isn't right and you fix it. They're so happy. What did we— we had just one the other day said, I can finally sleep at night. Can I have that on recording, please? Because it was just bothering her. So, you know, you have that as the flip side. So I think sometimes we can really be a hero when we help them correct their records. And that's, that's the fun part of our job, to help them. It's been messy for a long time— multiple bookkeepers, multiple banks, multiple software— and we come in and we figure it out. And it feels good for us to figure it out too, because we're like, we figured We're like high-fiving in the background in our own office.

So honestly, it feels like a marathon sometimes. I feel like I literally crossed the ribbon and I'm like, yes, where's my award? By myself, I have my award.

Yeah, but most attorneys are so happy when you let them know this is it, final story, here's what we need you to move because this was what was wrong. And they do it and everything's beautiful, and then they stay with us onward and upward from that point. And it's a great—

Well, you know, I, I know you two have come across this too, where you have a client that you've trained so well Yeah, on the trust accounting that they call you first. Yeah, they're like, I did this and you've got to know about it right now. And it's like, okay, let's, let's jump in and fix— I love that when I get that call.

Yeah, yeah, yeah. It's very— it's— and it's also what's helpful too is as you're working with someone and, and they open up in a different state, in a different area, and then they're the ones calling you saying, okay, I'm going to open an account in this jurisdiction. You're the one helping by looking up the records to ensure Okay, what are the compliance rules? What are the, you know, bar rules under this trust account for this type of, you know, state or whatever? It feels awesome to be that person.

It does. You know, it does. Great conversation.

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