1. Chapter 6 Client Trust Funds & Law Office Accounting Law Office Accounting

2. Client Funds Trust/Escrow Accounts ► Trust/Escrow account is a bank account that is separate from a law office’s or attorney’s business or operating account. ► Unearned client funds are deposited here. ► Checks/ deposit slips will have a designation of “client trust account” or something similar.

3. How is a trust account used? ► Sometimes clients pay cash advances on retainers and this money must be kept somewhere until it has been earned. ► Can also act as a source of settlement on behalf of the client.

4. Commingling of $ & Ethics ► Bottom line: Trust funds and operating accounts can not be mixed together. ► Read & interpret: Rule 1.5 of the Model Rules

5. Commingling continued… ► This is a very common problem. Attorneys are disbarred on this matter every year. YES: ► Client Funds ► * 3 rd Party Funds ► *Settlemen t Funds ► *Retainers for legal services that are unearned NO: ► Personal funds of the attorney or staff. ► Business funds of the law firm ► Investment funds ► Earned fee payments

6. Bonding? Dishonesty bond: a surety bond that covers employers from losses from dishonest and/or negligent actions of their employees. Dishonesty Bonds reimburse employers for losses from employee fraud, theft, forgery, and embezzlement of company's cash and other assets.

7. Ethics: continued ► Trust Accounts can not be used to pay law office/personal expenses. No borrowing monies from the trust account. However, trust checks can be written to cover client expenses. For instance, if a client had monies in trust and the firm needed to issue a check to a court report to pay for a deposition transcript for the case, the office would write a check from the trust account. This is perfectly acceptable as long as the expense is for the client’s case.

8. Ethics: continued ► One Trust Account Acceptable for all client funds. Law offices may have one trust account where all clients’ funds are deposited. Law offices do not have to have a separate bank account for each client, as long as there are proper records maintained showing how much each client has in the account.

9. Ethics: continued ► Attorney must promptly deliver client funds back to the client. Attorneys have an ethical responsibility to immediately turn over to clients any funds to which they are entitled.

10. IOLTA ► Interest on Lawyer’s Trust Account : an interest bearing account set up specifically to hold trust funds. The interest that accrues on an IOLTA account is given to a state bar foundation or other non profit legal organization for the good of the public.

11. 10 Rules for Good Trust Account Management 1. Have a trust account & use it for all client monies. 2. Only a managing partner should sign on the account. 3. Follow the IOLTA Rules for your state. 4. Notify the client in writing at least on a monthly basis regarding all deposits and withdrawals from the client’s account balance. 5. Unearned fees and unexpended costs belong in the trust account until earned or spent. 6. Do not commingle attorney or firm funds w/ the trust account. 7. Reconcile the trust account monthly and maintain a written record of the reconciliation. 8. Review individual client balances and don’t delay in refunds. 9. Maintain written detailed records justifying every deposit and every withdrawal in the trust account, including a detailed journal or ledger. 10. Retain trust records even after the matter is closed.

12. Budgeting ► A budget is a projected plan of income and expenses for a set period of time, usually a year. ► Budgets are a planning tool that allow the firm to plan for the future, to anticipate problems, needs and goals.

13. Steps in a Budget Process: STEP 1 ► Prepare an income budget. An income budget estimates how many partners, associates, paralegals and others will bill for their time, what the rate or hourly charge will be, and the number of billable hours each timekeeper will be responsible for billing.

14. Steps in a Budget Process: STEP 2 ► The time-to-billing percentage adjusts downward the actual number of hours the office will bill to clients, taking into account the fact that timekeepers are not always able to bill at their budgeted levels due to sickness and unforeseen events.

15. Steps in a Budget Process: STEP 3 ► Realization: what a firm actually receives in income as opposed to the amount it bills.

16. Steps in a Budget Process: STEP 4 ► Prepare a staffing plan. A staffing plan estimates how many employees will be hired or funded by the firm, in what positions or capacities they will serve, what positions will need to be added or deleted, and how much the compensation will be.

17. Steps in a Budget Process: STEP 5 ► Estimate overhead expenses. The law office must make a budget of all expected overhead expenses such as rent, utilities, equipment and other expenses.

18. Steps in a Budget Process: STEP 6 ► Set a profit margin. The last step is to set a target profit margin the firm would like to achive.

19. Budgeting Tips: ► Budgets should be communicated to everyone involved. ► Budgets must be tracked year-round. ► Document budget assumptions. ► Use zero-based budgeting. A zero-based budget means last year’s budget or actual expenses are not used in figuring the coming year’s budget. Each year, the budget figures stand on their own merit and must be justified.

20. Collection ► Collection and income are closely tied together.  Why? ► Collecting money that has been billed to clients IS how you make your money! ► It’s easy to bill, but harder to get paid!

21. Collection Strategies: ► 1. Get your $ up front! ► 2. Send invoices frequently! ► 3. Be selective in the cases you take on! ► 4. Last resort: sue the client for the fee.

22. When can an attorney get out? ► The withdrawal can be done w/out negatively affecting the interests of the client; ► The attorney believes that the client’s conduct is criminal or fraudulent, or that the client has used the attorney’s services to commit a crime or fraud; ► The client persists in a course of conduct with which the lawyer fundamentally disagrees; ► The client has not completed the obligation to the attorney regarding the attorney’s services; ► The representation of the client is causing an unreasonable financial burden on the attorney; ► The client is unreasonably difficult to work with; ► “other good cause”…..

23. HOW does the attorney get out? ► In most courts, the attorney must ask for permission to withdraw. ► If the attorney is permitted to withdraw from a case, the attorney must act prudently to protect the client’s interests; such as giving the client reasonable notice, providing the client with his or her file, and refunding unearned monies.

24. Internal Controls ► This refers to procedures that an organization establishes to set up checks and balances so that no one individual in the organization has exclusive control over any part of the accounting system. ► Good internal controls prevent (or make it harder) for employees to embezzle money.

25. Internal Control Procedures: 1. Never allow a bookkeeper or person preparing checks to sign checks or to sign on an amount. 2. Have careful, unannounced, routine examination of the books. 3. All documents must routinely be read and examined- no exceptions. 4. All checks should be stored in a locked cabinet. 5. Never let the person signing the checks reconcile the checks. 6. Use check request forms. 7. Establish guidelines for how the mail should be opened. 8. Use non-accounting personnel to help with internal controls. 9. Require two signatures on checks over $10,000. 10. Stamp invoices “CANCELED” 11. Have an audit done once a year or hire a CPA to help you set up internal controls.

26. ACTIVITY: Practicing with check requests.