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Money Can’t Buy Me Balanced Books

Heather Abissi Author : Heather Abissi | March 22, 2023

A typical refrain from most lawyers is, “If I was good at math, I’d be doing something else.” It almost always gets a laugh, as there is the perfect balance of truth and humor, for the comment to be universally relatable. The unfortunate reality is that lawyers, whether solo or firm-side, all struggle with the accounting end of business. 

Law school simply does not prepare you for the business side of running a law firm. If you built your career on learning how to litigate, being asked to sit in an office and crunch numbers can seem extremely daunting an undesirable. Nevertheless, bills need to be paid, payroll needs to go out, and client funds need to be accounted for.

Determining monthly firm expenses and ensuring adequate revenue to cover base expenses is really only half the battle law firms face. Additionally, law firms must account for client funds of all types and must maintain those funds appropriately. Records must be kept, and clients must receive regular invoices, accounting for all withdrawals from those funds. 

Given that many deposits are done together when an attorney goes to the bank, one challenge it keeping track of what amount belongs to which client. For example, a $10,000 deposit in a firm bank ledger, may actually be comprised of $2,000 for Ms. Jones, $1,000 for Mr. Scott, and $7,000 Ms. Adams, none of which would be reflected on a simple deposit slip.

Thus, the challenges faced by law firms and managing their funds begins from the first deposit. If the attorney does not contemporaneously record each of those deposits, the nature of the funds, and the client they are attached to, funds can easily be misused or misapplied.

There really isn’t a secret beyond diligence to ensure that proper records are kept. That said, having an arsenal of tools to make it easier, can facilitate the process.

Many attorneys hire bookkeepers and work with accountants. Hiring financial professionals definitely will help, but the rules surrounding IOLTA/IOLA account requirements sometimes leave the attorney solely responsible for certain tasks – tasks which lawyers have zero training in. Lack of training and misguided attempts at accounting can have disastrous results on efforts to balance law firm books.

There is no amount of money that can guarantee a firm balanced books, and given the ethical rules surrounding proper IOLTA accounting, it isn’t something that a law firm can take lightly.

Knowing that as an attorney, irrespective of who you hire that the ethical responsibility for client funds rests with you, means that attorneys need to get over their mathematical hurdles, roll up their sleeves and get into the “math” of it all.

In order to do so safely, using software that can check your numbers and keep an accounting, is a safe route to go. Unfortunately, many of these programs charge per user, and require a monthly fee. Fortunately, there is a freeware option, that requires only that the attorney open an account with the bank. M&T Bank launched NOTA accounting freeware for attorneys. It helps take the “math,” out of the reconciliation process. 

Attorneys simply have to enter in all of their deposits, tag it to a client account, and NOTA reconciles it directly with bank records. The NOTA onboarding staff will also help ensure that firms are starting with a reconciled beginning and help advise how to handle it if the account is not reconciled in a manner that comports with state ethical rules.

Analysis paralysis often prevents lawyers from getting help when they need it, they know their IOLTA account isn’t balanced or reconciled, but they don’t know what to do about it. For firms in this sort of bind, NOTA is an excellent resource. If the account already isn’t balanced, better to start fresh with M&T’s NOTA staff to assist, than to continue floundering with an unbalanced account elsewhere.

Regardless of what programs or resources are used, the key take away is that fear cannot drive decision making when it comes to firm accounting. Responsibility for client funds must always be paramount, and the ethical rules surrounding IOLTA accounting understand and have protocols for when errors are made and funds and clients are not able to be properly paired. 

The sooner accounting issues are addressed, the sooner they can be remedied. Prompt action is always favored when an error is made. Further, the sooner something is addressed, the easier it is to retrace steps on deposits and withdrawals. 

Even if the funds have been sitting for several years, it is still better to take action, and right the ship. As anyone who has ever had an unreconciled account knows, that one unidentified error will cause problems for years to come. 

The first step, as with all things, is admitting there is a problem. Something about the practice of law makes the ostrich-head-in-the-sand approach attractive to attorneys with bookkeeping issues. Unfortunately, the ostrich approach is also the fast track to the Grievance Committee. 

Mistakes happen, but lawyers owe an ethical duty to their clients, and that must always be paramount. If there is any issue involving client funds, it must be addressed immediately, and if you don’t know what to do, it is important to seek guidance from the ethics committee in your state.

An attorney who makes a mistake, but seeks guidance will be given assistance. Whereas an attorney who avoids the problem and deprives a client of his or her funds due to an accounting error will end up grieved. 

It is difficult for anyone to accept responsibility for mistakes, especially attorneys who are used to counseling others. Client funds, there is simply no gray-area; if there is any error made with respect to client funds, immediately consult the ethical rules for your jurisdiction and seek guidance from the ethics committee if you have further questions.

Unfortunately, attorneys who mix up client funds, are often attorneys who have trouble with budgeting and accounting in general. The temptation to use funds sitting in an account unclaimed has sometimes become too much for attorneys experiencing financial hardship due to overhead, or tax liabilities. Be forewarned however, not only is that stealing, it is stealing from a client. Few ethical offenses are considered more egregious than breaching the duty of loyalty to a client by stealing their funds.

Grievance committees have disbarred attorneys for conduct of this nature. The impetus for this conduct almost always stems from desperation from mismanaged and mishandled funds. 

It is therefore critically important to get organized, and get help if you need it. Client retainers are always a good place to start. Through the retainer agreement attorneys can track the approximate date of opening amounts for each client’s account. Then, using their case file, and invoices, withdrawals or payments can usually be retraced and recreated. 

By going through and auditing each file in this manner, attorneys can usually catch mathematical errors, omissions, or double entries, and if not reconcile the account, at least narrow the amount in controversy to a specific sum.

If not successful at reconciling the account on their own, it is absolutely in attorneys’ best interest to pay an accountant to assist them. Best that the attorney conduct the preliminary audit, however, because by compiling all documents necessary for an audit, the accountant will have the ability to retrace accounting steps, rather than paying for the accountant to spend hours sorting through a mess of documents.

The sweat-equity of doing a mini-audit upfront, will pay off in dividends when you get your accountant’s bill. Beyond that, if it becomes something that must be reported to the grievance committee, you will be able to outline the extensive effort taken in an effort to resolve the issue and reconcile your books.

All efforts related to client-funds must be viewed through the lens of, “How will the grievance committee view my conduct,” knowing that may be your audience is critical to making good decisions when it comes to handling client funds, and deciding when to ask for help when mistakes are made.

It is often difficult for attorneys to accept their shortcomings, in fact, the entire field of law is based upon hiding weakness – weakness of your case, weakness of your arguments, etc. Weakness in your IOLTA accounting abilities, however, is not a weakness you can hide – it’s a weakness you should embrace right upfront and ask for help.

In an age, where all attorneys have to do is open a bank account and can get freeware, like M&T’s Nota to help them with all of their accounting woes, there really isn’t an excuse for having unbalanced books.

The grievance committee is unlikely to be sympathetic to attorneys who have help available to them, but don’t use it, especially when that help is free.

Hard heads in this instance, will yield hard consequences. Sanctions, suspension, or disbarment are simply not consequences that any attorney wants to be looking at. If the issue is beyond mere accounting, and is financial insolvency overall, have a candid talk with an accountant and/or tax attorney about your options, but under no circumstances is it ever justified to take and use client funds.

There is no argument that can be made that can justify conduct of that nature, and there is no amount of money that it is ok to take. Even if that money were to pay your bills, no amount of money will ever balance your books at that point. 

There is no way to hide financial crime. The records proving financial crime are in the custody of the bank, they aren’t in attorney control. An unethical attorney can cook their books, but they can’t change bank records – the crime will be memorialized plainly for the grand jury to see at their indictment.

Beyond that, there is every reason for an attorney branching into white collar crime to expect to be caught. Attorneys aren’t the only party with fiduciary obligations attached to IOLTA accounts. Banks have IOLTA obligations as well, and certainly if there was an overdraft or allegation of stolen client funds they would report pursuant to those obligations.

There is no debt owed that is worth an attorney losing their law license, but somehow this is an all too common, but also completely avoidable, basis for disbarment.

It’s very simple. Client money held in escrow belongs to the client. If it is retainer money earned, you must be able to document sufficient work commensurate with the amount billed and withdrawn to justify the transfer of funds. 

When in doubt, consult your local ethics committee for guidance before taking any action.

Firm-side accounting can be challenging, but attorneys have many resources available to them. Accounting or financial difficulties can all be overcome with time and patience. What cannot be undone is unethical conduct. Attorneys are held to a higher standard because they are fiduciaries and counselors. 

We are all given only one chance at a good reputation, and when it is gone, it is gone. The attorney-client relationship is a sacred trust. People come to attorneys during the worst times in their lives, and trust attorneys with sometimes their greatest secrets and biggest business transactions.

In return for that trust, attorneys owe their clients a duty of loyalty. Being loyal to your client means always acting in their best interest. It is in your clients’ best interest that you have balanced books. So much as attorneys may hate math, there is simply no way around it – the time to get those books in order is now!

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