YLD WEBINAR HIGHLIGHTS TRUST ACCOUNTING PITFALLS AND DISCIPLINARY RISKS

It’s not your money: 'Borrowing' it for payroll or rent is no different than taking money from a cash register

For many lawyers, trust accounting is less a mastered skill than an afterthought — something picked up piecemeal after law school, if at all. But according to two Florida Bar experts, that knowledge gap is precisely what leads to some of the profession’s most serious disciplinary cases.

Florida Bar Young Lawyers Division President Arti Hirani welcomed attendees to the May 6 webinar, “Financial Wellness for Lawyers: The Do's and Don’ts of Trust Accounting.” Moderated by YLD board member Drew Moody and presented by YLD Lawyer Wellness Committee Co-chairs Alina Fernandez and Jessica Hogan, panelists Matt Erdecker, CPA, CFE, and Bar counsel Jill Hampton said mishandling trust funds is one of the fastest ways to face disciplinary suspension or even disbarment.

A Common and Dangerous Blind Spot

“No one ever taught them about trust accounting,” Erdecker said, describing what he routinely hears from attorneys during audits. Law school doesn’t teach it and there are no mandatory CLE requirements for trust accounting, he says.

“The first time they realize that they're doing something wrong with their trust accounts is when they face discipline,” Erdecker said.

That lack of familiarity can have serious consequences. Each month, The Florida Bar publishes disciplinary actions ordered by the Supreme Court, and trust account violations are a recurring theme.

Erdecker urges members to review the Rules Regulating The Florida Bar (RRTFB) Chapter 5: Rules Regulating Trust Accounts and learn more at LegalFuel, The Florida Bar’s Practice Resource Center, which offers videos, podcasts, and sample trust accounting templates, such as the Law Firm Written Trust Account Plan form, which is required for firms of two or more attorneys. He especially recommends reviewing a one-hour CLE video, “Maintaining a Trustworthy Trust Account.”

Florida lawyers also have free access to Nota, the financial platform designed to streamline trust account management and compliance through the Bar’s Member Benefits program.

What Lawyers Must Do

Erdecker said compliance begins with fundamentals.

A trust account must be clearly labeled with the name of the trust and registered with Funding Florida Legal Aid (FFLA), the entity that receives interest generated from IOTA accounts to fund legal services for low-income Floridians.

From there, the burden shifts to recordkeeping, an area where many attorneys falter. Failing to maintain and reconcile account records is a mistake, he says, because neglecting to maintain documents and routinely monitor trust account activity can allow manageable discrepancies to snowball into severe consequences.

Lawyers must maintain two categories of records:

• Bank-generated records such as statements, deposit slips, and canceled checks (front and back).

• Attorney-created records, including:
  • A receipts and disbursements journal — a chronological list of every transaction.
  • Individual client ledger cards — a list of all the deposits and disbursements for each client with the balance being held for that client.
  • Monthly reconciliations — adding outstanding credits and subtracting uncleared debits to the balance to determine the actual total amount held for that month.
  • Monthly three-way reconciliations — comparing the monthly ending balances of the journal, client ledger cards, and monthly reconciliations to verify they are the same.

All records must be preserved for six years after the conclusion of the matter.

“The hardest part is not the accounting itself,” Erdecker said. “The hardest part is being consistent and diligent because the longer you go without maintaining your trust records, them more likely you are to stumble into a violation or a mistake.”

The Audit Trigger

Florida Bar auditors do not conduct random audits. Instead, most investigations begin with an overdraft.

Banks are required to notify the Bar of any trust account overdraft or bounced check. Even a minor mistake can trigger scrutiny.

Bar rules also prohibit overdraft protection and ATM access for trust accounts.

Two common causes:

• Using the wrong account (e.g., writing a trust check instead of an operating account check).
• Disbursing uncollected funds, such as issuing checks before deposits clear.

The solution, Erdecker said, can be as simple as including “trust” or “operational” in the account name, using different-colored checkbooks, and keeping accounts physically separate.

Fraud and Internal Risk

While honest mistakes are common, some of the most damaging cases involve internal fraud.

Erdecker recounted an instance in which a bookkeeper siphoned off $500,000 in $5,000 to $20,000 increments over several years because none of the partners reviewed the firm’s bank statements.

Hampton echoed that warning, noting that lawyers remain responsible for their accounts, even when delegating bookkeeping tasks.

“You can have staff help you, but you are the one who will be held accountable,” she said.

She pointed to disciplinary cases where attorneys were disbarred after failing to detect employee theft, including one case involving millions of dollars in losses.

‘It’s Not Your Money’

Hampton focused on boundaries.

“It’s not your money,” she said, warning members against rationalizing “borrowing” it for payroll or rent. “It's no different than a cashier at a store taking money out of the cash register.”

The same principle applies to earned fees. Once fees are earned, they must be promptly removed from the trust account. Leaving them there for personal reasons, such as avoiding taxes or garnishment, is a violation.

Contrary to widespread belief, Erdecker says misappropriation rarely begins with the intent to steal and often grows out of financial strain.

Common contributing factors include:

• Living beyond one’s means.

• Rapid law firm expansion.

• Tax liabilities and unfiled taxes.

• Substance abuse or mental health issues.

In many cases, auditors can trace client funds moving from trust accounts to operating accounts and to rent, payroll, or even casino transactions.

“It usually starts small,” Erdecker said. “Then it spirals.”

Safeguards

The presenters offered a series of practical steps to reduce risk:

• Use accounting software such as the free, Bar-endorsed Nota platform, Excel, or Quickbooks.

• Personally review bank statements immediately upon receipt.

• Conduct monthly reconciliations, at minimum.

• Never pre-sign checks or make them payable to cash.

• Perform background checks on employees with financial access and make sure they are trained and supervised.

Common Problems

The webinar also addressed recurring issues in practice:

• Disputed funds (e.g., medical liens): Keep funds in trust until resolved and if necessary, file an interpleader action.

• Unclaimed client funds: After diligent efforts to locate the owner, funds must be remitted to the state’s unclaimed property program.

• Flat fees and costs: Fees may go to the operating account if properly structured, but client cost advances must remain in trust and non-refundable fees must be agreed to by the client in writing.

• Third-party obligations: Lawyers owe fiduciary duties not only to clients but also to lienholders and providers.

Both speakers said many disciplinary cases are avoidable with basic diligence.

“Innocent mistakes happen,” Erdecker said. “But not catching them; that’s where the problem begins.”

Rule 4-5.1 requires “reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers therein conform to the Rules of Professional Conduct,” and the actions of firm employees also are the responsibility of the lawyer, Hampton warns.

Hampton added a final recommendation: when in doubt, ask. The Ethics Hotline (800-235-8619) can offer guidance when you are uncertain what action to take.

“The Bar has an Ethics Hotline,” she said. “Use it. That’s what it’s there for.”

“Financial Wellness for Lawyers: The Do's and Don’ts of Trust Accounting,” course #9808, is approved for 1 CLE credit, and will be available soon on the YLD’s website.