Law firms: Are your trust accounts secure?

By Steve Davis on August 9, 2009

Many law firms, large and small, hold funds in trust (or escrow) for their clients.  These funds can be entrusted to you for a very short term, or for quite a long time and the amounts can be substantial.   But whatever the circumstance, make no mistake, you are responsible for the security of those funds.

Are you sure that your trust accounts are secure?

Making sure those funds are properly safeguarded requires adequate internal controls. Internal controls are a process by which those charged with governance promote operational efficiency, help ensure the reliability of financial statements and compliance with laws and regulations, and (perhaps most important to a law firm’s reputation and profitability) reduce the risk of asset loss.   

In my experience helping attorneys assess and improve their controls, I’ve become aware of weaknesses that could put their clients’ funds at risk.   And often these weaknesses lead to fraud.

For example, at one law firm the bookkeeper diverted cash receipts from trust. Then she’d have funds transferred from the operating account to the trust account, saying that certain receipts had been deposited in the operating account in error rather than in the trust account. The reimbursement from the operating account to the trust account was in actuality a reimbursement of the fraud from the firm’s own funds. 

Your risk could be significant if trust funds are misappropriated. 

Here are just a few of the important things to consider.

1. Who logs cash receipts?  A cash receipts log should be maintained by someone who does not have access to posting transactions in your accounting system.  The log should be checked against the deposit verification from the bank.
2. Are all bank statements (operating and trust accounts) and supporting documentation sent, unopened, to a person of authority who does not have access to the accounting system for initial review?
3. Do you have a written policy related to your trust funds and overall banking practices?  Are all employees aware of the policy?  Do you monitor compliance, and update regularly?
4. Do these policies limit the number of trust accounts to be established and the number of authorized signatories?
5. How are your computer system access and on-line banking privileges determined? Who assigns them, and who checks them?  You should have a checklist documenting which access should be assigned, based on properly segregated duties.  These privileges should be checked by someone who does not have the access to assign or change them. They should also be reviewed at least once a year.
6. What happens when an employee or partner leaves?  Are their computer and banking privileges terminated immediately? They should be.   
7. Are you making sure that funds are not disbursed until deposits have cleared the bank?
8. Are you properly insured?  A Commercial Crime Policy may provide coverage against, among other things, employee theft, forgery or alteration, and theft of money or securities.

In professional services, continuing business is based on solid, trusting relationships with clients. Properly securing the funds they entrust to you is essential.

Steve Davis, CPA, is a member of the management committee at Kaufman, Rossin & Co., one of the top CPA firms in the Southeast.   He leads the Accounting practice, and (among other services) provides internal control and other management consulting to law firms.  He can be reached at sdavis@kaufmanrossin.com

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