Page 22 - NC Triangle Vol 7 No 2

DAWN CASH-SALAU | Trust Accounting
Trust Accounting Misconceptions
Several misconceptions can lead to errors, and violations, in your trust account. Whether you are in a large law rm or a sole practitioner, you are not exempt from these errors. Unresolved errors can result in disciplinary action by the N.C. State Bar, while more serious violations can lead to disbarment.
As humans, we make mistakes. But in trust accounting, Rule 1.15-3(i) requires all errors be resolved timely. e past ten years, I have focused my accounting business on trust account- ing and compliance. During this time, I have discovered some common mis- conceptions that result in violations.
BANKING ERRORS (YES! BANKS MAKE ERRORS TOO.)
Bank errors can occur in di erent forms such as checks clearing for the wrong amount, checks clearing your bank twice, or checks clearing the wrong bank account. My company reconciles nearly 100 trust accounts every month, nding at least one bank error each month. Banking errors are simply out of your control. However, it is your duciary responsibility to identify these errors by performing bank reconciliations monthly. See Rule 1.15-3(d)(2).
Wrong Amounts: If a check clears the bank for an amount di erent than originally written, it must be cor- rected. Whether it is a penny o , or ten thousand dollars o , it must be corrected. In trust accounting, every penny matters, and belongs to a spe- ci c person. Each person must receive
the exact amount they are due; not a penny more or less.
Checks Clear- ing Twice: Bank- ing technology is
convenient. With the click of a button on our smartphone, we can deposit a check within minutes of receipt. Along with the convenience of mobile deposits, however, comes risk for po- tential errors.
For example, while performing monthly bank reconciliations for my clients, I discovered a particular mo- bile check deposit. Six months later that same check cleared the bank for a second time resulting in an over- disbursement on the client ledger. e bank has procedures in place to pre- vent this, but their procedures failed. Monthly reconciliations identi ed the bank error resulting in the bank cor- recting the mistakes.
Checks Clearing the Wrong Bank Ac- count: I know it is hard to believe that the bank could possibly clear checks on your account that are not your checks, but it happens. is bank error was discovered while working with a new client and had occurred several years earlier. e bank refused to cor- rect their error stating it was outside of the time period requiring them to correct it. Consequently, the attorney was held accountable and required to personally cover the $20,000 short- age in the trust account. e initial error was completely outside of the attorney’s control. However, monthly reconciliations would have identi ed the error.
HUMAN ERROR
We strive for perfection, but mis- takes happen. During the course of my work with a new client, it was discovered two deposits containing client trust funds were mistakenly deposited into the rm’s operating bank account. Not realizing the error, checks were disbursed from the trust account resulting in an over-disburse-
ment of nearly $50,000. A small hu- man error with costly consequences resulted.
TRUST ACCOUNTING COMPARED TO TRADITIONAL ACCOUNTING
Trust accounting has unique rules that do not apply to traditional ac- counting. Traditional accounting is regulated by the IRS and applies to your rm’s operating bank account. Trust accounting as de ned in Rule 1.15 of Rules of Professional Conduct dictates how an attorney must main- tain their client trust funds.
e following are just two rules showing the requirement di erences between trust accounting and tra- ditional. For trust accounting, Rule 1.15-3(b)(1) and (2) require that you identify the client on all deposit slips, and on the face of the check, for whom funds are received and disbursed on a trust account. ough this may sound like a good standard practice for an operating bank account, the IRS does not require this in traditional ac- counting.
Rule 1.15-3(d) requires you to pre- pare three reports: a bank reconcilia- tion report, a list of client funds held in trust, and a checkbook register. And, the balance on all three reports must agree. Traditional accounting (as applies to your operating account) only prepares the bank reconciliation report. If you stop with this step, you cannot identify if your trust account is fully funded. Only a er comparing the list of “positive client balances” will you identify if an over-disburse- ment occurred.
As an attorney, it is critical to un- derstand the di erences between the two types of accounting to ensure your attorney trust account is main- tained in compliance with Rule 1.15.
Dawn Cash-Salau is the owner of Escrow Consulting and Accounting, LLC, specializing in trust accounting. Real- izing an increasing need for experienced accountants versed in trust account compliance, Dawn established ECA in 2010, serving clients throughout North Carolina. With over 20 years of accounting experience, Dawn is uniquely quali ed to provide this service due to her concentration in this area. A graduate of East Carolina University, Dawn earned a Bachelor of Science in business administration in accounting in 1996. In 2008, Dawn was also recognized as Honorary Alumna at NC Wesleyan College. Contact her at (252) 531-4241 or visit www.trustcompliancenc.com.
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