BGBC: Who’s responsible for the IOLTA account? You are!

By Howard I.Gross and Sam Pollom

Attorneys are tasked every day with myriad responsibilities. Besides remembering court dates, filing requirements and court procedures, they must practice their craft with due diligence and competency. In the everyday shuffle, it’s easy for a lawyer to forget one of his or her most important duties: to act as a fiduciary. Clients and third parties rely on lawyers to perform their fiduciary duties with honesty and integrity, and to perform them expeditiously.

One of the most significant and important fiduciary duties that lawyers must perform is to safeguard all client and third-party property held in trust. Maintaining an attorney trust (or IOLTA) account for each client is the means by which lawyers fulfill this duty to protect client and third-party assets. The process of special care and fiduciary prudence begins with the lawyer properly identifying and segregating funds (or other property). This means designating which funds belong to the client, to the third party and to the lawyer. The lawyer must then properly segregate the funds accordingly, and maintain client funds, and those of third parties, in a special trust account separate from the lawyer’s funds.

Luckily for Indiana lawyers, there is no guesswork involved in maintaining an attorney trust or IOLTA account. The Indiana Supreme Court Disciplinary Commission provides a Web page that is a valuable resource for helping attorneys manage their fiduciary obligations. Attorney fiduciary duties with respect to trust accounts are spelled out in several of the Indiana Rules of Professional Conduct and the Rules for Admission and Discipline. The underlying theme of all these rules is simple: The attorney is ultimately responsible for his or her trust account, and that responsibility cannot be assigned to someone else.

But despite these clear and easy to follow rules, some Indiana lawyers get themselves into trouble with the Disciplinary Commission over their trust account. Most of the troubles are due to an intentional act by the lawyer — an infraction of a particular rule, such as the commingling of attorney and client funds. However, often a rule is inadvertently broken by the attorney or one of the attorney’s staff. The issue may not be immediately detected, or it may be hidden by the employee, who is afraid his or her employment may be in jeopardy. Or worse yet, an employee may be stealing client funds in an intentional scheme that isn’t discovered for months.

Unfortunately, an attorney cannot blame the office manager for shortfalls in client trust accounts. The responsibility falls squarely on the attorney, as does any punishment for a breach of the rules. Many attorneys have been suspended for months over trust account malfeasance, with some of the most egregious actors being disbarred with no opportunity to return to the profession. Simply receiving a notice from the Disciplinary Commission can cause major stress and headaches!

So how can attorneys help protect themselves from inadvertent mishaps and deliberate acts by employees? Unless monthly account reconciliations are performed regularly, an accounting mistake can languish for months on end. And most frauds are not detected until the damage is already done.

One way attorneys can take a proactive approach to protecting themselves from a trust account rule infraction is to periodically hire an independent certified public accountant to conduct an examination of the account. The accountant chosen should have specific expertise in lawyer trust accounts and should be well-versed in all the Professional Rules of Conduct associated with them. An independent examination of the trust account can assist the lawyer in knowing if the rules are being followed, and if all client and third-party funds are being safeguarded and maintained properly.

One of the first tasks that an accountant examining the trust account would perform is to reconcile the account with the bank statement. The accountant will then examine all the subsidiary (or client) ledgers to make sure the total balance in the trust account equals the sum of all funds being held for clients. The accountant can verify the appropriate handling of funds and proper document notation. If a problem is detected, the accountant can assist the lawyer with getting back into compliance and can train the attorney’s staff on how to avoid future issues. For a lawyer acting in good faith, this proactive approach is counted as a fact in mitigation in any proceedings initiated by the Disciplinary Commission. It demonstrates that the lawyer is making a solid effort to perform his or her duty as a fiduciary.

If you have substantial activity running through your trust account, it may be a wise move to periodically have the account examined by an accountant who has specific experience with lawyer trust accounts. Doing so may save you a major headache.•

Howard I. Gross, CPA/ABV/CFF, CFP and Samuel M. Pollom, JD, CPA are with BGBC Partners LLP – Litigation, Forensic and Business Valuation. Contact BGBC at 317-633-4700 or visit www.bgbc.com. The opinions expressed are those of the authors.