HOW SHOULD A PA LAW FIRM RESPOND TO A DEMAND AUDIT OF THEIR IOLTA ATTORNEY TRUST ACCOUNT?

FAQ # 1 – What are the consequences when a law firm is the subject of a trust account audit, and it has not been maintaining its bookkeeping properly with appropriate three-way reconciliations?

Pennsylvania attorneys are required to perform three-way reconciliations of their trust account(s) at a minimum on a monthly basis.

Implementing an internal office procedure because it will confirm whether the attorney is properly safeguarding client funds in compliance with Pa. RPC 1.15.

To do so, the attorney must ensure the law firm’s (1) receipts and disbursements journals comport with the (2) ledger balance and the (3) balance reported on the bank statement.

If any of those three balances do not match, the attorney should investigate and resolve the issue immediately. Indeed, while there may be many reasons why the accounts are not reconciling, perhaps the most  important would be that the law firm is not holding the correct amount of funds in its trust account. That could lead to an inadvertent misappropriation of client funds.

FAQ # 2 – May a law firm destroy its IOLTA account bookkeeping records after a certain period of time, and if so, when?

The requirement for maintaining bookkeeping records related to funds held by the law firm is set forth in Pennsylvania Rule of Professional Conduct 1.15(c). It includes a list of the following items that must be maintained for five (5) years.

1. Required records. Complete records of the receipt, maintenance, and disposition of Rule 1.15 Funds and property shall be preserved for a period of five years after termination of the client-lawyer or Fiduciary relationship or after distribution or disposition of the property, whichever is later. A lawyer shall maintain the writing required by Rule 1.5(b) (relating to the requirement of a writing communicating the basis or rate of the fee) and the records identified in Rule 1.5(c) (relating to the requirement of a written fee agreement and distribution statement in a contingent fee matter). A lawyer shall also maintain the following books and records for each Trust Account and for any other account in which Fiduciary Funds are held pursuant to Rule 1.15(l):
   1. all transaction records provided to the lawyer by the Financial Institution or other investment entity, such as periodic statements, cancelled checks in whatever form, deposited items, and records of electronic transactions; and
   2. check register or separately maintained ledger, which shall include the payee, date, purpose and amount of each check, withdrawal and transfer, the payor, date, and amount of each deposit, and the matter involved for each transaction; provided, however, that where an account is used to hold funds of more than one client, a lawyer shall also maintain an individual ledger for each trust client, showing the source, amount and nature of all funds received from or on behalf of the client, the description and amounts of charges or withdrawals, the names of all persons or entities to whom such funds were disbursed, and the dates of all deposits, transfers, withdrawals and disbursements.
   3. The records required by this Rule may be maintained in hard copy form or by electronic, photographic, or other media provided that the records otherwise comply with this Rule and that printed copies can be produced. Whatever method is used to maintain required records must have a backup so that the records are secure and always available. If records are kept only in electronic form, then such records shall be backed up on a separate electronic storage device at least at the end of any day on which entries have been entered into the records. These records shall be readily accessible to the lawyer and available for production to the Pennsylvania Lawyers Fund for Client Security or the Office of Disciplinary Counsel in a timely manner upon a request or demand by either agency made pursuant to the Pennsylvania Rules of Disciplinary Enforcement, the Disciplinary Board Rules, the Pennsylvania Lawyers Fund for Client Security Board Rules and Regulations, agency practice, or subpoena.
   4. A regular trial balance of the individual client trust ledgers shall be maintained. The total of the trial balance must agree with the control figure computed by taking the beginning balance, adding the total of monies received in trust for the client, and deducting the total of all moneys disbursed. On a monthly basis, a lawyer shall conduct a reconciliation for each fiduciary account. The reconciliation is not complete if the reconciled total cash balance does not agree with the total of the client balance listing. A lawyer shall preserve for a period of five years copies of all records and computations sufficient to prove compliance with this requirement.

FAQ #3 – What is the law firm’s obligation with respect to interest earned on funds held on behalf of a client in an IOLTA trust account?

The answer to this question must start with the foundational principle that interest earned on money held for a client belongs to that client. However, that is not the entire answer. There is an exception to this rule if the funds are deposited in an IOLTA account. That interest is payable directly by the banking institution to the IOLTA Board. See Pa.R.P.C. 1.15(o).

It should also be noted that if significant funds are being held for longer than a brief period, the client may request that the funds be deposited in a trust account that earns interest for the client, rather than it being remitted to IOLTA. The rules relating to that are somewhat complex, but one key point that must be kept in mind is that the law firm may have a requirement to provide the appropriate federal tax documentation to the client relating to the income represented by that interest.

FAQ # 4 – If the law firm cannot locate the person or entity whose funds are being held in trust, or if funds are otherwise unidentifiable, what is the appropriate procedure?

If an attorney cannot reasonably identify the owner of funds held in trust, they should first conduct a reasonable investigation to ensure that is actually the case. At a minimum, they should review their records, client ledgers, case files and otherwise undertake efforts to determine whether there is an alternate means of identifying and contacting the owner of those funds.

Whether the attorney cannot identify the owner of the funds or can identify the owner of the funds, but cannot reach them for a minimum period of two (2) years despite reasonable efforts to do so, the attorney should likewise, consider the funds unclaimed.

Under either scenario, the next step would be to submit the matter to the IOLTA Board and proceed accordingly.

FAQ # 5 – May an attorney hold their own funds in their IOLTA trust account?

While an attorney is allowed to hold a small amount of funds in their IOLTA attorney trust account (for certain bank charges), they are not otherwise typically allowed to maintain their own funds in trust. Instead, the attorney should hold such funds in their law firm professional account. For that reason, law firms should have at least two bank accounts.

The Nissenbaum Law Group’s Approach to PA Attorney IOLTA Trust Account Audits

The Nissenbaum Law Group welcomes referrals for matters relating to attorney trust accounts. This may or may not involve the firm working in concert with a forensic accounting firm that can assist in responding to it. Please contact Mr. Nissenbaum if you are the subject of an IOLTA attorney trust account audit.