Should your firm undergo an audit of its trust accounts, it’s likely to make you a little nervous even if your documents are meticulous. Given that improper handling of a trust account can lead to an ethics violation, audits can be stressful even under the best of circumstances. This means you want to make sure your records are audit-ready at any given time.
Typically notices for audits are mailed, and the amount of time lawyers have to prepare can vary. For example, in New Jersey, audit notices normally arrive ten days to two weeks before[1]. If your books aren’t in order, then you may find yourself scrambling to feel prepared. And even with a significant amount of work, nothing can replace consistently keeping up with your trust accounting recording and reporting requirements.
During an audit, law firms can expect auditors to want to see[2]:
- Recent bank statements
- Any cancelled checks (images may suffice)
- Receipts and disbursements journal
- Individual client ledgers
- Check register
Should you receive an audit notice, you should make the above items readily available for auditors.
To best prepare for an audit, law firms should:
- Run regular three-way reconciliations
- Record any deposits or disbursements from client trust accounts
- Maintain individual client ledgers, even if the money is kept in one pooled trust account
- Never commingle trust account funds with firm funds
- Never use client funds for personal reasons (misappropriation)
- Never overdraft individual client ledgers
References
1. Random Compliance Audits
2. Would Your Trust Account Survive an Audit