The Lawyer’s Bank Accounts
By Jim Calloway, Director, OBA Management Assistance Program

This month we will talk about a topic that should be near and dear to every lawyer’s heart — the lawyer’s bank accounts. Several new admittees have recently taken their oaths as attorneys, and this article is directed at making sure that those who are opening a practice get started correctly with their bank accounts. Certainly many established lawyers may want to review this topic as well.

Perhaps the most important concern about a lawyer’s bank account is making certain that the money only goes where it is supposed to go.

For a discussion of that important topic, your attention is directed to the online article “Fighting Fraud: Implement Appropriate Internal Controls” by Daniel E. Pinnington, who is the director of practicePRO, the risk management and claims prevention initiative of the Lawyers’ Professional Indemnity. This article was published a few weeks ago in the webzine Law Practice Today and can be found online at www.tinyurl.com/awych. Review this article today while it is fresh on your mind.

Obviously, the level of controls will be different depending on the practice setting. A true solo practitioner, preparing all of the checks personally, has no need for internal office controls against fraud. In a smaller firm setting, there may not be sufficient staff to have the textbook separation of duties. That is why it is of utmost importance in the small firm setting that the lawyer insists that the bank statements be delivered to him or her unopened so that the lawyer can examine the bank statements.

This concept has been covered in several Oklahoma Bar Association publications, most recently in “The Trustworthy Trust Account” by Melissa DeLacerda and Dan Murdock (OBJ 74 3373 Dec. 13, 2003) There it is noted:

1. The responsible attorney should insist that the trust account bank statement is delivered to him immediately in its sealed and unopened form as it is received from the bank. Deposit slips and particularly the checks which are enclosed with the statement should be reviewed. Be particularly alert for checks paid to employees or other unexpected payees, signatures that don't look right, returned checks and telephone transfers in and out of the account. Ask questions about checks so that your employees will be aware that you are looking at your bank statements.
2. Consider having your trust account at an institution where the firm has no other accounts to lessen the possibility of the bank (or an employee) mistakenly making a deposit to the wrong account.
3. After reviewing the trust account bank statement, compare it briefly with the firm records concerning the individual client's ledgers.
4. Carefully review your ledger to ensure that all totals add to the same figure and that there are not a suspiciously large number of deposits in transit or outstanding checks. Do not hesitate to question your employee as to why there would be a large number of deposits in transit.

Probably by spending no more than an hour per month following the procedures outlined above, the attorney can be assured that there are no questionable transactions in the trust account while at the same time making an impression on all employees that the trust account is not subject for pilfering.

The same logic applies to other law office bank accounts as well. Of course controls on the trust account are paramount. With your office operating account, dishonest third parties can only steal your money. With the trust account, they can endanger your license to practice law. If you have not read the article cited above recently, you might want to take the opportunity to reread it at this time.

In the smaller firm setting, it is strongly suggested that the lawyer be the only one who can sign checks on any of the bank accounts, but particularly on the trust account. While this practice may be problematic at times, it provides an important safeguard. Larger firms may have other administrative policies that provide stringent safeguards that allow the lawyer to focus on practicing law instead of financial management. But even in the largest law firm, a lawyer or group of lawyers should be assigned to review trust account transactions.

HOW MANY BANK ACCOUNTS DOES A LAWYER NEED?

The answer to that depends on the lawyer’s practice setting. But even the solo practitioner needs at least two, and in almost all situations, three bank accounts.

That lawyer needs a personal account and an office operating account. As simple and tempting as it may sound to a beginning lawyer to just have one account, it is a bad policy. On a pragmatic level, having an operating account for your law practice makes bookkeeping and preparing your taxes less complicated. You use that account to write checks for deductible business expenses and other business transactions. When it is payday for that lawyer, a check is written payable to the lawyer, which is then endorsed and deposited in the lawyer’s personal account. Never pay for personal, non-business items with a check written from the law firm operating account. That payment would represent income to the lawyer and should be handled the same way the all paychecks or draws are handled.

Most readers are probably having a hard time believing that a lawyer would combine all personal and business transactions into one bank account. But it happens more frequently than you might imagine and has many negative consequences.

Almost every lawyer in private practice will also be required to have an attorney’s trust account as well. Trust accounts are governed by Rule 1.15 of the Oklahoma Rules of Professional Conduct. This is required anytime that the lawyer will be holding money that belongs to a client or other third party in connection with the lawyer representing a client. When one considers such items as unearned retainers, settlement proceeds, court cost deposits, disputed funds and other monies, it will be the rare lawyer in private practice who does not need a trust account.

As you should know, effective July 1, 2004, an Oklahoma lawyer’s trust account is required to be an interest-bearing IOLTA (Interest on Lawyer’s Trust Account) account. Beginning lawyers and others who are setting up a trust account for the first time can contact the Oklahoma Bar Foundation for assistance and information about setting up an IOLTA trust account.

Lawyers with staff in their office should consider whether they might benefit from setting up a fourth bank account - a payroll account. Hiring employees involves many responsibilities and one of them is to withhold taxes and FICA from the employee’s paycheck and match it with some contributions on the part of the employer. Depending on the amount of the withheld funds, these funds must be submitted to the government within different time frames. The Internal Revenue Service considers these withheld funds as trust funds. While the implications of this differ from attorney’s trust accounts, it is an equally serious matter.

The best practice is to transfer an amount equal to the gross pay plus any employer matching contributions to the payroll account a few days before payday. Staff paychecks can then be written on this account and when it comes time to remit the required funds to the IRS, the money will already be in the payroll account.

WHAT TYPE OF CHECKS SHOULD ONE USE?

I have a personal aversion to a lawyer using the carbonless paper smaller-sized checks for the law firm. I want the cancelled checks, or at least the images of the paid checks and deposits, returned to my office for my records.

My personal preference is for the larger-sized checks with large check stubs that have room for writing significant notations and memoranda. The “three checks per page” style of checks generally comes in a large, noticeable checkbook that is not easily misplaced — at least not for long.

The 21st century lawyer will likely find that fewer checks are written out of a traditional office checkbook anyway.

Many law firms are streamlining operations by using software to prepare and print out checks on their printers. There are many accounting packages like QuickBooks Professional and PC Law that allow the lawyers to consolidate accounting and check preparation into one function. Lawyers who have implemented these processes find that they are very beneficial and great time savers.

More electronic transfers are in our future. ATM cards are strongly discouraged for use in conjunction with trust accounts. But electronic billing payment for regular month expenses like utilities and regular monthly payments are certainly common for many people and will become more universal. These various methods of handling our credits and debits will make law firm accounting practices even more challenging.

Most lawyers are very busy. But the successful lawyer will take the time to ensure that there are proper safeguards on all bank accounts. Money isn’t everything, but none of us wants to lose any money or waste hours trying to puzzle out year-old transactions.

May your operating account have great positive cash flow, your trust account always remain in perfect balance and your personal account overflow with profits from your practice.

Law Practice Today
In the accompanying story, I noted an excellent article contained in the webzine Law Practice Today. Each month Law Practice Today contains numerous stories that can help you improve your law practice. The publication is online and it is free. It’s produced by the American Bar Association Law Practice Management Section, and the section has decided to make it not only available to their members, but to anyone who wishes to read it.

Check out Law Practice Today at www.abanet.org/ lpm/lpt. The issues are usually placed online near the end of the month. The current issue (April 2005) features several articles on avoiding malpractice, another topic that should be near and dear to the hearts of lawyers. Archives of stories from previous issues are also available online.

You can click on a link on the site to subscribe to Law Practice Today. A subscription just means that you will receive an e-mail notifying you each time a new issue is placed online. This is a great resource, and I hope each of you will take advantage of it.

Originally published in the Oklahoma Bar Journal May 14, 2005 - Vol. 76; No.15