3.14 Avoiding Pitfalls
The following are some suggestions to help avoid common trust accounting pitfalls:
Agree with your client on payment from trust funds by confirming in the retainer letter that you are entitled to take funds from trust to satisfy your bill.
Before issuing a trust cheque, review the individual client trust ledger card to ensure there are sufficient funds held for that client.
Do not rely on the client file for evidence of funds in trust. You risk a shortfall if you pay out trust funds on the strength of a mortgagee's letter stating that funds will be advanced. Mortgagees do not always pay as and when they have committed.
Do not allow a mortgagee to credit your trust account directly. Such transactions can occur if you use the same bank branch. If your pay-out cheque clears the account before the mortgagee actually credits the mortgage proceeds, your account will be overdrawn and you will have a shortfall. You may also find that you have a shortfall if the approved depository claims that an amount was advanced in error and reverses the deposit through a debit memo. These situations cannot occur if you insist on payment by cheque instead of internal credit.
Operating too many trust accounts often causes confusion and errors, for example, funds are deposited to Account A but cheques are issued on Account B.
Balance the statement of adjustments twice. Arithmetical errors on statements of adjustments, leading to over-disbursement, are easily avoided if you add and balance the statement twice: once in draft and again after it has been prepared. Conduct a separate in/out analysis on just the cash actually coming in and being paid out.
Do not delay in depositing cheques. Do not keep cheques in the client file. Cheques can get lost or payouts are made on the strength of the lawyer's memory of having received the funds. A shortfall will result if the cheques have not actually been deposited.
Photocopy the front and back of cheques for deposit. It may be necessary to review details about a receipt, either to verify an endorsement, or to get information about the drawer. Since this information is lost on deposit of the cheque, you should keep these photocopies as part of your receipt record.
Do not pay out of a pooled account when you hold a term deposit (SIBA) for a client. This results in the client benefiting from the use of other clients' funds; the pooled account will be overdrawn and the client continues to get term deposit (SIBA) interest.
Request that funds are in the form of money order, certified cheque or a bank wire directly into your trust account if you have to pay out before a cheque has time to clear the bank. Alternatively, get the money in early enough so that it has time to clear.
Be aware of processing times for cheques. Cheques presented for payment are processed on the same date but deposits made after a certain time (usually 3 p.m.) may not be credited until the next day's date.
Cheques drawn on US banks take time to clear. Cheques drawn on US banks may be credited to the bank statement but then charged back for a three to four week period before being cleared and permanently credited to your account.
A cheque deposited at a different bank branch may not be credited immediately. Cheques deposited at one bank to the credit of an account at another branch may not be credited for several days if the savings institution uses a courier system instead of online facilities.
Establish a policy as to when a certified cheque will be required for deposit to trust. If an uncertified cheque is returned "NSF" you will be responsible to make good any deficiency until the funds can be recovered.
Telephone instructions to hold funds are not a substitute for certification. Your approved depository may contact another depository to ask that funds be held to cover a cheque, but this is not foolproof; an NSF cheque is still your responsibility.
Encourage your staff to ask questions about your trust account. Instruct your staff to ask questions when in doubt about your trust account, rather than guess at the answer.
Do not allow staff to take trust ledgers out of your office. Many bookkeepers work off-site. If you need to disburse funds from trust and the client trust ledger is not in the office, you cannot be sure the funds are there.
Be aware that "stop payments" may be ineffective to prevent the cashing of a cheque through deposit at an ATM. Fully investigate the circumstances before issuing a replacement cheque, and if possible, have the client pick up a trust cheque. Always get the client to confirm a safe address for mailing a trust cheque.