1. What is meant by “inspection and audit” of a trust account?
Pursuant to Rule 13 of the Statewide Grievance Committee Rules of Procedure, an inspection and audit is defined as “the inspection of a randomly selected client’s funds account to ensure compliance with ethical rules, including, but not limited to, Practice Book Section 2-27 and the Rules of Professional Conduct.”
2. What accounts are subject to inspection and audit?
Trust accounts that are required to be registered with the Statewide Grievance Committee pursuant to Practice Book Section 2-27(d) as part of an attorney’s annual registration are subject to inspection and audit. These are accounts that hold the funds of more than one client.
3. How does the selection of a trust account work?
Section 2-27(e) of the Connecticut Practice Book and Rule 13 of the Statewide Grievance Committee Rules of Procedure provide that the Statewide Bar Counsel’s Office will randomly select trust accounts for inspection and audit. First, the computer selects a trust account number randomly from the attorney registration information. The computer then provides the audit team from the Statewide Bar Counsel’s Office with a bank name and account number. Thereafter, the audit team determines which attorneys have reported the selected account number on their registration. Those attorneys will each receive a random audit notice and other documents related to the random audit.
4. Is the selection really random?
Yes, the selection is done randomly by computer.
5. What happens during the audit?
The audit team does a complete “drill down” of your trust account. Each auditor takes one month’s bank statement and checks and compares those documents to the general ledger, each individual client ledger and the checks for that month. Every item is reviewed for accuracy and compliance with the Rules of Professional Conduct. One auditor will perform a three way reconciliation of the trust account to the last day of the last month of the audit period. See “How to Reconcile Your Clients’ Funds Account.”
6. What happens after the audit is completed?
The Statewide Bar Counsel’s Office will prepare and send the attorney a random audit report card that lists all the requirements and prohibitions in the Rules of Professional Conduct. If an attorney has violated all or part of a Rule, then the report card will indicate the violations and direct the attorney as to what must be done in order to comply with the Rules of Professional Conduct.
7. How much time does an attorney have to complete the audit?
The Statewide Bar Counsel’s Office will provide an attorney with as much time that is needed, providing the attorney continues to work diligently to complete the requirements of the random audit report card.
8. How will I know that an account I have registered has been selected for an inspection and audit?
Each attorney who has had his or her account selected will receive a letter by certified mail providing notice of the audit and the date and time the audit will take place. Each attorney will also receive a random audit questionnaire and option letter that needs to be completed and faxed to the Statewide Bar Counsel’s Office prior to the audit.
9. What financial records will I need to produce?
A detailed list of all the documents that must be produced on the day of the audit will be enclosed with the random audit notice. The documents to be produced include, among other things, the financial records that are required to be maintained in accordance with Rule 1.15(i) of the Rules of Professional Conduct.
10. How do I comply with the inspection and audit?
Normally, representatives of the Statewide Bar Counsel’s Office perform an on-site inspection and audit at the attorney’s office. An attorney who has an office in Connecticut must comply with the audit by preparing and producing the financial records for the Statewide Bar Counsel’s Office on the date of the audit. A responsible attorney must be present during the audit process, however, once the audit team and the attorney review the documents prepared and produced, the attorney need only be available for questions. If the attorney or firm utilizes a bookkeeper or other financial person, that individual should also be available for questions. An attorney who has an office outside of Connecticut will need to provide the requested financial documents to the Statewide Bar Counsel’s Office by the date of the audit.
11. How far back will the inspection and audit look?
Rule 13 of the Statewide Grievance Committee Rules of Procedure states that, “the random inspection and audit shall cover, at a minimum, the previous six months from the date of the notice of the inspection and audit.” Generally the audit period ends on the last day of the month preceding the date of the audit.
12. What will happen if I do not cooperate with the inspection and audit?
Section 2-27(e) of the Connecticut Practice Book and Rule 13 of the Statewide Grievance Committee Rules of Procedure requires an attorney to “fully cooperate” with the Statewide Bar Counsel’s Office in the inspection and audit. Rule 13(E) specifically provides:
“The attorney(s) whose account is selected for inspection and audit shall fully cooperate with the inspection and audit. “Fully cooperate” as that term is used in Practice Book Section 2-27(e) means, among other things, providing the Statewide Bar Counsel’s Office with all the documents referred to in this Rule and any other records and information as may be necessary for the Statewide Bar Counsel’s Office to complete its inspection and audit. If the attorney(s) whose clients’ funds account is the subject of the inspection and audit fails to fully cooperate, the Statewide Bar Counsel’s Office shall, in its direction, refer the matter to the Disciplinary Counsel’s Office for an interim suspension proceeding pursuant to Practice Book Section 2-42.”
13. What can I do now to be prepared for an audit?
You should immediately review your financial records to make sure that your trust accounts are in compliance with Rule 1.15 of the Rules of Professional Conduct and Sections 2-27 and 2-28 of the Connecticut Practice Book. You should endeavor to correct any errors or omissions contained therein.
You should also review the trust account information that you have registered to make sure it is accurate and up-to-date. Log into E-Services and select the Attorney Change of Information option from the E-Services menu. Your last registered information, including your trust account(s) information will be displayed. Verify that all accounts required to be registered are included and that the account number, financial institution, city and state of each registered account is correct and make any necessary changes now.
14. What are the most common errors and omissions that are found in a random audit?
a. No disbursement/receipt ledger (Rule 1.15 (i)(1) of the Rules of Professional Conduct).
The attorney holding client or third person funds must maintain a general receipt and disbursement journal that indicates each receipt and disbursement containing a record of deposits to and withdrawals from the trust account, specifically identifying the date, source, and description of each item deposited, as well as the date, payee and purpose of each disbursement. The audit team will verify the existence and accuracy of the general receipt and disbursement ledger.
b. No individual client ledger card (Rule 1.15 (i)(2) of the Rules of Professional Conduct).
The attorney must maintain an individual client ledger for each client showing the source of all funds deposited, the names of all persons for whom the funds are or were held, the amount of such funds, the descriptions and amounts of charges or withdrawals, and the names of all persons or entities to whom such funds were disbursed. The ledger must show a running balance held in the trust account on behalf of that individual client. The audit team will verify the existence and accuracy of the individual client ledgers.
c. Client Ledger updates not performed on regular basis (Practice Book §2-27(a)).
The attorney should make periodic entries for each receipt into and disbursement from the general ledger and the individual client ledgers so that the ledgers accurately reflect the amounts held in the trust account on any given day for any individual client and for all the clients collectively.
d. No quarterly reconciliation (Rule 1.15(i)(9) of the Rules of Professional Conduct).
The attorney must perform quarterly reconciliations of their trust account. This process requires the attorney to reconcile the bank statements, checks, client ledgers and the general ledger to each other.
e. Quarterly reconciliation is not accurate (Rule 1.15(i)(9) of the Rules of Professional Conduct and Practice Book §2-27(a).
The reconciliations performed as stated above must be done accurately and each financial document must show the same balance.
f. More than $500 in attorney’s personal funds held in the bank account (Rule 1.15 (b) and (c) of the Rules of Professional Conduct).
In order to avoid the impermissible co-mingling of funds held in trust with the funds of the attorney, the Statewide Grievance Committee has determined that attorneys should maintain only a de minimis amount of personal funds, sufficient to cover administrative costs, in the trust account. Generally the amount should not exceed $500. Retainers taken and not yet earned remain the property of the client or third person on whose behalf the attorney is holding the funds and it is appropriate to hold these funds in the trust account. The fees must be disbursed as they are earned.
g. The attorney is using the trust account for personal transactions (Rule 1.15 (b) and (c) of the Rules of Professional Conduct).
This practice is prohibited. If the audit team detects checks or other types of disbursements that are paid to questionable recipients (e.g. credit card companies, non law-related retail businesses, utility companies, etc.) the audit team will ask for supporting documentation showing the disbursements were made for a legitimate purpose and made on behalf of a client or third person.
h. Memo description on checks is not sufficient.
Failure to implement this practice is not a violation of any rule. However, placing a client name or other identifier on each check in the memo section will make an attorney’s reconciliation much easier to complete. By providing a client identifier for each check, the attorney can easily trace the check to the client ledger and to the general ledger and, in so doing the attorney will be able to complete the reconciliation faster.
i. Memo description on deposit slips is not sufficient.
Failure to implement this practice is not a violation of any rule. However, placing a client name or other identifier on each deposit slip will make an attorney’s reconciliation much easier to complete. This is true particularly when the attorney deposits numerous checks using one deposit slip. By providing a client identifier for each deposited item, the attorney can easily trace the deposit to the client ledger and to the general ledger and, in so doing, the attorney will be able to complete the reconciliation process faster.
j. Fee retainers not properly accounted for (Rule 1.15(d) of the Rules of Professional Conduct).
Fees taken by the attorneys are one of the most carefully scrutinized transactions during the random audit process. All checks or other disbursements made to the attorney will be thoroughly investigated. As such, the audit team will require that each disbursement made to the attorney have complete documentary support. The audit team will ask for client ledgers, billing statements and HUD-1s depending on the type of transaction involved.
k. Payments made to cash, cash withdrawals, debits and on-line payments (Rule 1.15 (j)(3) of the Rules of Professional Conduct).
Payments made to cash and cash withdrawals are prohibited by Rule 1.15 (j) (3). Further, debits and on-line payments are also carefully scrutinized during the random audit process. All payment disbursements made by debits and on-line payments will be thoroughly investigated. As such, the audit team will require that each disbursement have complete documentary support. The audit team will ask for client ledgers, billing statements, and HUD-1s depending on the type of transaction involved.
l. Checks outstanding for over six months and the interest-holders are known (Rule 1.15 (e) of the Rules of Professional Conduct).
An attorney has the obligation to make sure that the funds that he or she is holding are transferred to the interest-holder in a timely manner. The attorney must keep a list of all the checks that are outstanding from month to month. This step is essential to a proper reconciliation. If a check is not cashed within six months of its disbursement, the attorney should contact the payee and offer to issue a replacement check. If the payee declines to accept a new check, then the attorney should return the money to the person who funded the check. If, after due diligence, the attorney is unable to locate the payee or the person who funded the check, the funds may be earmarked to escheat to the state after the completion of the statutory waiting period. Connecticut General Statute Sec. 3-61(a). Under no circumstances may the attorney take these funds.
m. Funds in a trust account where the interest-holder is unknown (Rule 1.15 (b) and (e) of the Rules of Professional Conduct and Practice Book §2-27).
If an attorney’s trust account contains funds that are not allocated to any representation, then the attorney must use due diligence to determine who owns those funds. If the attorney cannot determine who owns the funds, then those funds should be removed from the trust account and placed in a separate account for safe keeping. After the completion of the statutory waiting period, if no claim has been made for the funds, then the funds may be escheated to the state as abandoned fiduciary funds. Under no circumstances, may the attorney take these funds, unless the attorney is able to substantiate the funds are fees earned.
n. Un-reimbursed fees or service charges on the account (Rule 1.15 (b) and (c) of the Rules of Professional Conduct).
The funds held in a trust account presumptively belong to clients. Therefore, fees assessed against the trust account should not be paid by a client. The attorney may deposit the attorney's own funds in a trust account for the sole purposes of paying bank service charges on that account but only in an amount necessary for those purposes. Allowable reasonable fees for trust accounts are per check charges, per deposit charges, a fee in lieu of a minimum balance, federal deposit insurance fees, sweep fees, and a reasonable administrative or maintenance fee. NOTE that fees may be deducted from interest or dividends earned on a trust account, however, no fees or service charges other than allowable reasonable fees may be assessed against the accrued interest or dividends on a trust account. Any fees and service charges other than allowable reasonable fees shall be the sole responsibility of, and may only be charged to, the attorney or law firm maintaining the trust account.
o. Attorney has failed to update the registration information (Practice Book §2-27(d) and §2-28(c).
As part of the random audit process, the audit team verifies that each attorney who has reported the selected trust account has registered on a yearly basis with the Statewide Grievance Committee and is still employed by the firm who uses the selected trust funds account and has registered the correct firm and bank name. Letters are sent to the attorneys who are not in compliance and the letters are copied to the firm. Failure to register is considered misconduct.
p. Attorney has not properly designated the account as a trust account (Rule 1.15(b) of the Rules of Professional Conduct and Practice Book §2-28(b)).
The Rules require that the checks, deposit slips and bank statements are clearly labeled as "trust," "client funds," "escrow" or “IOLTA” accounts.
q. HUD-1 contained inaccuracies, errors or omissions (Practice Book §2-27(a) and (b)).
Federal law requires that HUD-1 forms accurately reflect all the charges and adjustments to be made to the borrower at the closing. By signing the HUD-1 form the attorney is attesting to its accuracy. Accordingly, the audit team will verify that the HUD-1s are accurate by comparing the HUD-1 form to the settlement disbursement statement and to the bank statements and checks.
r. Interest not remitted to Connecticut Bar Foundation (Rule 1.15(g) of the Rules of Professional Conduct).
The Rules require that interest earned on the trust account be remitted to the Connecticut Bar Foundation. It is the responsibility of the attorney to make sure that the account is established properly and that interest continues to remit to the Connecticut Bar Foundation. The audit team will verify that interest continues to remit to the Connecticut Bar Foundation.
s. Overdrafts on the account were not reported to the Statewide Grievance Committee (Practice Book §2-28).
The audit team will investigate any overdraft situation that occurred during the audit period. All overdrafts to the trust account will be completely investigated. As such, the audit team will require that each overdraft that occurred during the audit period have complete documentary support. The audit team will ask for client ledgers, billing statements, and other pertinent documents.
t. Unacceptable storage location for financial data (Rule 1.15 (b) of the Rules of Professional Conduct).
The attorney must safely store all financial documents held on behalf of his or her clients or third persons in a secure place.
u. Attorney is not maintaining financial data for at least 7 years (Rule 1.15 (b) and (i) of the Rules of Professional Conduct and Practice Book §2-27 (b)).
Clients’ financial documents must be maintained from the time of receipt until seven years after the final disbursement.
v. Financial documents prepared by attorney are illegible (Practice Book §2-27 (e).
In order for the auditors of the Statewide Bar Counsel’s Office to be able to complete the audit process, they must be able to read all the financial documents.