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Ethical Dilemma of the Week: Accounting Mistakes and Client Funds

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By Casey C. Sullivan, Esq. on May 04, 2015 3:55 PM

There aren't many lawyers who went into law because a career in theoretical mathematics would have been just too easy. In fact, many of us can probably get away with counting on our fingers much of the time -- except when it comes complex patent litigation. Or to client funds. Lawyers' ethical responsibility to maintain a client's funds in trust is one of the most common reasons lawyers face disciplinary action.

As a rule of thumb, you should strive to manage your client funds so that, should you die tonight, everything would remain in order. Of course, we don't always live up to that ideal. So, if you find an accounting mistake in an trust account, what sort of ethical issues might arise and what must you do about it?

I'll Just Borrow Some Money

"Borrowing" from a trust account can lead to serious ethics violations. These sorts of violations are most common when an attorney takes money out of a trust account that he is not entitled to, or before he has earned it. For example, if you have a retainer set aside to be used for specific matters, dipping in to cover unrelated expenses, such as general payroll or overhead costs, can violate ethics rules.

Even if you plan on paying the money back ASAP, you are still violating your ethical responsibilities. A failure to provide your client an accounting of their trust account, on demand, can quickly result in disciplinary action. Recently, a D.C. lawyer and IRS ethics attorney, of all people, was disbarred for just this ethics violation. If misappropriation is happening, make sure the practice is terminated and the accounts made whole.

Theft

Obviously, no attorney would be dumb enough to steal from their clients. But if, let's say, a paralegal or bookkeeper does, the lawyer may still be responsible. When it comes to trust accounts, lawyers have a personal, non-delegable responsibility to protect the funds. Two Florida lawyers found this out the hard way. They were disbarred after their bookkeeper embezzled nearly $5 million and fled the country. If theft is suspected, quickly notifying clients, police and forensic accountants could help other attorneys avoid a similar fate.

Commingling Funds

Ethics rules are very clear that attorneys can't commingle funds. Separate clients must be treated as separate accounts -- one client's funds can never be used to cover another's obligations. According to the Michigan Bar Association, commingling funds is an ethics violation even if no injury results.

If you have commingled funds, it's time to get busy separating them. Go through your records and make sure you can account for each and every client's balance. Even if you can make a full accounting, in a zero-tolerance jurisdiction you could still face discipline for any commingling.

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