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Finance

Implement Appropriate Internal Controls

by Dan Pinnington and David Bilinsky

April 2006

Ideally, your office should have clearly established internal controls for handling and documenting all types of financial transactions. These internal controls are really just policies and procedures that direct what steps should be taken when various financial transactions occur. Although a lack of internal controls does not necessarily constitute a breach of the professional conduct or ethics rules, you may consider implementing internal controls to assist your efforts to comply with them.

The following are some suggested internal controls you may consider implementing at your office:

Check requisitions

When dealing with check requisitions for both your general and trust accounts, consider the following:

• all check requests are accompanied by a signed check requisition evidencing approval;
• only certain designated lawyers may authorize trust account payments;
• only certain designated individuals may authorize general account payments;
• firm personnel responsible for preparing checks are instructed not to prepare checks unless the requisition includes a signature of approval;
• supporting documentation (such as an original invoice, reporting letter, statement of receipts or disbursements) accompanies the check requisition, where possible;
• original copy of the invoice is stamped paid (to prevent an individual from using an invoice more than once to obtain funds); and
• photocopies of invoices are not generally accepted as support for check requisitions.

Check signing policies

When dealing with check requisitions for both your general and trust accounts, consider the following:

• checks in excess of a threshold amount require the signatures of two partners;
• blank checks are never to be signed;
• checks made payable to financial institutions include details of the transaction;
• checks are in numbered order and the sequence is checked; and
• at least one of the individuals signing the checks always reviews the request for payment to determine if the request relates to trust funds and reviews the client file, to determine:
• validity of the request for payment;
• reasonableness of the amount requested;
• if sufficient funds are available to pay the amount of the check; and
• that an accounting to the client for receipts and disbursements is completed.

Trust records

Trust accounts are an essential part of the practice of law. When dealing with trust accounts and trust records consider the following suggestions:

• monthly reconciliations and adjustments are reviewed and signed by someone other than the individual who prepared the reconciliation,
• reviewer of the reconciliation ensures that:
• reconciliations are prepared on time;
• reconciled items are cleared promptly;
• all unusual items are questioned and an adequate explanation is given for the unusual nature of the item and noted in the firm records and client file; and
• a list of trust balances is periodically reviewed for closed or completed matters including trust balances that have not changed in the past twelve months; and

• Trust transfer requisitions are prepared to transfer funds from one client’s trust ledger account to another trust ledger account, and:

• written authorization from the client to transfer funds to another trust ledger is always obtained prior to the trust transfer;
• the trust transfer requisition is signed by the responsible lawyer and an explanation is provided; and
• the accounting department, or personnel responsible for accounting has been instructed to process trust transfer requisitions only if the criteria for signatures and explanations has been met;
• A senior partner or office manager periodically reviews the client’s trust ledger accounts for unusual items; and
• Blank trust checks should be kept in a secure manner.

Clients’ valuable property

Although it varies by area of practice, in many circumstances lawyers can find themselves taking custody of clients’ valuable property. To ensure that this property is properly handled, consider taking the following steps:

• keep a proper inventory of valuable items held on behalf of the client(s); and
• make sure the physical existence of these items is periodically tested.

Staffing policies and procedures

Law firm staff are an essential part of getting all work done in a law office. The following are some suggested staffing policies that can operate as internal controls:

• the firm has a policy respecting an individual’s need to take regular holidays;
• the firm conducts periodic reviews of lawyers’ work;
• periodic reviews of client files are conducted by a senior partner or office manager to ensure:

• the client receives an accounting for trust receipts and disbursements;
• the details of the accounting to the client match with the trust ledger; and
• the file is maintained in an orderly fashion; and

• lawyers are required to consider whether their outside interests may put them in a conflict of interest situation.

The firm should also be aware of indicators of potential problems which may result in inappropriate activities or conduct, including:

• a lawyer or staff member who is consistently too busy to take holidays;
• a lawyer or staff member who appears to be living beyond his or her means;
• sudden and significant increases in advances for entertainment expenditures;
• large increases in unbilled disbursements;
• a lawyer or staff member whose production has fallen off for no apparent reason;
• a lawyer or staff member who appears withdrawn or nervous; and
• a lawyer or staff member who continually makes last minute requests for funds.

Segregation of duties

Lawyers should segregate firm duties so that the same individual does not have complete control over the management of funds. Consider the following suggestions:

• the individual who opens the mail is different from the individual responsible for preparing a listing of all cash and checks received;
• all checks received are stamped “deposit only”;
• the firm issues receipts for all cash or checks received to:

• provide client with proof of payment; and
• help prevent funds from being redirected to another client’s account; and

• the numerical sequence of receipts is checked to ensure that all funds receipted are also recorded in accounting records and deposited in the bank.

Trust account don’ts

As a lawyer you are in a unique and special position of trust, and have been given the ability to use a very special tool, the client trust account. Mishandling client funds or misusing a trust account can have dire consequences – and it is the most common reason for disbarment. For this reason alone, you should be diligent about the use of your trust accounts.

Lawyers are not bankers

No matter what demands or pressures are placed on you, DO NOT use your trust account for any purpose that is not directly related to the practice of law, and don’t simply run money through your account, as an escrow agent or otherwise. Doing so may raise a question as to whether or not you provided any legal services in connection with the monies that flowed in and out of the account. Activities that raise doubts about whether or not you provided legal services could result in a denial of coverage under your malpractice policy, leaving you potentially personally exposed to the full costs of the claim being made.

Don’t commit or be a victim of fraud

As a lawyer you are in a unique position of trust. Moreover, your access to a trust account and your ability to assist in the completion of transactions, make you an especially attractive alternative to traditional financial institutions for those who prefer not to leave a traditional paper trail. You could be duped into moving money around in inappropriate, and sometimes illegal, ways. While handling matters you could find yourself in the commission to or a victim of a fraud. Beware!

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