COVID-19’s Impact on Law Firms’ Escrow Handling

We have all heard the stories or read the news articles with headlines regarding an attorney being fined, suspended, or in some cases disbarred for misappropriation or misuse of client escrow funds.  This often leaves the law firm, the victim and the public scratching their heads wondering how this could happen.  Escrow accounts are often a prime area for processing errors and target of fraud perpetrated internally or externally.  The reputational damage resulting from a negative escrow account incident may be haunting for those involved.  In this blog, we will analyze how the transition to a remote workforce, due to COVID-19 restrictions, has increased the susceptibility of escrow accounts to fraudulent activity.

Law firms hold a tremendous responsibility to guard their clients’ escrow funds.  As a fiduciary, the law firm must safeguard escrow funds in accordance with the “Rules of Professional Conduct” (the Rules) of the state(s) in which the law firm operates.  Among other requirements, client escrow funds are to be maintained in an account separate from the law firm’s operating account or any of the attorneys’ personal accounts. 

Many law firms have preemptively elected for an independent review over their escrow policies and procedures to identify issues or gaps in current processes.  Law firms looking to enhance their escrow procedures can benefit greatly by applying the following measures:

• Strengthening controls over user access;
• Implementing proper management review;
• Maintaining segregation of duties; and
• Reducing manual procedures.

In recent months, we have seen COVID-19 and the resulting remote workforce amplify escrow account process inefficiencies and highlight the existence of control gaps.  Due to the unprecedented transition to a work from home (WFH) environment, firms experienced significant challenges translating manual procedures to operate in a remote environment.  Segregation of duties, particularly around the disbursement of escrow funds, became paramount, not only for internal safeguarding measures, but to protect law firms from the uptick in external threats, such as phishing campaigns. 

Process automation, which was often viewed as a luxury, is now a more viable solution for some.  By introducing bots into the escrow process, law firms are able to ‘add a body’ without incurring additional headcount.  Leveraging process automation tools such as UI Path’s Robotics Process Automation (RPA) or the Blackline application for reconciliations and cash matching centralizes and streamlines the process, therefore providing greater transparency and control. 

These are only a few examples of how law firms are able to achieve greater controls around escrow account procedures, while providing the organization with the flexibility to adopt a hybrid, remote and in-office, workforce in a post-COVID-19 world.

EisnerAmper does not represent or warrant that any product(s) depicted in this content are appropriate for any particular business purpose or use.  The material contained in this presentation is for the general information of our clients and business associates and should not be acted upon without prior professional consultation with a legal, accounting, or other professional.