Risk Mitigation for Law Firm Escrow and Trust Accounts
In this podcast Nina Kelleher, director in Process, Risk, and Technology Solutions, and Carolyn Dolci, partner and co-leader of the firm’s Law Firm Services Group, explore the risks law firms face with escrow and trust accounts and discuss proactive ways to mitigate these risks.
Nina Kelleher: Hello, and welcome to EisnerAmper's podcast on law firm escrow and trust accounts. I'm Nina Kelleher, and while I'm usually your host today I'll be relinquishing the hosting duties to Carolyn Dolci. Carolyn is a tax partner and co-leader of the firms law firm services group. Carolyn's responsible for serving privately and closely held businesses.
Carolyn Dolci: Thanks, Nina, I'll take it from here.
So we've all heard stories or read about in news articles headlines regarding an attorney being fined, suspended, or in some cases being disbarred for misappropriation or misuse of funds. In this podcast I'd like to talk about the risks law firms have with their escrow and trust accounts, and some of the ways you have been able to help our law firm clients. More and more of our clients from law firms have been asking for reviews over their escrow and trust accounts, so can you tell us about the risks associated with these types of accounts?
NK:Sure. So law firms holds a tremendous responsibility to guard their clients escrow trust accounts. As a fiduciary, the law firm must safeguard escrow funds in accordance to the rules of professional conduct, which each state has their own and it governs how the law firm operates. And so while it may vary from state to state as far as nuances, the basic principles in the rules of professional conduct are the same. Mainly the law firm can't use these types of funds for themselves, and the money has to be kept separate from the law firm's operating account, or any of the accounts of their attorneys. Simply put, it's not the law firm's money, but they do have to protect it from misuse.
CD: So Nina, what are some of the common issues that law firms have with safeguarding escrow and trust accounts?
NK:Well Carolyn, there's a few things that I see repeatedly. Certainly lack of documented policies and procedures, improper segregation of duties. There's usually some sort of key man risk, often there's weak management review controls, and then lack of controls governing user access. Oftentimes, especially when some of these issues are seen together such as lack of segregation of duties and user access issues, the control gaps may be large enough for not only mistakes to go undetected, but for fraud as well.
CD: Okay. So you mentioned the risk of not having proper segregation of duties, can you give us some examples?
NK:Sure. So segregation of duties being built into a process is really important, no one person should be able to do everything. For example, you are the individual that disperses or wires money out of the account, and you make the journal entry to the general ledger, you shouldn't do the reconciliation. If you did all of those things there wouldn't be proper enforcement of segregation of duties in this process. In this case the one person if they wanted to could really wire money to a fictitious account, and then since they're doing the reconciliation nobody would notice it.
CD: Okay. So what can be done about this?
NK:Oftentimes putting proper checks and balances into the process helps. We typically recommend that law firms take a proactive approach. One way to do this is through a current state analysis where control gaps in the current process are identified, and practical solutions are recommended.
CD: So Nina, do you have any final thoughts to share before we conclude?
NK: Law firms shouldn't wait for an adverse event before they look at their procedures around these accounts. There's legal, monetary and reputational ramifications for misappropriation or misuse of escrow and trust account funds. Oftentimes the risks in this area can be greatly mitigated by implementing a few simple controls.
Carolyn, thank you for taking over hosting today, and thank you for listening to Eisner Amper's podcast series. For more information on this and a host of other topics visit eisneramper.com/PRTS, and join us for our next podcast.
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