Knee Deep in Escheating: Intricacies of Lawyer Trust Accounts, with Amy Woods

Episode Notes

Transcript

Stephanie Everett:

Hi, I’m Stephanie.

Zack Glaser:

And I’m Zack. And this is episode 5 79 of the Lawyerist Podcast, part of the Legal Talk Network. Today, Stephanie interviews Amy Woods about I OTA accounts, and I can never say it right, A sheeting, not only could I not say it right, I probably am not doing it right. So this is a topic that I think a lot of attorneys would be interested in.

Stephanie Everett:

Absolutely. So we won’t talk about a sheeting because we’ll get into that in a few seconds with Amy. But yes, it was a good reminder. I was like, haven’t thought about this since probably Barbary. But one thing that’s been coming up for our team lately, and maybe other people too, is that we have someone on our team that does a lot of the first round hiring screens for us, and we have several jobs that we’re interviewing for, and apparently bots keep showing up to these interviews.

Zack Glaser:

I saw that. And when we say bots keep showing up to these interviews, you think, well, obviously it’s bots and it’s going to be an animated figure that’s coming in there and it’s blatant that it’s a bot. But these are deep fakes that are, I mean, passing a Turing test, they’re tough to tell. What the hell? What’s the point of having a bot go to an interview?

Stephanie Everett:

I know. I’m like, I don’t understand because the bot doesn’t need a job. Are people out there creating these bots, trying to troll us and they want to make fun of us? Do they think that maybe a bot will get a job? These things look like, to be fair, we’re doing video interviews, we’re a remote team, so these things are showing up to video calls and it looks like a person, it doesn’t, to your point, it kind of, and poor Paige is like, wait a minute, is this a bot? Like I think its,

Zack Glaser:

And you kind of have to err on the side of this as a human, right? Because imagine going to an interview and somebody just saying, no, I think you’re a bot. That would be devastating. Now that would probably tell you, you’re not getting the job if you’re doing just what a bot is talking about. But I saw a real quick clip of this and they’re answering direct questions, but in a shady way, right?

Stephanie Everett:

Yeah. I mean it must be someone out there. Someone out there is probably trying to, maybe they’re trying to test this tool and have it, it’s the next iteration of ha. Maybe it’s not just, maybe it really is like, Hey, we did, it’s like secret shopping. They’re trying to secret shop to see if their bots passed as humans,

Zack Glaser:

I don’t know to sell. My first thought was somebody’s trying to get another job and they’re going to have four jobs with their bots that they created.

Stephanie Everett:

I mean, what if this bot got a job offer and then did this person set up an identity for them? Or to your point, maybe it is their identity, they just have bots going as them and then they’re going to give their social and collect a paycheck.

Zack Glaser:

I don’t know. I want to hear what people think. Is the end game help us?

Stephanie Everett:

What’s

Zack Glaser:

The, help us

Stephanie Everett:

Understand why are these botch trying to apply to work with us? We’re going to have to put new, we already have to say must be whatever the right word is, eligible to work in the us or I don’t know the phrase are we going to have to say and be a real person? Bots need not apply.

Zack Glaser:

Stephanie is that anti-bot though.

Stephanie Everett:

Well, they’re not protected as a class yet.

Zack Glaser:

They’re not a protected

Stephanie Everett:

Class. They haven’t changed our laws yet. They’re working on that next.

Zack Glaser:

That’s why they want these jobs. Alright, let’s get into something real with you and Amy talking about IOLTA and a sheeting.

Amy Woods:

Hi, my name is Amy Woods and I am the owner of IOLTA Consulting. We’re a firm that helps lawyers manage their trust accounts and everything from setting it up to closing it out to sheeting and helping you with the audits, everything involved your trust account. That’s what we do.

Stephanie Everett:

Well, hi Amy. I am happy to have this conversation with you today because let’s just get honest. Everyone has, we have our IOTA accounts and I don’t know, they’re a little scary. They’re just that thing that we, if sometimes it might feel like that’s the ticking time bomb, if I don’t do it right, I’m going to get in big trouble.

Amy Woods:

Yes, I completely agree. And most lawyers go into law not wanting to do anything with accounting stuff or numbers or trust accounting. It’s just a piece that they have to manage. It’s not something they want to manage. So it gets pushed off to the side very easily. And once you push it off to the side, things can snowball out of control so quickly.

Stephanie Everett:

And I thought it was interesting too when I first met you and even in your introduction just now, there’s a lot of people who are doing bookkeeping for law firms, which is super smart. And we’ve talked about that on the show before. But I thought it was interesting when I asked you, you’re like, no, no, no, not bookkeeping really specific on IOLTA accounts. I’m helping lawyers with these trust accounts, set ’em up and manage ’em the right way. And I was like, wow, that’s really specific, but probably really needed.

Amy Woods:

I don’t do any of the bookkeeping or accounting work. I mean I did for years and years and years, so I know all that side, but I really focus on just the trust account. So your bookkeeper will make sure your books are all right even with your trust account. And oftentimes they also do the three-way reconciliation, but typically your accountant or bookkeeper, that’s where they stop and sometimes they say, oh yeah, we’re keeping you in compliance, and they are for that part. But a lot of them don’t understand that if you get audited, there’s so much more to the audit. They want to see all sorts of different documents. Some of them aren’t even financial related. They want to see if you’ve been sheeting the funds properly, if you’ve been taking the right CLEs. I mean there’s so many other aspects of it. So yes, I work with accountants and bookkeepers, but I don’t do that side of it.

Stephanie Everett:

Well, you mentioned one, but let me just kind of set us up here. And what are some of the big mistakes or pitfalls that you see people kind of unknowingly get themselves into when it comes to their I OTA accounts? I’m going to call ’em I OTA accounts. Some states, I mean we could just say trust accounts too, right? But that’s that concept. I know some states leave out or add a letter or take away a letter.

Amy Woods:

They take add a letter, they call it

Stephanie Everett:

Ia. There you go. Or is

Amy Woods:

It interest on Yeah, or IOLTA or something. They take out a letter. Yeah,

Stephanie Everett:

It’s

Amy Woods:

Fine.

Stephanie Everett:

We all know what we’re talking about here. It’s those things. It’s where you put your client’s money. That’s not yours yet.

Amy Woods:

Yeah, it is not yours. And that’s one thing I really want to emphasize. The reason there are all these regulations and compliance is because this is not your money. You are a steward of this money handling it for your clients. And when things mess up with the trust account, the public loses faith and trust in law firms and how they’re handling things. So this goes all the way up to your reputation as a law firm.

Stephanie Everett:

Okay, so what are we missing? What are those pitfalls that we should be thinking about?

Amy Woods:

I think a lot of pitfalls are this gets pushed to the side so very often and whether it’s setting up the account properly or managing it from the get-go properly usually gets pushed aside and then something happens, a client complains or you get audited and that’s when you start looking at it. And at that point it’s sometimes too late to fix a lot of things if you have a mistake from several months ago. If you don’t fix it within a month or so, it can snowball into something so much larger and so much more difficult to fix. So that’s a problem not taking full responsibility for it and expecting your accountant to 100% know what needs to be done for compliance. There are some specific questions you should be asking them. Have they ever been through an audit? Do they know the non-financial side of what needs to be in compliance?

Are they going to help you keep track of what needs to be cheated? Will they show up if you get audited? So one thing is if most accountants and beekeepers will not be involved in the audit. So if you get audited, the auditor is going to ask you specific questions to your trust account. And if you’re not familiar with that, that can be really difficult for you. So when I do, I go in and help an audit, I sit with the auditor, I walk them through all the questions, and then at the very end of an audit, the lawyer comes in and sees the report and signs everything. But most accountants and bookkeepers don’t do that. So that puts the responsibility on you of being able to answer all these questions. And then a big thing that lawyers miss is the whole sheeting process. Often one of the big ones is outstanding checks.

So when you write a check out of your trust account, kind of in your mind and even in your accountant’s mind, that check’s gone, that money is gone, it’s been paid. But as far as theBar is concerned, that money is still in your trust account until that check clears. So if that check is still in your trust account and every state is different or not, states usually do three to five years to determine if funds are abandoned, if that money is still in there when it should be considered abandoned, you have to a sheet that. And I think law firms miss that a lot.

Stephanie Everett:

Alright, Amy, you’ve used this word a sheeting a few times now and I’m going to take us back. It’s been a while for me since I studied for theBar. I do remember having to learn it, but I suspect that I’m probably like a lot of people sitting here going, oh yeah, what is that thing? So maybe you could just help us out and let’s get everybody on the same page with the rules and why we need to care about this.

Amy Woods:

Yes. So lots of companies have to achieve not just law firms, it’s when you hold something of value, trust, bonds, stocks, money, something like that. Sometimes it’s refunds for a certain amount of time and then you can no longer get in touch with the person that belongs to you try everything in your power phone number, email mailing address, you can’t get in touch with them. Then you are obligated to turn that money over to the state treasurer. For law firms, the timeline varies from state to state, but it’s usually three to five years. So after having money in your trust account for three to five years, there’s a whole process you have to go through. You have to make one final attempt to try to reach out to the client. And then once you’ve done that, you have to create a report and then submit that report to the state treasurer in the way that they want it and then pay those funds to the state treasurer.

And then at that point, if the client does come back, you have to point them to the state treasurer and say, Hey, I have a sheet of your funds. They’re now with the state treasurer. You’ll have to go to them to get it. Two states that are unusual are New Jersey and New York. They don’t a sheet to the state treasurer. They have their own fund called Lawyers Fund for Client Protection. And I think that they take that money after a certain period and use it for different things. So this is is just old funds in your trust account where you can’t find the client. And this includes outstanding checks. Even if you have sent a check to a client and it’s still in your trust account after five years, I’m just going to use five years as general, then you need to transfer. You need to cancel that check or void that check and move that money to state treasurer.

Stephanie Everett:

So you can’t just say, oh, let me go delete that entry in my accounting and I’ll just keep that money. That doesn’t work.

Amy Woods:

No, no. I know as far as your accounting is concerned that money is not in your bank account. But again, theBar view it that way as far as theBar is concerned, that money is still in your bank account until that check clears and you’re still 100% responsible for it. So if the check doesn’t clear now that money is still in there, you need to transfer it to the state treasurer,

Stephanie Everett:

Which is also a good reminder. I have done this myself. You can actually go, there’s usually a website for your state where you can go and you can put your personal name or your company name in there and you can see if they’re holding any money for you. So there have been a couple of times where I’ve done that and some checks somebody thought they sent me and I didn’t get it, or maybe I forgot to deposit it, I don’t know. But it’s there and then you fill out a form and the state sends you that money. So it’s also a good little practice to go check it every once in a while for yourself.

Amy Woods:

It is. And so I’ll also mention if you have gone past the timeline, so one big thing, if you get audited and you haven’t cheated, you can get in trouble with theBar, but you can also get in trouble with state treasurer and you have to pay penalties and interest on that money. But almost all states have a process you can go to in North Carolina it’s called Voluntary Disclosure, where you go in and say, Hey, listen, I messed up. I didn’t sheet this in time that I was supposed to, but I want to moving forward. I want to do it correctly. Can you please forgive me and help me to move forward? And especially if it’s your first time, they will, they’ll say, okay, yeah, we’re going to forgive all the penalties and interest. We submit your forms and your funds and then moving forward please follow the procedures and the timelines. So that’s really important because if you just submit your money, you will get charged penalties and interest.

Stephanie Everett:

Yeah, okay, well that’s a good thing. So now everybody is secretly hitting pause right now and running over to their trust account to be like, what are the outstanding checks that we’ve had that we haven’t done anything with for years? And I guess it’s also a good reminder because I know I probably was guilty of this when I practiced. We feel like we’ve sent that check and we’re done. It just kind of feels like, whew, okay, I can close that. But really until the check clears, we need to keep calling that client, staying in touch with them, trying to actually get them to go cash the check.

Amy Woods:

And I have so many stories of, so law firms writing small checks like 10 cents and sending it to their client and their client is like, I don’t want to cash a check for 10 cents. It’s not worth my time to go to the bank or do whatever I need to do. And so they don’t cash it and then the law firm is stuck. You can’t do anything with that until the sheeting time has gone by. So another tip is there is language you can put in your retainer agreements that can protect you from that. Every stay is different. You need to make sure you look at your trust handbook and see what your specific language needs to be. But it can be things like very small amounts. It’s called something minimum amounts or

Stephanie Everett:

Minimus, maybe

Amy Woods:

Some sort of Latin term,

But I don’t know. But if you put that in there and say that the client waives that amount, if it’s left in there, then if you have 10 cents left in there, you can just have it move to operating and not worry about sending a 10 cent check to your client who’s not going to want to cash that. And you also won’t have to worry about waiting five years before you can sheet that 10 cent check. I had a client a few years ago who had numerous, I guess clients who needed to sheet, and most of them were around one to $5 and we’re talking like hundreds. They had to sheet hundreds of clients and they’re all around one to $5. And it was just very tedious. And if they had had this language in their retainer agreement from the beginning, this would’ve been solved.

Stephanie Everett:

That makes sense. Okay. Another term you threw out casually, but let’s just make sure was the three-way reconciliation. And I know that’s super important and maybe you could just define that for us and make sure we are doing that right?

Amy Woods:

Yeah. So a normal reconciliation is always your general ledger, which is basically your check account, your checkbook, where you keep track of what’s in your bank account as far as your checkbook is concerned, and then your bank statement and you reconcile those. So if you have any outstanding checks or outstanding deposits, they’re going to be in your general ledger, but they’re not going to be on your bank statement because they haven’t cleared yet. The three way reconciliation adds in the balances of all your client ledger cards. So your trust is made up of all the different clients you have balances for. So in the three way, you’re reconciling your general ledger, your bank statement, and then all the balances that add up to your total and your trust, which is all the balances of your ledger cards. So that’s the three-way reconciliation and that’s what the auditor will want to look at when you get audited.

Stephanie Everett:

Now, back in the old days, I mean hopefully no one is doing this anymore, although occasionally I meet an attorney who pulls out their little general ledger book. They’re like a physical book,

Amy Woods:

Physical ledger cards

Stephanie Everett:

Or an Excel spreadsheet or something crazy, right? I mean, guys, there’s software out there that does this for us now and would, if you’re not using it, please use it. It just makes it so easy. But that was going to be my question is if I’ve set up my trust accounting using fill in the blank, there’s so many software products that do this today. Is it kind of doing that three-way reconciliation for me or is there another step that I’m missing that I’m not going to? I guess that’s what I’m worried about because we don’t actually have ledger cards anymore. You’re using that term, it’s not like a card, but it’s in the software. So

Amy Woods:

Yeah, I feel like ledger cards is the equivalent of the little floppy disc you click to save in all the Microsoft things. No one knows what that floppy disk is anymore, but we still click it to save. So ledger cards is the equivalent of that. No one uses actual ledger cards anymore, but that’s what they’re called. So yeah, so if you’re doing your bookkeeping and something like QuickBooks, QuickBooks is going to do the bank statement and general ledger reconciliation for you. But QuickBooks doesn’t have a great way of handling all the client ledger cards, and you can put them in as customers. There is workarounds you can use in QuickBooks, but it’s not going to do the full three rate way reconciliation for you. And then in things like Clio practice, pan case, all sorts of different case managements, they don’t do the three-way either, but they produced a report you need. So they will produce a report that shows you the breakdown of every single client’s ledger and then what they add up to. And that’s report is what you’ll use to look at your ledger car, your general ledger, and your bank statement, and then your ledger card balances. So as of right now, I have not seen a system that brought all of it together perfectly to reconcile everything.

Stephanie Everett:

But it sounds like if we run that report, that’s really, that’s probably the missing step that people are doing. They probably don’t know they need to go run that report and check that against their statements, it sounds like. Right. I guess the key thing here, Amy, that I’m hearing for you is you need to check and see if your software’s doing this. Maybe there might be US platform out there, maybe they’ve even made revisions, they’re always coming out with new features, so maybe they are doing this. I’m not trying to test your knowledge on every trust accounting software that exists, but the point is, if you’re not sure, ask the question, do you need to run a report? Do you need to push another button? Do you need to do something? Because chances are, for most of us, we don’t even realize this third step is necessary.

I think that’s my big takeaway here. Yes, correct. Alright, I would agree. Alright, let me just ask you straight up, kind of given this advice for years, but now I’m like, oh, let’s see if the expert agrees with me. So we’ll test my, I hope I’m right, but my very strong recommendation to lawyers has been, don’t use QuickBooks for your trust accounting. It’s not designed to do it makes it, and like you just said, there’s some workarounds, so if you really know what you’re doing, you can set it up the right way. But why when there’s so many other programs out there that actually understand legal, understand the requirements of your accounts and will help you set it up the right way. So that’s always been my advice and I would just love for the expert to tell us your opinion.

Amy Woods:

I agree. I do think QuickBooks has a really good space in the legal world because I also haven’t seen great accounting software, especially accounting software that integrates with tax return software and things. So a lot of my clients do use QuickBooks, but then they use something else, like we said, Clio practice, Panther or some other case management. And those programs are specifically made to keep track of your matters and your client balances and your activities, your transactions and everything that’s going on with your client. And they are much better at keeping track of those balances and giving you a report. QuickBooks is not set up to do it that way. So I think using QuickBooks in a combination with something, or if your accountant uses something other than QuickBooks, that’s fine, but I do think you need some sort of client matter management system that’s going to keep track of all that.

Stephanie Everett:

Absolutely. I hope we kind of glossed over this in the beginning, but I hope everyone knows you might have one single bank account that is you set up as specifically what you go to the bank. And in Georgia it was really easy like these are the banks approved by the state bar. They know how to set up these accounts. And so from the bank’s purpose, it’s just one big pot of money, but for our purposes it might be 10, 50, a hundred, 500 clients who we have all their money in there and we have to know because it’s almost like we have 500 different little bank accounts and that all those bank accounts have to be precise, can’t, that’s where we get ourselves in trouble people is if we think we can, oh, the money’s in there. Let me just move it. That’s not sufficient. It’s like is the money in client ABC’s account? And if it is then and it’s time, you can move it, but otherwise those accounts have to match to the penny.

Amy Woods:

Yes. And one thing lawyers do a lot is they don’t keep track of those individual client balances and then they think, oh, I have plenty of money in my trust account. Look at this big balance I have. I can of course move money, but you do, you have to look at the individual client’s balance because overall you might have plenty of money in your trust bank account, but this particular client, and if you move money for them, you technically go into a negative balance and that is a huge no-no for trust compliance.

Stephanie Everett:

Yeah. So if people are hearing this and are like, oh boy, maybe they’re feeling a little butterfly in their stomach, I just don’t know. I’m not sure because like you said, this is an area when we get into accounting and numbers and finance that lawyers sometimes do put our heads in the sand or pretend that that’s not our strong suit. And my words to you guys is always, it has to be, if you’re running a business, you’ve got to figure this stuff out, just no excuses. It’s not that hard. But if they do need some help, is that something you come in and sort of almost not audit, like you were talking about an auditor coming in, but you can come in and be like, actually, let me make sure you are set up the right way and you’re doing all your monthly processes, correct.

Amy Woods:

Yes. So I have just a standalone service that I can come in and review up to six months of all of your compliance documents. And this can just be a one-time thing. If you’re like, I think my accountant’s doing a really good job, but I would really like to check. I can come in, look over everything and be like, yeah, your accountant’s golden, you’re good. Or I can be, well, there’s an area here or there, and I’m not here to replace your accountant. I can speak to them and say, Hey, we’re missing this area right here. Here’s what you need to do. And then they can take it from there. I’m very willing to work with whatever accountant or bookkeeper there is. So yeah, I can come in and audit, do a small audit of your books to make sure that you are hitting all of the main compliance components. Yes.

Stephanie Everett:

Yeah, I think that’s a great service and that’s why I was so excited and excited to share because I do think this is an area where sadly we are just unsure or maybe we unknowingly, I’m sure there’s bad actors, but I suspect for the most part, people are getting themselves in trouble simply because they don’t know, like you said, they don’t set it up the right way or they don’t manage it actively. And then it snowballs into big problems.

Amy Woods:

And I think people need to understand the high level of consequences. So like you said, most people who get in trouble with trust compliance in theBar are not meaning to be fraudulent or to do anything wrong. They’re just making little mistakes and then not fixing them quickly or just not stay on top of things. And then the consequences are real. You have disciplinary action that can go anywhere from having to take time to fix something and your processes all the way up to having your license suspended to being disbarred. So the consequences are real. You have to take time and money to fix things or even sometimes hire a general counselor to represent you in front of theBar. It is easier and less costly just to make sure you’re doing things right from the,

Stephanie Everett:

I love that. Great advice. I think we’ve learned so much today. We’ll make sure to put Amy’s information in our show notes so that if you do want to check out and see if you’re in compliance or just even learn more about all of these technicalities, these things that we need to get right, then don’t sit on this guys. Make sure you get it done and then you’ll sleep better at night. So thank you, Amy, for joining me and reminding us about a sheeting loss taking us back to Barbie. Thank you

Amy Woods:

So much for having me.

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