Rule 1.15 of the Model Rules of Professional Conduct, or its equivalent, requires that lawyers who are entrusted with the property of law clients and third persons in the practice of law must hold that property with the care required of a professional fiduciary. The basis for Rule 1.15 is the lawyer's fiduciary obligation to safeguard trust property, to segregate it from the lawyer's own property, and to avoid the appearance of impropriety.
Rule 1.15 specifically requires a lawyer to preserve "complete records" with respect to a law firm's trust accounts. It also obligates a lawyer to "promptly render a full accounting" for the receipt and distribution of trust property. A violation of Rule 1.15 may subject a lawyer to professional discipline. Rule 1.15 does not, however, provide lawyers or law firms with practical guidance in complying with these fiduciary obligations or in establishing basic accounting control systems for their law practices.
The Model Rule on Financial Recordkeeping is intended to give further definition to the requirements of Rule 1.15. Adapted from existing court rules, it proposes uniform and minimal standards for the maintenance of law firm financial records. These standards should guide lawyers and law firms, particularly those new to the practice of law.
A lawyer who practices in this jurisdiction shall maintain current financial records as provided in this rule, and shall retain the following records for a period of [five years] after termination of the representation:
(1) receipt and disbursement journals containing a record of deposits to and withdrawals from bank accounts which concern or affect the lawyer's practice of law, specifically identifying the date, source, and description of each item deposited, as well as the date, payee and purpose of each disbursement;
(2) ledger records for all trust accounts required by [Rule 1.15 of the Model Rules of Professional Conduct], showing, for each separate trust client or beneficiary, the source of all funds deposited, the names of all persons for whom the funds are or were held, the amount of such funds, the descriptions and amounts of charges or withdrawals, and the names of all persons to whom such funds were disbursed;
(3) copies of retainer and compensation agreements with clients [as required by Rule 1.5 of the Model Rules of Professional Conduct];
(4) copies of accountings to clients or third persons showing the disbursement of funds to them or on their behalf;
(5) copies of bills for legal fees and expenses rendered to clients;
(6) copies of records showing disbursements on behalf of clients;
(7) checkbook registers or check stubs, bank statements, records of deposit, and prenumbered canceled checks or their equivalent;
(8) copies of [monthly] trial balances and [quarterly] reconciliations of the lawyer's trust accounts; and
(9) copies of those portions of clients' files that are reasonably necessary for a complete understanding of the financial transactions pertaining to them.
With respect to trust accounts required by [Rule 1.15 of the Model Rules of Professional Conduct]:
(1) only a lawyer admitted to practice law in this jurisdiction shall be an authorized signatory on the account;
(2) receipts shall be deposited intact and records of deposit should be sufficiently detailed to identify each item; and
(3) withdrawals shall be made only by check payable to a named payee and not to cash, or by authorized bank transfer.
Records required by this rule may be maintained by electronic, photographic, computer or other media provided that they otherwise comply with this rule and provided further that printed copies can be produced. These records shall be located at the lawyer's principal office in the jurisdiction or in a readily accessible location.
Upon dissolution of any partnership of lawyers or of any legal professional corporation, the partners or shareholders shall make appropriate arrangements for the maintenance of the records specified in Paragraph A of this rule.
Upon the sale of a law practice, the seller shall make appropriate arrangements for the maintenance of the records specified in Paragraph A of this rule.
Paragraph A enumerates the basic financial records that a lawyer should maintain with regard to the business and trust accounts of a law firm. These include the standard books of account, and the supporting records which are necessary to safeguard and account for the receipt and disbursement of client funds as required by Rule 1.15 of the Model Rules of Professional Conduct or its equivalent. Consistent with Rule 1.15, this rule proposes that lawyers maintain financial and safekeeping records for a period of five years after termination of each particular legal engagement or representation.
The potential of these records to serve as safeguards is realized only if the procedures set forth in Paragraph A(8) are regularly performed. The trial balance is the sum of balances of each client's ledger card (or the computerized equivalent). Its value lies in comparing it on a monthly basis to a control balance. The control balance starts with the previous month's balance, then adds receipts from the Trust Receipts Journal and subtracts disbursements from the Trust Disbursements Journal. Once the total matches the trial balance, the reconciliation readily follows by adding amounts of any outstanding checks and subtracting any deposits not credited by the bank at month's end. This balance should agree with the bank statement. Quarterly reconciliation is recommended only as a minimum requirement; monthly reconciliation is the preferred practice given the difficulty of identifying an error (whether by the lawyer or the bank) among three months' transactions.
Paragraph B enumerates minimal accounting controls for lawyer trust accounts. It also enunciates the requirement that only a lawyer admitted to the practice of law in the jurisdiction be an authorized signatory on a lawyer trust account.
Paragraph C allows the use of alternative media for the maintenance of bookkeeping records if printed copies of necessary reports can be produced. If trust records are computerized, a system of regular and frequent (preferably daily) back-up procedures is essential.
Paragraphs D and E provide for the preservation of a lawyer's financial records in the event of dissolution or sale of a law practice.