Any individual acting in a fiduciary capacity is responsible for maintaining fiduciary accounting – tracking, reconciling, and auditing funds to protect their clients. While it involves simple accounting, managing fiduciary accounts presents attorneys with challenges that lead to mismanagement of funds, something that can put them into disciplinary issues with their state bar. One could even risk disbarment.
But you can stay out of trouble by avoiding some common mistakes and getting on top of things throughout. In this article, we look at the 10 common fiduciary accounting mistakes and what you ought to do to avoid them.
1. Lack of or Unclear Trust Rules
Reliable fiduciary accounting requires clear rules and regulations on how to handle funds. But some individuals end up ignoring this fact and end up in trouble. It's crucial that both parties, the trustee and attorney, adhere to the terms of their agreement.
2. Not Keeping the Client Updated and Informed
Please don't keep the trustee in the dark about his account details to avoid disputes. It's advisable always to let your client know how much is in the account, any account transfer you make, the total amount due, any work done or transaction made, and the account balance after a transaction.
3. Co-commingling Trust with Personal Funds
Some attorneys mix funds held in a trust with those of the fiduciary, making it hard to track and determine which funds are the beneficiary accurately. Commingling funds can also suggest dishonesty, even though it's an honest mistake.
Any funds from the client's funds to yours need to be removed or withdrawn from the account. Some risk-averse attorneys tend to leave large amounts of personal funds in trusts to safeguard them against accidental overdrafts from the trusts' accounts. That's unethical –one should avoid overdrafts by maintaining and managing the account properly.
However, you can have some personal funds in the trust to meet some expenses and bank charges like monthly maintenance fees or funds transfer charges.
4. Having Many Signatories
Authorizing many individuals to sign checks on a trust account or fund exposes it to issues and irregularities. While it might be tempting to permit a bookkeeper or assistant to sign checks for you, being the sole signatory helps reconcile and manage the account better. You'll know exactly how much is in the fund and any transfers made.
5. Unreliable Leadership
Fiduciary accounting requires skilled, informed, and experienced individuals to run, maintain, and manage trusts. People charged with overseeing the account and its everyday operations need to be diligent enough to avoid making or promptly rectifying any accounting mistakes.
6. Reckless Bank Reconciliations and Transaction Records
It's advisable to have a reliable system of balance and checks. Define everyone's role in the trust account explicitly to avoid confusion. People responsible for depositing into the account shouldn't be the same ones who withdraw and disburse funds.
Also, record all transactions before signing checks or issuing approvals so that you can identify and prevent fraudulent purchases. Ensure you're around during reconciliation since you're liable for any issues or mistakes with the account.
7. Unnecessary Overdrafts
While overdrafts are a common mistake, you can avoid them by having proper account controls, management, and maintenance procedures. Make sure you record every transaction and reconcile the trust account as required.
8. Lack of Standardization
It's important that you have standard deposit, withdrawal, credit card processing, and disbursement procedures. Everyone involved in managing and maintaining fiduciary accounts needs to use these accounting procedures and adhere to the rules to ensure safe and accurate accounts.
9. Inadequate Backups
Excellent fiduciary accounting and the best fiduciary accounting software don't completely shield you from accounting risks. It's vital that you back up your data to avoid the nightmare of losing your data. While some recommend that you back up data every month, it's better to do It daily to avoid losing a week's or month's data.
10. Listing Funds in the Account as Assets
Remember, the money in the trust account isn't yours until you earn it. List the funds as a current liability in your company's financial statement so that you can easily and quickly refund them if a client requests a refund.