Part I of this series described what you can expect during a compliance audit and how to prepare for it. Part II described the revisions to Rule 1.15 and the elimination of the Interpretive Guideline. We conclude our series with cautionary tales as to what can happen as a result of compliance audits which reveal deficiencies.
Matter of Higgins, Del Supr., 582 A.2d (1990). Compliance revealed a failure to maintain cash receipts and disbursement journals or separate ledgers. Also cited was a failure to perform trial balances and reconciliations.
Matter of Figliola, Del. Supr., 685 A.2d 1071 (1975). Compliance audit noted a failure to transfer firm funds out of the real estate account on a timely basis. Rule 1.15(d) and Interpretive Guideline No. 2 were also cited regarding a failure to properly maintain books and records.
Matter of Gregory, Del. Supr., No. 433, 1995 (1/4/96). Compliance audit noted that earned fees were not properly withdrawn from a real estate escrow account. Resulting in an improper commingling of attorney and client funds. A failure to properly supervise the bookkeeper was included in the sanction that resulted.
Matter of Williams, Del. Supr., No. 307, 1989. Compliance audit noted the attorney's failure to maintain books and records relating to fiduciary and non-fiduciary accounts in compliance with Interpretive Guideline No. 2. This ultimately resulted in a charge of false certification of compliance in violation of DLRPC Rule 8.4(d). In addition to the public reprimand, the Respondent was advised that he could be subject to unannounced compliance audits for the next four years.
Matter of Barrett, Del. Supr., 630 A.2d (1993). Neither a compliance audit nor the attorney's own efforts could locate personal injury settlement funds which the Respondent claimed to have escrowed 13 years prior. Respondent was suspended for three years as a result of his failure to preserve the client's property.
Private Admonition. Board Case No. 57, 1991. A compliance audit revealed that the attorney maintained a large sum of earned fees in a fiduciary account. Failure to "sweep" the account on a timely basis results in commingling of attorney and client funds. Neglect of proper account reconciliations was also noted.
Private Admonition. Board Case No. 43, 1992. A compliance audit found that the attorney was maintaining personal funds in a real estate escrow account to cover fees and to prevent overdrafts in excess of the November 19, 1992 Amendment to DLRPC Rule 1.15(a) allowing $500.00 of firm funds to be maintained in an escrow account for that purpose.
Private Admonition. Board Case Nos. 39, 41 and 42, 1994. The firm had withdrawn from the IOLTA program several years before the audit. The firm planned to pay the interest to the clients. A compliance audit showed that problems and errors in the transfer of the interest occurred and the interest was ultimately transferred to the firm's operating account. In addition to the sanction, the firm was ordered to pay the accrued interest to IOLTA because of the difficulty in calculating the interest due to individual clients.
Private Admonition. Board Case No. 53, 1995. A compliance audit noted violations of Rule 1.15(a), (b), and (d) as well as Interpretive Guideline No. 2. The attorney in question had an impermissible amount of personal funds in a client escrow account. The accrued interest on client funds had not been delivered to the Delaware Bar Foundation through the IOLTA plan. A failure to maintain subsidiary ledgers for each client transaction, failure to prepare monthly listings of client balances and a failure to perform monthly reconciliations of cash in escrow were also noted.
Private Admonition. Board Case No. 1, 1989. A failure to pay a water bill for one month after a real estate settlement and a delay in paying an exterminator bill for several months were noted in a compliance audit which ultimately resulted in the imposition of the discipline.
Private Admonition. Board Case Nos. 937 and 1004 (3/2/88). An attorney represented both sides in a real estate transaction and failed to properly maintain the required financial books and records for a three year period contrary to the Certificate of Compliance which was filed.
Private Admonition. Board Case No. 3, 1999. Compliance audit disclosed unspecified non-compliance with Interpretive Guideline No. 2 and Rule 1.15(d).
Private Admonition. Board Case No. 8, 1989. Unspecified non-compliance with a books and records keeping requirements were noted. These violations were compounded by the false Certification of Compliance. The resulting sanction included two years of unannounced compliance audits with the costs to be borne by the Respondent.
Private Admonition. Board Case No. 9, 1988. Violations of the Rule 1.15(d) and Interpretive Guideline No. 2 record keeping requirements by an attorney who was acting as an Executor where "non-nominal" estate funds were maintained in a non-interest bearing account.
Private Admonition. Board Case Nos. 2, 3, 4 and 5, 1992. Four attorneys in the same firm were found to be in violation of DLRPC Rule 5.3(a) for failing to supervise a non-lawyer employee charged with the responsibility of maintaining the firm's books and records. A compliance audit showed that the books and records were not being maintained in compliance with Interpretive Guideline No. 2 to Rule 1.15(d). After being so advised, two subsequent compliance audits were performed which also showed non-compliance. The fourth and final audit showed compliance.
Private Admonition. Board Case No. 39, 1995. A compliance audit revealed that an attorney deposited an unearned advance fee payment in an operating account rather than to a client escrow account. In addition, failure to perform monthly reconciliations was cited.
No sanction. A recent compliance audit noted a deficiency where a firm maintained escrow funds in an interest bearing account. The auditor felt that a deficiency existed because there were accounts available that yielded higher interest. After consideration, the Office of Disciplinary Counsel declined to prosecute the matter as a disciplinary violation.
As these cases illustrate, proper maintenance of the required books and records is much more than an academic issue. Sanctions can and do result from failure to understand and implement these requirements.
Lawyers' Fund for Client Protection of the Bar of Delaware
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Phone: (302) 577-7034 * Fax: (302) 577-1006 * E-mail: Bunny.James@state.de.us