So you've received a notice that you or your firm has been selected for a compliance audit by the Lawyers' Fund for client protection ("LFCP"). This news comes somewhere between "Looks like you're going to need a root canal" and "This is the police. We have your son/daughter here at the station." Sooner or later, it's going to be your turn.
We all know that Rule 1.15 of the Delaware Lawyers' Rules of Professional Conduct (DLRPC) and Interpretive Guideline No. 2 to that Rule require that certain books and records be maintained. The Guideline is also quite specific as to the process for maintaining those records.
For non-fiduciary funds, a cash receipts and cash disbursements journal, a record of fees (preferably by pre-numbered invoices) and bank statements, (including canceled checks and duplicate deposit slips) must be maintained. The cash balance derived from the cash receipts and disbursements journals must be reconciled monthly. All such accounts should be designated as an attorney business account, attorney professional account or attorney office account.
For fiduciary accounts, separate cash receipts and cash disbursements journals must be maintained. In addition, a subsidiary ledger containing separate accounts for each person for whom money or other property is held in trust, must be kept with a monthly trial balance shown.
These records must be preserved for at least five years either in print or in a computerized format. Guideline No. 2(a).
Each year, as part of their annual registration statements with the Delaware Supreme Court, attorneys must state that they have read the DLRPC Rule 1.15 and the guideline relating thereto and that they are in compliance with those requirements. If this is later shown not to be the case, attorneys face disciplinary prosecution for both the non-compliance and a violation of DLRPC Rule 8.4(c) for dishonesty or false statement. See IN RE: December 1997, pages 11-12, "The Certificate of Compliance and Improper Certification", by Martin Zukoff and David Glebe.
Guideline No. 2(d) states that "books of account records of every Attorney are subject to examination by a person or firm, engaged and directed by the Trustees, for the purpose of verifying the accuracy of certificates filed by the Attorney." If the books and records are not located in Delaware, the attorney has the option of bringing them to Delaware or paying the expenses of auditing them out-of-state.
Regulation V(1) of the LFCP states "at the direction of a Justice of the Supreme Court or upon request of the Chairperson of the Board on Professional Responsibility or their own motion, the Trustees shall cause an audit to be made of the books and records of the member of the Bar or of the member's law firm pursuant to paragraph (d) of Interpretive Guideline No. 2. There is no personal or professional right of privacy to the books or records required to be maintained. Even if there were such a right, it would bow to reasonable governmental regulation by the court. In Re Kennedy, Del. Supr. 442 A.2d 79 (1982).
At one time, The Trustees contracted with several accounting firms to perform the compliance audits on a seasonal basis. (Accounting firms were often unavailable at tax time.) To ensure consistency as well as year-round availability, the Trustees hired accountant, Martin Zukoff, to perform compliance audits throughout the year.
Marty has been serving in this capacity for approximately five years. He performs 40 to 50 audits per year. This is a substantial increase from the number of audits that were performed under contract. The Trustees select the individual practitioners and firms based on criteria such as size of firm. (One or two large firms are selected for audit each year.) whether or not the attorney or firm has been selected for past compliance audits and the results of those audits. The compliance check is performed by use of an "audit program" found at Regulation VII of the LFCP (page 1299 of the Delaware Rules Annotated). Firms may also be selected for compliance audits for investigative purposes at the request of the Office of Disciplinary Counsel.
Attorneys have the option to have their own accountant to certify their compliance and to file that certification with the Court. While there is no guarantee that they won't be audited, this certification reduces the chance that they will be selected. However, perhaps due to the costs for such a certification, this procedure is rarely used.
I interviewed Marty Zukoff for this column. He reports that as of august, 1998, he was finding a 62% compliance rate which is up from 40% a year ago. He credits the educational efforts by the Trustees as well as the requirement that attorneys certify their compliance by their signature on the annual registration statement. Marty also stated that the increased use of computerized records has also been a factor in achieving greater compliance. Programs such as "Quick Books" are user friendly and make accounts easier to reconcile.
He reports that negligence, ignorance and requirements are the most common causes for non-compliance. Not reconciling bank statements monthly and not maintaining a running list of client balances are two of the most common examples of non-compliance. Solo practitioners who are overly reliant on untrained staff are frequent offenders, per Marty.
If Marty finds non-compliance during an audit, he reports this to the Chairman of the Trustees. Depending on the nature of the non-compliance, the matter may then be referred to ODC who will request a written explanation from the attorney and a follow-up audit may be scheduled. If the non-compliance is minor and technical, the firm or practitioner may receive a letter requesting a written statement that the correction has been made.
Marty stated "The process is not that difficult. I recommend that an attorney start off with a good computer system from day one. Enter all deposits on the computer and write all of your checks off of your computer. If you run the program every month, you should have no problems." In addition, as he has in the past, he recommends attendance at the numerous CLE programs offered by the Trustees and the ODC on this subject as well as his own availability to answer specific or general questions on the topic. Finally, he recommends contact with the Professional Guidance Committee of the Bar Association for those who are too squeamish to call him.
Lawyers' Fund for Client Protection of the Bar of Delaware
200 West Ninth Street, Suite 300-B, Wilmington, DE 19801
Phone: (302) 577-7034 * Fax: (302) 577-1006 * E-mail: Bunny.James@state.de.us