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Saturday, 18 August 2012

About Reasons for Trust Overdraws and How to monitor progress of correction of Negative Trust Balances

Most firms operate Trust accounts and the operation of these Trust funds are governed by strict local bar and law society rules. However there are also firms that operate in jurisdictions with non existent or lax Trust Accounting rules and do not pay attention to trust account management. Worse things have happened to firms that also operate without due diligence and controls exercised by firm partners and management. The result is inadvertent or fraudulent Trust overdraws. Reasons for inadvertent Trust overdraws include:
 Accounting for trust transactions on incorrect matters: Writing trust cheques against wrong matters when there are sufficient funds at the time only comes to light towards the end of the matter .When time comes to dispose balance of the trust funds it is determined that the balance should be more that what is available. This anomaly can be caused by a) pure mis-postings by accounts staff or b) incorrect/distorted matter details availed to accounts staff by lawyers/legal staff. At the time of disbursing balance of trust funds, some lawyers, because of time constraints, will approve payments with instructions “to sort out later”. This is very true for instance, for real estate (property) transactions when there are completion dates that need to be adhered to and the firm is acting for the buyer and vendor and somewhere along the line disbursements for the buyer were incurred utilizing trust funds belonging to the vendor.
Multi Currency trust transactions: Firms who choose to handle foreign currency trust transactions do so by processing trust entries in their local currency whilst keeping a manual record for the value of foreign currency trust balance for each matter. This is a primitive method because one can track the foreign currency value as well as the reporting currency value of the trust balances in PCLaw (this is a topic for another day). Because of fluctuating exchange rates negative trust balances can occur although in reality the forex value of the trust funds is not negative.
Disbursing uncleared trust funds: Again some firms flaunt rules because ‘urgent’ payments need to be made and accounts staffs are instructed to process payments on matters before funds for that purpose have cleared the bank. When Trust receipts result in NSF trust balances go into negative.
Allowing Negative Trust Balances: Most firms restrict the occurrence of negative trust balances. This can be set under: Options>System Settings>Data Entry tab. However, this is sometimes left unchecked and subsequent trust overdraws warnings during data entry go unheeded.
PCLaw has a great tool to identify and manage the correction of negative trust balances. The Trust Listing report can be run for negative balances only. The report gives last trust entry date for every matter that has a negative trust balance. The Last Trust entry date signifies:
·         The last date of the Trust cheque that resulted in the matter going into Trust Overdraft
·         The last date of the Trust receipt on a matter that already had a Trust Overdraft but the receipt was not enough to move the matter out of Trust Overdraft
Once negative trust balances have been identified and are determined as genuine, the resultant Trust Listing report can be exported to Excel and sorted by Last Trust date. This Excel report will give the earliest and latest date and can act as a starting or ‘base’ report. Once the latest date is known on this base report, subsequent trust listing reports can be run for negative balances with advance search filter (that can be saved in the system) for dates greater than the latest date as per the original report. For example if the last Trust date per base report was 18/Jul/2012, under Advance filter of the Negative Trust Listing report, the date can be set as greater than 18/Jul/2012. By so doing you can identify if any subsequent dated trust entries have taken place on matters that have negative balances and is useful for tracking progress on correction and more importantly help prevent matters from aggravating further!
Of course on every report the total of negative Trust balances need to be checked and compared to prior reports to determine overall improvements/replenishment efforts!

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