California's New Client Trust Account Protection Program (CTAPP)

The State Bar of California has introduced the Client Trust Account Protection Program (CTAPP), a significant step forward in regulating and overseeing client trust accounts. This program brings new reporting requirements and compliance measures for attorneys.

Previous Trust Account Oversight

Previously, attorneys followed trust accounting guidelines via Rule 1.15 and the state bar’s trust accounting handbook. While banks had to report overdrafts, additional oversight from the state bar was minimal. Actions were taken based on client complaints, but primarily, attorneys or law firms were responsible for self-regulation.

Key Requirements of CTAPP

Under the new CTAPP regulations, actively licensed attorneys must:

1. Annual Registration: Attorneys must register their client trust accounts, including IOLTA accounts, with the state bar annually, either individually or through their firm.

2. Annual Self-Assessment: Attorneys must complete a yearly self-assessment of their client trust account management practices.

3. Certification of Compliance: Attorneys must certify that they understand and comply with the requirements for safekeeping client funds and property as outlined in Rule 1.15 of the Rules of Professional Conduct.

Implications for Attorneys and Law Firms

These changes introduce more comprehensive reporting and compliance requirements, raising questions about how firms and attorneys can ensure full compliance.

For Attorneys Without Management Responsibilities

Even if you are not in a management role, you must still comply and complete the self-assessment. Subordinate attorneys should monitor the trust accounts of the clients they manage and facilitate communication between the administrative team and clients to ensure compliance with state bar guidelines. Law firms should clearly state in employee agreements and codes of conduct that all members must maintain trust account compliance, adhering to the highest ethical standards.

Role of Supervisory Attorneys

A supervisory attorney is responsible for ensuring that trust account duties not performed by individual attorneys are properly handled by others in the firm. The ideal candidate for this role should:

• Have a thorough understanding of the firm's client transactions and their proper accounting.

• Possess knowledge of accounting processes to identify and correct issues promptly.

• Be a strong communicator capable of mobilizing the team to maintain compliance.

Education and access to outside experts are essential for supervisory attorneys to fulfill their duties effectively.

Red Flags Indicating Potential Issues

Several key indicators may suggest deeper problems with trust account compliance, including:

• Historical unreconciled differences

• Negative client balances

• Prolonged periods without transactions (over 45 days for settled accounts and 6 months for retainers)

• Large balances in the IOLTA account

• Lack of three-way trust reconciliation

• Excessively aged outstanding checks

• Deposits in transit aged over three days

Addressing Noncompliance

If you discover potential noncompliance, it is crucial to consult with a CPA, ethics attorney, or other outside experts immediately. Prompt resolution is vital to prevent worsening issues.

Impact of Billing/Accounting Systems

Integrated billing and general ledger systems simplify the required three-way reconciliation of trust accounts. However, non-integrated systems necessitate more complex reconciliation processes and internal controls. Ensuring a clean match is crucial, regardless of system complexity.

Next Steps

The state bar plans to provide training and educational resources to help maintain trust account compliance. Additionally, random audits of trust accounts by independent CPAs will be conducted at the firm's expense.

Given the enhanced reporting and compliance structure and the potential for audits, it is urgent to establish a robust control structure in your firm. This includes creating policies and procedures for trust accounting, checklists and handbooks for the finance and accounting teams, and a comprehensive review and reporting system to provide supervisory attorneys with clear insights into trust account management.

Conclusion

The CTAPP represents a significant shift in how client trust accounts are managed and regulated. By adhering to these new requirements and implementing strong internal controls, attorneys and law firms can ensure compliance and uphold the highest standards of ethical trust accounting.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. ClearPath CPA assumes no liability for actions taken in reliance upon the information contained herein.