Journal Article

North Carolina State Bar Amends Procedures for Exemption from Random Audit of Trust Accounts

BE IT RESOLVED: Henceforth, it will be the policy of the North Carolina State Bar Council that a lawyer may seek exemption from the random audit of trust accounts authorized by 27 NCAC 1B, Rule .0128(b), by having a CPA or CPA firm perform an examination of his/her trust account pursuant to procedures approved by the council and by having the CPA or CPA firm send a report showing compliance to the North Carolina State Bar. The required period covered by the CPA examination is 12 months. Exemptions are good for 15 months from the date the CPA examination was concluded. A lawyer is prohibited from seeking exemption from the random audit of his/her trust accounts during the quarter in which the lawyer’s judicial district bar has been selected for review.

Since the creation of the State Bar’s Random Audit Program in 1985, lawyers have, as a matter of policy, been permitted to obtain exemption from selection for random audit by preemptively submitting their trust accounts for examination by certified public accountants. The impetus behind this policy was to allow lawyers to subject their trust accounts to an examination similar to a random audit and thus preclude selection by the Random Audit Program. In theory, this policy would be a win-win for both the State Bar and the lawyer, as it would allow the State Bar auditor to examine other lawyers and let the lawyer have his account examined on his own schedule and by a CPA of his choice. This policy remains in effect; however, the method for seeking and being granted an exemption has been revised.

Previously, a certified public accountant examined the lawyer’s trust account and certified that the trust account was in compliance with Rule 1.15 of the Rules of Professional Conduct. The CPA was not required to provide any specific findings, explain the process by which the examination was conducted, or show that any remedial measures were taken to bring the trust account into compliance. When the State Bar received a completed form that showed compliance with Rule 1.15, the lawyer or law firm was exempted from random audit for 15 months. The State Bar received, on average, 35-40 exemption forms a year from law firms of all sizes, including solo practitioners.

Not surprisingly, the reports the State Bar received from the accountants almost always certified that the lawyer’s trust account was spotless and had no deficiencies. From our experience with the Random Audit Program and the high percentage of non-compliant trust accounts, we were suspicious that the examinations were either not thorough enough or not conducted at all.

Additionally, the Board of CPA Examiners expressed reservations with the format and language of our exemption form, and asked us to revise the form to provide more specific requirements for the CPA examination. Given our concerns with the effectiveness of the exemption process and the request from the Board of CPA Examiners, we undertook to revise our forms and procedures for seeking and obtaining an exemption from the Random Audit Program. Descriptions of the new forms are below.

  • The Lawyer’s Representation Form will require the lawyer to certify to the State Bar that he/she is in compliance with certain trust accounting rules. The form requires the lawyer or law firm to list all of their trust accounts and all of the lawyers covered by the requested exemption. The representation form must be provided to the CPA/CPA firm prior to commencement of the examination and must be attached to the CPA report sent to the North Carolina State Bar.

  • The Agreed Upon Procedures Form specifies what records the CPA must examine for the State Bar, how they are to examine the records, and what we want CPAs to report to us. It will make the CPA trust account examination more equivalent to the random audit procedure, and will give the State Bar a more detailed look into the lawyer’s compliance with trust accounting rules.

  • The Agreed Upon Procedures Engagement Letter is the contract between the lawyer and the CPA that clearly states what the CPA will be examining and how information will be reported to the State Bar.

Finally, the CPA will provide the lawyer and the State Bar with a report detailing the results of the examination pursuant to the agreed upon procedures.

These documents are available in the “Forms” section of the State Bar website, under “Trust Accounting.” They are also available in the Lawyer’s Trust Account Handbook, available online at ncbar.gov/PDFs/TrustAccountHandbook.pdf.

Please note that a lawyer is prohibited from seeking exemption from the random audit of his/her trust account(s) during the quarter in which the lawyer’s judicial district bar has been selected for review.

The revisions to the procedures regarding exemption from random audit balance the need to advance the State Bar’s mission of protecting the public with the desire to allow lawyers to have their accounts audited in a more convenient and less stressful environment. If you have any questions about the new procedure and forms, please contact Peter Bolac, trust account compliance counsel, at (919) 828-4620 or PBolac@ ncbar.gov.

THE NORTH CAROLINA STATE BAR
217 E. Edenton Street • PO Box 25908 • Raleigh, NC 27611-5908 • 919.828.4620
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