Why Law Firms Must Strengthen Trust Account Controls as Regulatory Scrutiny Intensifies

Across the country, every state has one or more regulatory bodies charged with issuing and enforcing the rules of professional conduct for attorneys and law firms. While the structure varies by jurisdiction, the mission is consistent: protect the public by ensuring that attorneys safeguard client funds and maintain proper financial records.

In New York and New Jersey, these responsibilities fall to the Appellate Division’s Attorney Grievance Committees and the Office of Attorney Ethics (OAE), respectively. Both states, like all others, have adopted rules that outline attorneys’ ethical and fiduciary obligations when handling client funds and other assets entrusted to them.

At the core of these obligations are the requirements found in Rule 1.15 of the Rules of Professional Conduct. Attorneys must maintain client funds in a designated Attorney Trust Account, separate from any personal or business accounts. They must promptly notify clients or third parties when funds are received on their behalf, safeguard those funds appropriately, and refrain from withdrawing money until it is earned, or any dispute over entitlement is resolved. Just as importantly, attorneys must maintain accurate, complete, and contemporaneous records of all trust related financial activity.

These recordkeeping requirements are extensive. Attorneys must retain trust account bank statements, check registers, receipts and disbursements journals, and detailed client ledgers — each maintained separately for every client whose funds are held in trust. They must also keep supporting documentation such as deposit slips, canceled check images, wire transfer confirmations, retainer agreements, client billing statements, and proof of disbursements. Business account records are subject to similar documentation standards. In both New York and New Jersey, these records must be maintained for seven years.

In addition, attorneys are required to perform regular reconciliations, monthly in New York and New Jersey, to ensure that trust account bank balances match the balances reflected in their books and client ledgers. These reconciliations are not optional; they are a critical safeguard against errors, misallocations, and potential misuse of client funds.

Some states take a proactive approach to monitoring compliance. New Jersey’s OAE, for example, conducts Random Audit Programs (RAP) to assess whether firms are meeting their safeguarding and recordkeeping obligations. Audit activity has increased significantly in recent years. In 2024, the OAE completed 744 random audits, up from 454 just five years earlier, an approximately 64% increase.

Other states, including New York, have the authority to conduct similar proactive audits but currently rely on a reactive model. In these jurisdictions, audits are triggered by client complaints, bank overdraft notices, referrals from other agencies, or disciplinary investigations. That may soon change. A pending New York State Senate bill (S9129) proposes the creation of a statewide random audit program focused on law firms that manage real estate escrow trust accounts. If enacted, New York would join the ranks of states that proactively monitor compliance.

Like New York and New Jersey, several states have adopted their own nuanced frameworks — some highly prescriptive, others structurally unique — that shape how attorneys must safeguard client funds. States such as Pennsylvania, Illinois, Florida, and California each impose distinct definitions, procedures, timelines, and oversight mechanisms that go beyond the foundational requirements of Rule 1.15. Understanding these differences is essential.

In Pennsylvania, Rule 1.15 of the Rules of Professional Conduct contains some of the most detailed definitions and classifications of client funds in the nation. The rule distinguishes among “Rule 1.15 Funds,” “Fiduciary Funds,” “Qualified Funds,” and “Nonqualified Funds,” each of which determines whether money must be held in an IOLTA or non‑IOLTA trust account. Pennsylvania also limits trust account deposits to “Eligible Institutions,” a term defined with precision in the rule itself. These requirements are supplemented by the Pennsylvania IOLTA Board, which mandates annual certifications of compliance and emphasizes heightened vigilance due to the frequency of disciplinary cases tied to mishandled fiduciary funds.

Illinois has recently undergone one of the most comprehensive revisions of trust account rules in the country. As of July 2023, the Illinois Supreme Court reorganized Rule 1.15 into multiple subrules (1.15, 1.15A, 1.15B, and 1.15C) to provide clearer, more structured guidance. The revised framework includes an explicit prohibition on cash withdrawals from trust accounts and more detailed instructions regarding the separation of client funds, required records, and the distinction between IOLTA and separate client trust accounts. These structural changes reflect Illinois’ movement toward greater transparency, stricter documentation, and more robust fiduciary safeguards.

In Florida, trust account regulation is governed by Chapter 5 of the Rules Regulating the Florida Bar, which contains some of the most prescriptive operational requirements of any jurisdiction. Under Rule 5‑1.1, attorneys must immediately report any trust account shortage to the Bar and may replenish only the precise amount needed to correct the deficiency. Florida also mandates monthly bank reconciliations, detailed receipts-and‑disbursements journals, individual client ledgers, and monthly comparisons of ledger totals to reconciled bank balances. These procedures are designed not only to prevent misuse of client funds but to detect errors quickly — reflecting the state’s long history of strict enforcement and significant disciplinary actions tied to trust‑account mismanagement.

California has recently introduced some of the most far‑reaching trust‑account reforms in response to high‑profile failures within its legal community. Its updated Rule 1.15, effective January 2023, requires attorneys to notify clients of receipt of funds within fourteen days and prohibits commingling except for minimal bank charge amounts. Beyond the rule itself, California has implemented the Client Trust Account Protection Program (CTAPP), which represents a major shift in enforcement strategy. Under CTAPP, the State Bar now has authority to conduct random, suspicion‑free audits, requires attorneys to register all trust accounts annually, and has hired forensic accountants specifically to review compliance. These measures demonstrate a significant tightening of oversight and a move away from the historically reactive model toward proactive monitoring.

Together, these jurisdictions highlight how rapidly trust account regulation is evolving nationwide. While the underlying ethical principles remain consistent — segregation of client funds, accurate records, prompt notification, and prohibition on misuse — the procedural expectations, definitions, audit authority, and enforcement mechanisms vary meaningfully from state to state. This growing diversity underscores the importance of law firms maintaining state‑specific compliance frameworks, particularly for firms practicing across multiple jurisdictions where differing rules, timelines, and controls apply.

Regardless of whether a firm operates in a proactive or reactive audit environment, the message is clear: law firms must be audit ready. Non‑compliance with safeguarding and recordkeeping rules can result in admonition, public censure, suspension, or even disbarment. Beyond the disciplinary consequences, firms risk damaging their professional reputation, weakening client trust, and jeopardizing talent retention. In many cases, the cost of non‑compliance far exceeds the cost of implementing proper controls.

As regulatory scrutiny increases, particularly around trust account management, more firms are turning to forensic accountants for support. These professionals help assess compliance, perform reconciliations, identify deficiencies, prepare for audits, and strengthen internal financial controls. For many firms, this collaboration provides peace of mind and ensures that their trust accounting practices meet the high standards required by state regulators.

In an environment where expectations are rising and enforcement is becoming more rigorous, law firms cannot afford to take a passive approach. Strong trust account controls are no longer just a best practice — they are a necessity.

Connect with Mike Garcia and our Law Firms Industry Practice for more information on why law firms must strengthen trust account controls.