Many courts view the misappropriation of client funds as one of the most serious forms of professional misconduct. While many attorneys would prefer to direct most of their focus to their performance in the courtroom, serious consequences can result from accounting mistakes and inaccuracies, even when there has been no intent to deceive or defraud a client.

Attorneys are held to a high standard of fiduciary duty to their clients, with attention to proper accounting near the top of the list. Malpractice claims are stressful and costly, which is why it’s important to guard against the risks of mismanaged client trust and IOLTA accounts.

Misappropriation of client funds risks for lawyers can include comingling and conversion, as well as improper accounting and recordkeeping. Make sure you take the time to understand these risks and take steps to help avoid a claim.

Maintaining Bank Accounts

Reducing your risk of a fiduciary duty claim starts with having the right bank accounts set up for the firm. Be sure to review the rules that pertain to your specific jurisdiction. Most jurisdictions require a law firm to maintain three types of bank accounts:

Operating account

An operating account is designed to hold client funds that the law firm has earned, as well as monies from others that is not being held in escrow. Care must be taken that client funds that have not yet been earned are not placed in the operating account. If payment is taken at the time services are rendered and the engagement is completed, the funds can be immediately deposited in the operating account.

Client trust account

A client trust account is designed to hold client funds that are intended to pay fees of a law firm that have not yet been earned. The client trust account is often used in the case of a retainer on an hourly basis for the portion of the retainer payment that has not yet been earned. If a firm receives a large retainer upfront, the funds are typically kept in the client trust account, with smaller amounts transferred into the operating account as fees are earned.

IOLTA trust account

An Interest on Lawyer Trust Account (IOLTA) is designed to hold client funds or funds of a third party, which are either nominal in amount or expected to be held for a short period of time. No jurisdiction has specifically defined what constitutes a “nominal” amount or a “short” period of time in terms of an IOLTA account, leaving attorneys to use discretion and make sound judgements. If an attorney represents a client who receives a judgement or settlement, the funds are typically kept in an IOLTA account until they can be delivered to the client.

When it comes to your client trust accounts and IOLTA accounts, banking with a reputable institution and ensuring regularly balanced books are a must. State supreme courts and state bar associations exercise authority over how a law firm manages its client trust accounts and IOLTA accounts, designating which financial institutions may open such accounts and obligating those financial institutions to report an overdrawn status of an account to the relevant bar disciplinary authority.

Proper handling of accrued interest is another area of concern. The amount of interest anticipated can sometimes be the determining factor of where funds should be kept.

  • If a non-nominal amount of interest is anticipated, funds are kept in the client trust account and the interest is paid to the client, rather than the law firm.1
  • If the interest anticipated is nominal, funds are kept in the IOLTA account and any interest is donated to charitable institutions, such as legal aid entities.2

Keeping Proper Records

Keeping proper records of your banking transactions is another key strategy for reducing claims. ABA Model Rule 1.15 states that firms must preserve “complete records” of client trust account funds for five years after the termination of representation. Attorneys should research their specific obligations as other jurisdictional rules may require even longer periods of retention.

These recordkeeping obligations typically apply to:

  • Banking transaction records – such as monthly banking statements, records of deposits and cancelled checks
  • Receipt and disbursement statements – including documentation for any cash transactions
  • Engagement letters and fee agreements – including documentation concerning legal fees and expenses to be paid to the client
  • Bills and invoices – including all bills and invoices issued to clients for legal services or expenses
  • Third-party vendor payments and expenses – such as expert witnesses, transcription services, filing fees and other costs related to client matters
  • Law firm bookkeeping and accounting records – including any ledgers or electronic records that track activity in the law firm’s operating and trust accounts

Avoiding Comingling

Comingling remains one of the most serious professional misconduct scenarios a lawyer must guard against. Comingling occurs when a law firm mixes its own funds with those of its clients, making it difficult to determine the ownership of funds.

The only exception typically allowed is explained in Model Rule 1.15 (b):

“[A] lawyer may deposit the lawyer’s own funds in a client trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose.”

Model Rule 1.15 requires lawyers take steps to prevent all other comingling of funds, including by:

  • Segregating client funds and property separately from the law firm’s own property.
  • Giving notice of the receipt of any funds or other property.
  • Maintaining appropriate records of any property, particularly money, held on behalf of another.
  • Rendering an accounting of any funds held in a fiduciary capacity.
  • Delivering promptly funds or other property to the person who is legally entitled to them.
  • Keeping separate property involved in a representation where two or more persons claim interests in its possession.

Preventing Conversion

Often a result of comingling, conversion is the most serious money management risk a lawyer has to guard against. Conversion occurs when a law firm makes unauthorized use of trust account funds that deprive a client or a third party of the use of the funds, even if only temporarily and without lasting harm to the client.3

Because conversion can occur even if a lawyer had no dishonest motive in taking the funds,4 it’s important to put safeguards in place to limit the possibility of either comingling or conversion occurring. The risk of intentional conversion within the firm can be minimized by:

  • Banning the use of debit cards and ATMs to withdraw the funds.
  • Prohibiting the writing of checks made payable to cash.
  • Disallowing “cash out” on deposits.
  • Requiring all law firm bank accounts be reconciled monthly, with a review of accounts payable and receivable.
  • Delaying the writing of checks until all outstanding deposits have cleared.
  • Prohibiting the use of signature stamps and signed blank checks.
  • Requiring dual signatures on checks.
  • Rotating job duties related to banking and accounting duties.
  • Changing passwords to bank accounts whenever a lawyer or support staff member who knows the passwords leaves the firm.
  • Separating job duties related to finance and accounting.

Note that when it comes to conversion, lawyers and law firms can be held liable for the actions of a negligent or rogue colleague or subordinate.5 Proper vigilance is necessary to minimize risks6 and any incidence of conversion that does occur must be promptly disclosed to affected clients.7

Managing the Risks of Comingling and Conversion

If you are accused of misappropriation of client funds, you will have to defend yourself and your actions from an intensive review of the facts, while facing professional sanctions that can range from a reprimand to disbarment. The process is stressful and costly and best avoided by properly managing the risks of comingling and conversion.

The best course of action is to know the risks of managing money for a law firm and take the necessary precautions. Educate yourself on banking rules for your jurisdiction, keep careful records, take steps to avoid comingling and prevent conversion, and understand the important duty you have as a lawyer to protect the funds of your clients.


  1. See, e.g., Ill. Sup. Ct. Rule 1.15 (f)
  2. See, e.g., Ill. Sup. Ct. Rule 1.15 (j)(2)
  3. People v. Brown, 461 P.3d 683 (Colo. O.P.D.J. 2019)
  4. In re Mulroe, 956 N.F. 2d422 (Ill. 2011)
  5. In re Wallman, 696 N.Y.S.2d 164 (App. Div. 1999)
  6. Husted v. Gwinn, 446 N.E.2nd 1361 (Ind. Ct. App. 1993)
  7. See, CNA, “To Err is Human: A Guide for Attorneys on How to Manage Errors.”