Trust account violations have drawn a public reprimand by the Iowa Supreme Court of an attorney admitted in 1973 with no prior discipline.
The violations came to light in a bar audit.
Historically, the firm kept track of its individual client trust balances using handwritten ledger cards. At some point, it supplemented the system with an accounting software program. Smith was responsible for maintaining the firm’s client trust account. He also enlisted the services of an accounting firm located within the law firm’s building. To reconcile the client trust account, Smith stated his general practice was to look at ledger cards only for individual accounts he believed had some activity in the past month.
In June 2013, a representative of the Client Security Commission performed a regular audit of the client trust account of Smith’s law firm. The auditor found what appeared to be a negative balance in the trust account of $47,365.95 as of August 15, 2012. Through further investigation, the auditor identified five specific client accounts with issues: Agro-Ray, L.L.C.; Smith Farms; Smith-Kriegel; Smith-Klaassen; and an “unknown” account consisting of a single $11,000 entry. The main contributor to the August 15 deficit was a negative balance of approximately $46,000 in the Smith Farms account.
The ledger cards were confusing. Some of the transactions on the cards were not listed in chronological order. There were also concerns about possible inaccuracies. Smith’s outside bookkeeper therefore reconstructed the ledgers to clarify the transactions and the balances. After the ledger cards were reconstructed, the auditor concluded there had been a negative balance of nearly $50,000 in the client trust account as of April 30, 2013. This deficit was the result of a negative balance of $48,700 in the Agro-Ray account that had not been immediately apparent from the original Agro-Ray ledger card.
The attorney immediately deposited $50,000 to cover the shortfall.
In 2014, shortly after the audit was finished and Smith became aware that his reconciliation practices were inadequate, he implemented a new system of accounting and reconciliation. The system no longer relies on handwritten ledger cards and balances every individual client account every month.
The court rejected his plea for private discipline
We are not persuaded. As the auditor testified, and as the post reconstruction ledgers indicate, in March 2012 the Agro-Ray client trust account had a deficit of $48,700. The only meaningful surplus at that time in a Smith-related account was the approximately $21,000 in Smith-Kriegel. The $24,000 in El Sombrero funds did not arrive until December. As the auditor put it, “[T]hat El Sombrero did not come into the trust account until December of 2012. So back in March of ’12 when the deficiency first originated, that money was not available to withdraw.” Although no client was actually harmed, the potential for harm existed. As the auditor explained, if all clients had simultaneously asked for their funds in the trust account, Smith “did not have enough funds to cover all liabilities starting [in] March of 2012.” Also, Smith could have figured out some individual client trust accounts were short on funds without performing individual reconciliations: the original, uncorrected ledgers showed that.
The record indicates that Smith is a gifted attorney with a highly successful practice. However, in 2013 he was operating a bookkeeping system that was not up to the needs of that practice or the requirements of rule 45.5 The auditor testified that he had to spend approximately forty hours on the 2013 audit of Smith’s law firm. The bill for that time
falls on all practicing lawyers. Even the amended individual ledger cards, which were prepared by Smith and his bookkeeper in response to the 2013 audit, still have some entries out of chronological order and remain difficult to follow.
(MIke Frisch )