City Bar Analyzes Efficacy of Random Audit Programs to Protect Client Funds

Finds Random Audits Proven Tool to Detect and Deter Attorney Trust Account Misconduct

Citing the need to better protect client funds and reduce the $11.6 million in reimbursements paid by the New York Lawyers’ Fund for Client Protection in 2024 alone, the New York City Bar Association has released a comprehensive report examining random audit programs for attorney trust accounts across the United States, and urges the development of a pilot random audit program in New York State.

The report by the City Bar’s Professional Discipline Committee, titled “Evaluating Trust Account Oversight Mechanisms,” analyzes random audit programs implemented in nine other states and demonstrates their effectiveness in detecting and deterring the misappropriation of client funds. The study comes as New York faces an upward trend in trust account violations, with the Lawyers’ Fund paying out 94 awards totaling $11.6 million in 2024—a 31% increase in the number of awards and a 90% increase in payouts from the previous year.

“Few, if any, of an attorney’s professional obligations are as crystal clear as the duty to safeguard client funds,” the report states. “Despite the perceived costs, random audit programs are a powerful tool in the arena of proactive attorney regulation. They both protect the public and educate lawyers to be better guardians of client funds.”

The report notes that while the First and Second Judicial Departments of the Appellate Division have rules in place authorizing random audit programs, no such program has been implemented. Currently, audits of attorney trust accounts in New York are only triggered by a specific complaint or a dishonored check or overdraft report from a bank—a reactive rather than proactive approach.

Proven Success in Other States

The City Bar’s analysis of programs in California, Connecticut, Delaware, Iowa, Kansas, New Jersey, North Carolina, Vermont, and Washington reveals significant benefits:

• New Jersey, which has operated a random audit program since 1981, has completed over 18,000 audits and referred only 4.5% for discipline, demonstrating that most violations are technical in nature and easily corrected.
• Connecticut saw dramatic improvement in compliance rates, with the percentage of audits requiring no corrective action increasing from 14% in 2017 to 30% in 2024.
• Delaware’s Executive Director of the Lawyers’ Fund for Client Protection attributes the state’s minimal client protection fund payouts since 2018 directly to their random audit program.

“Random audits are a fair method of allocating resources,” are “effective policy tools to encourage regulatory compliance and uncover noncompliance,” and “allow for policy evaluation,” the report states.

A Framework for New York

The report provides a survey of random audit programs employed by states across the country and offers possible frameworks for the Grievance Committees in New York State to use as a model. Statistics from New York’s client protection fund provide ample support for a pilot random audit program. In 2024, real property escrow losses accounted for $9.9 million in awards, while theft of settlement proceeds accounted for another $415,476. The fund noted “a disturbing trend over the past seven years where settlement losses have been among the largest category in the number of awards paid.”

In comparison, New Jersey—with about one-fifth the number of attorneys as New York—paid only $1.1 million in client protection awards over a 12-month period, demonstrating the potential impact of proactive regulation.

“Whether a random audit program will lead to uncovering thefts of client funds or, at least, deter an attorney from committing theft, will never be known unless a program is implemented,” the report concludes. “There has not been a more appropriate time for the Grievance Committees in the First and Second Judicial Departments to develop a pilot random audit program.”

Read the report here: https://bit.ly/3ITqbaA

About the Association
The mission of the New York City Bar Association, which was founded in 1870 and has over 20,000 members, is to equip and mobilize a diverse legal profession to practice with excellence, promote reform of the law, and uphold the rule of law and access to justice in support of a fair society and the public interest in our community, our nation, and throughout the world. www.nycbar.org.