New York City Bar Recommends Random Audits

NYC Bar Report Urges Random Trust-Account Audits in New York

The New York City Bar Association’s Professional Discipline Committee released a policy paper on July 8, 2025 titled Evaluating Trust Account Oversight Mechanisms. The report focuses on whether New York should implement a proactive compliance tool that is used in a number of other jurisdictions: random audits of attorney trust accounts. (The report notes that the First and Second Departments already have rules authorizing a random audit program, but no such program has been implemented.)

Few, if any, professional obligations are as clear as the duty to safeguard client funds. The report explains that many states regulate this area beyond the text of the rules of professional conduct by adopting loss detection and prevention mechanisms. In New York, two commonly cited tools are: (1) payee notifications by insurers in third-party liability settlements and (2) dishonored check/overdraft reporting by banks. The report argues that a third tool—random audits—can strengthen deterrence and improve compliance through education, even though random audit programs are sometimes viewed as costly or logistically difficult.

The report describes the current New York model as largely reactive. Trust account reviews are typically triggered by a complaint (often from a client) or by the Grievance Committee’s receipt of a dishonored check or overdraft notice from a bank. A “typical audit,” the report explains, involves review of a period of bank and bookkeeping records—such as bank statements, canceled checks, deposited items, and the attorney’s general ledger—and may reveal anything from technical recordkeeping failures under Rule 1.15(d) to serious defalcations.

By contrast, a random audit program involves compliance reviews that are not triggered by suspicion. The report explains that “random” simply means there are no specific indications of wrongdoing prompting the review. The report outlines what regulators commonly request at the outset, including: a trust receipt/disbursement journal or general ledger, bank statements, canceled checks, deposited items, individual client ledgers, and a three-way reconciliation (adjusted bank balance, general ledger/journal balance, and the total of client ledger balances). If the summary-level review reflects compliance, the regulator typically does not pursue a forensic reconstruction; if red flags appear (e.g., negative balances or checks payable to cash), the review can become more intensive.

As comparative support, the report surveys audit programs in other states and discusses models that emphasize education, deterrence, and detection. For example, New Jersey’s Random Audit Compliance Program is described as a mature and well-funded system that conducts hundreds of audits annually and frequently routes deficient lawyers into an education/diversion track rather than immediately into discipline, while still referring serious misconduct for prosecution. North Carolina’s program is described as heavily education-oriented, publishing recurring audit findings and using the results to target training and monitoring for firms with significant deficiencies. Connecticut’s program is described as unusually granular, with “drill down” testing that compares bank items to journals and client ledgers and requires a three-way reconciliation as part of the review.

The report also highlights New York-specific incentives to consider a pilot program. It notes that the New York Lawyers’ Fund for Client Protection approved 94 awards totaling $11.6 million in 2024 and emphasizes that large categories of losses have been tied to escrow and settlement proceeds. The report argues that, without a proactive audit program, neither deterrence nor improved compliance will be maximized—and that even a pilot program would be a meaningful step given the existing authority in the First and Second Departments’ rules.

The First and Second Judicial Departments of the Appellate Division have rules in place authorizing the creation and implementation of a random audit program, but no such program has been put in place.

For lawyers and firms, the practical takeaway is that “audit readiness” is not exotic—it is the same discipline that prevents errors and reduces risk: consistent three-way reconciliations, accurate client ledgers, clear source/purpose documentation for every trust transaction, and systems that prevent obvious red flags (e.g., checks to cash, unexplained electronic withdrawals, or persistent stale items). If New York moves toward a pilot random audit program, those basics will matter more than ever.

Source: New York City Bar Association, “Evaluating Trust Account Oversight Mechanisms” (July 8, 2025).