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Trust Accountin Reports

7 Reports Vital for Trust Accounting

Trust accounting, also known as escrow accounting or IOLTA accounting, is an essential component of every law firm. From tracking client funds in trust accounts to meeting state regulations to maintaining a complete record of clean and accurate three-way reconciliations, trust accounting requires meticulous bookkeeping of both software records and paper trails. Although trust accounting may not be concerned with standard accounting functions like profit & loss, depreciation or tax accounting, the management of client funds in trust is a highly regulated practice and has many specific rules in place that can quickly damage a law firm if overlooked.

In this post, we want to look at some of the most generally accepted compliance guidelines and best practices along with common trust accounting reports that are often requested during a trust account audit. Take note: These are general compliance rules and each legal professional is responsible for understanding and following the defined requirements in their jurisdictions.

What’s Required For Proper Trust Accounting?

Specifically, trust accounting demands the following from law firms:

  • Track funds for each matter. While a bank account displays a total balance, firms are responsible for knowing what portion belongs to which matter—at all times.
  • Reconcile books monthly. While a business account may be flexible since the money belongs to the firm when it comes to managing client funds, monthly reconciliation is not only important, it is a requirement.
  • Maintain an audit trail. Again, when dealing with client’s money, firms must account for every action taken on that account and maintain a full record of it, including compliance reports.

So, what can wrong with Trust Accounting?

The short answer is: a lot. Over 95% of disciplinary cases are related to poor recordkeeping and compliance practices, or “negligent misappropriations.” While a staggering figure, it’s also an avoidable one, and with the help of technology, firms can more easily protect themselves from severe consequences.

When handling trust accounts, firms should behave as if an audit is always around the corner. The following reports are vital for proper trust account management, and if conducted regularly, will significantly improve a firm’s recordkeeping and compliance practices:

Bank Ledger

This consists of both receipt and disbursement books, and lists all transactions, including voids for a particular bank account. Not only does the bank ledger outline overall activity, but it also highlights any overdrafts that may occur on the bank level.

Receipts & Disbursements Journals

A receipts journal can be separated into two reports (neither of which keep a running balance): a cash receipts journal, which is a record of deposits for a bank account, and a disbursements journal, which only lists disbursements.

Client Ledger Balances

A ledger card balance report is essential, as it monitors the cleared and uncleared balances for every client on the books. Remember, even if a check is “in transit,” the firm is in possession and responsible for the funds until cleared by the bank.

Individual Client Trust Ledger

Acting like a mini bank statement for each matter, an individual client trust ledger summarizes all transactions for a particular matter. This report is especially useful when attempting to track down uncleared transactions, and in order to demonstrate the absence of overdrafts, a running balance must be kept at all times.

Bank Reconciliations

In addition to being a helpful reference by summarizing a completed reconciliation, this report also helps to keep track of uncleared transactions by regularly checking firm records against the bank’s numbers.

Three-Way Reconciliation

A critical report come audit time, three-way reconciliation ensures the sum of the individual client ledgers totals the same as the bank balance and the book balance.

Trust Accounting Best Practices

In addition to understanding these reports and how to compile them, it is also important to understand best practices in case of an audit.

  1. It is recommended (and may be required) that records be retained for up to seven years.
  2. In addition to the reports themselves, keeping physical copies of the actual instruments (e.g. deposit slips, canceled checks, paper statements, etc.) is necessary.

This may seem like a lot for a firm to handle, and without the proper system in place, it can quickly become a compliance disaster. However, legal-specific software that provides a fully integrated trust accounting workflow simplifies the process of generating accurate reports. By separating client funds, printing check/deposit slips, enabling monthly bank and three-way reconciliations as well as producing required print reports and maintaining physical records of instruments, a practice management tool like CosmoLex helps firms avoid the pitfalls often associated with trust accounting and ensures compliance.

If you’re looking for more information on the most important trust accounting reports for law firms, be sure to watch our full webinar, The 7 Vital Reports for Trust Accounting.

Notebook

Rick Kabra

Dr. Rick Kabra is President of CosmoLex Cloud, creator of cutting-edge technology solutions to help solo and small law firms law firms. Rick has a Ph.D. in Electrical Engineering from NJIT and has over 13 years of experience in the legal software industry catering to the specialized technology needs of small to mid-sized law firms. Rick has given numerous seminars and published articles on legal technologies such as law practice technology management, cloud computing, and legal billing, business & trust accounting compliance.