A trust accounting issue is on nearly every lawyer’s list of biggest fears, especially since all it takes is one mistake to get you disbarred. With everything you need to know about the actual practice of law, maintaining compliant trust accounts on top of it can seem daunting. Nailing down the basics and putting measures in place to avoid any problems is a necessity for every lawyer.
The concept of a trust account is pretty straight-forward: an account that keeps client funds separate from business funds to ensure that there’s no commingling and funds are used only for client purposes.
But the actual practice of how to maintain those accounts, keeping accurate records, and knowing which reports are required makes it more complicated.
General Compliance Practices
Let’s start off with the basics of what you need to know. The list below are critical components when it comes to dealing with trust accounts:
Separate bank accounts
At no point should client funds be kept in the same account as the general firm account. All monies belonging to a client should be placed in some form of a trust account, whether it’s an IOLTA account or a general trust account.
This avoids any mixing in the records that could lead to client funds being used for firm-specific purposes. Having these two separate accounts is the required way of showing that the lawyer is never using any clients funds for purposes other than that related to their matter.
Interest on Lawyer Trust Accounts (IOLTA) should be used when the amounts are nominal or will only be kept for a short period of time. In these types of accounts, any interest accrued needs to be turned over to the IOLTA program for your jurisdiction.
Uncleared and unclaimed funds
Lawyers have a responsibility to regularly check reconciliation reports for any uncleared transactions and to try to remedy the situation if they’re carrying over month to month. This means if a check hasn’t been cashed by a client, the lawyer must reach out to them to figure out why. In the event you can’t get a hold of the individual or entity the funds were for, the uncleared or unclaimed funds will often wind up being sent to a bar association after a certain period of time in accordance with your bar association’s rules.
Law firms must keep immaculate records when it comes to trust accounts. Funds have to be accounted for down to the penny and inaccurate recording can lead to issues when it comes time for reporting. Every transaction should be entered into the accounting system, along with the date, amount, matter, and purpose.
Not only do firms need to keep a ledger for the trust account, but individual trust accounts must also be maintained as well. Being able to tie an entry to a matter is especially important when it comes to keeping up with this compliance requirement, which can become difficult with generic accounting programs that don’t support this feature.
At any point in time, should a client call or request a balance statement (or if you’re audited), a lawyer should be able to produce a precise balance along with a report for all transactions for that matter.
Required trust reports aren’t meant to be a headache (although they certainly can be if you need to track down data entry errors), but instead are meant to help you catch mistakes, prevent money laundering, and prove ethical and proper handling of your clients’ funds. Oftentimes lawyers have support staff handling their accounting in some form, and reviewing these required reports is an excellent way to ensure there is no fraud.
Reports that lawyers should run on a regular basis for trust accounts include:
- Three-way reconciliations, comparing the balances of the trust account, the bank balance, and the sum of the individual client ledgers
- Bank reconciliations
- Trust ledger report
- Deposits report
- Withdrawals report
- Individual client ledger report
Running reports manually can add considerable time to the process as well as leave room for errors. Legal-specific accounting programs offer the ability to produce these reports in a matter of minutes, reducing mistakes in the process.
Trust Accounting Basics
It’s the responsibility of every lawyer to be aware of all of their obligations for trust accounts. If your firm winds up being audited, you want to have peace of mind knowing that you’ve handled your recordkeeping and accounts correctly – otherwise, the results could be disastrous for your career. Make sure each of the above are regular practices in your firm and that any support staff you have is also aware of these trust accounting requirements.