If you administer trust accounts, and most law offices do in one way or another, then you need to know how to generate three-way reconciliation reports. Standard bank reconciliations compare two balances: the book balance and the adjusted bank balance. The book balance is the balance your records show for an account — basically this is your check register. The adjusted bank balance takes the balance shown by the bank, adjusted for checks and deposits that haven’t cleared. When you have a trust account or IOLTA account then you have separate client ledgers for each trust, plus a ledger for bank charges. The sum of these individual ledgers must be the same as the book balance and the adjusted bank balance.
Three-way reconciliation reports ensure that a trust administrator is correctly accounting for all monies entrusted, and that a client’s funds isn’t being used to pay bank fees or another client’s charges. These reports are, if nothing else, a function of good accounting practices. However they serve another purpose: compliance with state trust regulations. Your state almost certainly requires three-way reconciliation reports at specified intervals, such as 30 or 60 days.
It can take hours to generate three-way reconciliation reports if you are trying to do them by hand. Luckily you don’t need to. Dedicated law firm billing software that includes built-in attorney trust accounting functions simplifies your compliance with state trust regulations. It is essential to use software that integrates all billing and trust functions.
The Rules of Professional Conduct for each state bar are typically based on the American Bar Association model rules, and regulations for trust fund management will be found under Rule 1.15 (Safekeeping Property). Each state may have other rules that add to or supersede bar association guidelines. Here are some sample three-way reconciliation rules, but this information should not be considered legal advice. Consult your state’s trust account regulations to find out how often you need to provide three-way reconciliations, and how long you need to keep those documents.
Dr. Rick Kabra is CEO of CosmoLex and has over 10 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 & trust accounting compliance.
Full Disclosure, Legal Ink Magazine is an affiliate partner with CosmoLex.