Trust Accounting Compliance: Common Mistakes and How to Avoid Them
Trust accounting violations are the #1 cause of attorney disbarment. It is an area where honest mistakes are punished as severely as intentional theft. The rules are rigid, the math is unforgiving, and the auditors are thorough.
This article highlights the common pitfalls in IOLTA management and how to build a bulletproof accounting workflow.
Key Concepts
The sanctity of client funds is the highest duty of the profession.
- Segregation of Funds — The absolute prohibition on commingling operating funds with client funds.
- Three-Way Reconciliation — The monthly ritual of balancing the bank, the client ledger, and the checkbook.
- Audit Trail — The requirement to trace every penny to a specific client matter instantly.
The Commingling Trap
It starts innocently. A bank fee hits the IOLTA, and the attorney covers it from operating to "fix it later." That is a violation.
Solution: Keep a small buffer of firm funds (allowable by bar rules, usually ~$500) in the IOLTA solely for bank fees. Never move money without a documented purpose.
Three-Way Reconciliation
Most firms balance their checkbook. That is two-way. Three-way means: (1) Bank Statement matches (2) Checkbook Register which matches (3) Sum of all Individual Client Ledgers.
If these three numbers do not align to the penny every month, you rely on hope as a strategy. Accounting software should perform this check automatically.
Conclusion
Trust accounting is not bookkeeping; it is stewardship. A system that relies on memory or manual entry is a ticking time bomb. Automate your reconciliation, lock down your permissions, and sleep soundly.
Frequently Asked Questions
Can I use QuickBooks?
Yes, but generic QuickBooks allows you to delete transactions. Legal-specific tools lock entries to preserve the audit trail.
What if I find a small error from years ago?
Self-report or fix it immediately with documentation. Covering it up turns negligence into fraud.
Sources & Further Reading
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