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Would You Pass a Trust Account Audit?

By Peggy Gruenke, Owner LegalBizSuccess | On Twitter

ChecklistRecently, there was an article in Attorney-at-Work regarding random trust account audits. We all know mismanaging a trust (IOLTA) account can have terrible consequences. However, while it seems to be discussed in theory, most attorneys receive little or no training on how to manage a trust account before opening one of their own. Law schools don’t address this in enough detail based on the blank look I get when I mention trust accounting to new grads. Only the enlightened the bar associations conduct a hands-on, mud up to your elbows, trust accounting class for all new lawyers. (I think they need to turn it up a notch and get a little muddier.) All of which begs the question, “Are your trust accounting practices sufficient?”

If you are in doubt as to whether you are at risk for disciplinary action regarding mishandling of client funds, here is a mini checklist and items you can start implementing today:

Do you maintain separate client ledger for each client’s money held in trust?

You better. Ethics rules require keeping an individual ledger for each client so specific funds can be identified. So make sure you have the ability to do this – even if it is a simple spreadsheet. If you are not good at accounting and QuickBooks, there are great practice management software packages available today to help you manage these funds and stay in ethical compliance.

Does your invoice include an accounting summary of your client’s trust funds?

This is simple and your practice management system should have this feature available. You have a duty to notify your client how and when you used their funds and keep detailed and accurate records. Below is a sample of what you should be including on an invoice where client trust funds were used.

  1. Invoice detail of work performed (time entries)
  2. Total amount due (new charges)
  3. Amount applied to pay the invoice (payment)
  4. Remaining client trust balance

If your invoicing software does not allow you to create a custom invoice template (like above), then you can include with the invoice a report called “client trust ledger report” which is basically a spreadsheet showing all deposits and withdraws and current trust balance.

Best practice tip: After applying the trust funds to the invoice, send the client an updated invoice, which includes the amount of retainer applied and the balance remaining in trust. If the balance is zero or approaching zero, you should also include a letter requesting additional retainer money be deposited (if you are anticipating more work to be done.)

Trust Accounting Statement Clio

Do you accept credit card payments for retainers deposited into your IOLTA account? And if so, how do you account for the credit card fees?

Does your credit card company allow for credit card fees to be deducted from your operating account? If not, are you keeping a reserve in your IOLTA account to cover these fees and then properly recording them when entering the deposit? (Side note: This is the one exception to the rule regarding lawyers depositing their own funds into IOLTA accounts: it is acceptable for a lawyer to deposit their own funds into the IOLTA account to cover the payment of bank fees, including credit card fees.)

Do you know what a 3-way trust account reconciliation is and how to do one?

A 3-Way Reconciliation means that your IOLTA Bank Balance matches your Checkbook Trust Balance and they both match the Sum of all Individual Client Ledger Balances. Most accountants do not understand 3-way reconciliations. That’s no excuse for your lack of understanding. You have fiduciary responsibilities and you cannot delegate this responsibility. Here is a simple spreadsheet to use for a 3-way reconciliation.

Where do you deposit flat fee payments? Not all flat fees are created equal.

This fee may be deposited in the trust account until earned or, upon full disclosure and client consent (in your fee agreement), may be treated as earned upon receipt and deposited in the operating account. This is a common practice for criminal cases. In some states, even litigation tasks billed as flat fee tasks and clearly communicated in your fee agreement can be earned upon receipt. Check you individual state ethics rules.

Best practice tip: Upon receipt of the money, create a flat fee invoice, apply the payment and provide the client with a copy of the invoice.

If your flat fee is for work that involves multiple steps, like bankruptcy filings, then it is better to deposit the flat fee into a client’s trust account and withdraw when reaching specific events or milestones. Again, as outlined in your fee agreement.

One last tip, something that actually came from an attorney who suffered through the Katrina disaster.

On each check you receive that will be deposited into your IOLTA account, write on the memo line of the check: Client Name and Matter. May seem obvious to you now, but if a disaster struck and you had to re-create your IOLTA accounting records, there is no way you will have remembered this information.

Thanks for reading and happy reconciling!

With over 30 years experience in the legal environment, as an entrepreneur/business owner and an IT consultant, Peggy has combined her experiences to bring results and a competitive advantage to law firms assisting solo and small firm attorneys in building their businesses. Peggy focuses on the solo/small firm lawyers with the delivery of practice operations services, including practice management, technology, marketing, financial services and business development.  Peggy is an avid cyclist for JDRF, Gold Certified Clio Consultant and Xero Certified. She serves on various industry associations.