When it comes to IOLTA accounting, the American Bar Association has imposed clear and important rules about how funds should be handled by attorneys and law firms. While many firms utilize attorney trust accounts with the purpose of separating clients’ money from the regular business or operating accounts of law firms, many lawyers find themselves struggling to maintain trust accounting compliance due to the complexity of the process and the breadth of rules imposed by the ABA. Today, I’ll go over some of the most common trust mistakes that I see small law firms make and how you can avoid them!
Failing to Follow IOLTA Account Rules About Transfers
One of the main ways that law firms put themselves at risk with lawyer trust accounts is by incorrectly recording transfers in and out of the account. While most accounting softwares, including QuickBooks Online, provide a convenient way to automatically categorize transfers, these transactions should actually be recorded differently when it comes to client trust accounts. The reason for this is because a transfer between an IOLTA account and your operating account is not a simple transfer. It’s actually two separate transactions. The first transaction is a withdrawal from your IOLTA account. The second is a deposit into your operating account. Failure to record this transaction will result in noncompliance and could also lead to off-balance accounts in the future.
Forgetting to Keep Backups for Documents Associated with Your IOLTA Account
RPC 1.15A and B highlights a list of documents that you are required to maintain for any given trust account. Download WA 1.15A and WA 1.15B to see which documents you’re required to keep track of. Once you’ve tracked down these documents, make sure they’re stored in an appropriate place in case of an audit or needing to pull the documents for a client. Luckily, QuickBooks online and other law firm accounting software allow you to attach documents to transactions so that they’re easy to find in all scenarios. You can even upload photos from your phone using the QuickBooks app or forward documents via QuickBooks email forwarding to make things even easier.
Being Lazy When it Comes to 3 Way Reconciliation
Most state bar associations require IOLTA trust accounts to undergo a 3 way reconciliation process at least once on a monthly basis. Three way trust account reconciliation is the process of ensuring that the client ledger balance matches with both the bank balance and the book balance. Here’s an overview of what those mean.
Bank Balance is the dollar amount your bank account says is in your trust account.
Book Balance is the dollar amount your accounting software says is in your trust account after all transactions are accounted for.
Client Ledger Balance is the sum of the individual client ledgers that make up your trust account.
It is required for all three of these numbers to match at all times. The best way to ensure that’s the case is by performing a three way reconciliation in QuickBooks or your other accounting software at least monthly.
