Top 10 Financial Errors: #4 Failing to Regularly Reconcile Your Trust Acccounts

“Put not your trust in money, but put your money in trust” was said by Oliver Wendell Holmes, The Autocrat of the Breakfast-Table, in 1857.

A lawyer’s trust account often poses a lawyer’s greatest risk for ethics trouble. Yet it seems that one of the tasks lawyers quickly delegate is that of properly maintaining client trust accounts. It is certainly acceptable to have a bookkeeper administer this function, but the lawyer must remain active in the oversight of the account. The lawyer should – indeed we say – must either reconcile the account each month or thoroughly review the reconciliation completed by the bookkeeper.

Here are some quick tips to help keep your accounting in good shape:

• Keep separate ledgers. In addition to the account journal (or general ledger) that has the running balance of how much money is in the trust account, you must create a ledger for each client on whose behalf you hold money. Also, ensure that all bank administrative trust account charges are taken from your general account rather than from the trust account. (Your computer bookkeeping program may automatically do this, but if you don’t know for sure, confirm it immediately.)
• Never pay trust funds  with cash; always have a check as a record. Do not use an ATM card to withdraw trust money, and never use a deposit ticket to get “cash back.” Even a wire transfer out from a trust account can be problematic depending on the ethics rules of your jurisdiction.
• Don’t disburse a check from trust until the deposited funds have cleared. Be diligent, but don’t let a client rush you. (In most if not all jurisdictions, it is not permissible to to issue postdated trust checks – a trust cheque must be able to be cashed at the time it is written).  The problem with post-dated trust cheques is that they may be written in anticipation of sufficient funds being deposited at some time in the future – which means that at the time the cheque was written, the lawyer did not have sufficient funds in the trust account to the credit of that client. When you write trust  checks, always take a moment to add them up and compare them against the client’s balance in the trust account. Make sure there are funds available in that client’s ledger to cover the checks (and ensure that the cheque and the deposit went into the same trust account, if you maintain separate ones).
• Have a good audit trail. In addition to the account statement and any canceled checks, keep a monthly folder with the following:
• A trust cash book – that shows all trust transactions that month.  This should record the date and amount of all funds received and disbursed, the source of funds, the identity of the client for whom the funds were deposited (since there are circumstances where the funds are paid by a third party on behalf of a client), the cheque number or wire transfer record of all trust withdrawls, and the name of the recipient of all trust cheques;
• A trust ledger breaking down the pooled trust account into separate clients;
• Records showing all transfers between client trust ledgers and containing an explanation of why each transfer occurred and containing a lawyer’s signed written approval for each trust transfer;
• Copies of all bank validated duplicate deposit slips and
• All supporting vouchers and documents, including all bank statements, passbooks, cancelled cheques (do not bank with a financial institution that refuses to provide you with your cancelled trust cheques or images of same), bank vouchers and all other relevant documents.  In particular should be any memos that you have made concerning bank errors and steps taken to have them corrected, regardless of amount.
• Reconcile your client trust account monthly, regardless of how boring the task seems. Compare your monthly bank statement to the canceled checks; the canceled checks to the copies you made before they left your office; the checks to the account journal; and the account journal to the client ledgers. Everything should match.  Some accounting systems will help automate this task by downloading account information directly from the bank and entering this information into the accounting system. However, this is only part of the task – you must still oversee this process and ensure that everything is reconciled monthly and all exceptions are investigated and resolved.

Check your ethics rules regarding how long you must maintain all the above-mentioned books, records and accounts, in case questions arise later.  Organizing your recordkeeping now will save headaches later. Also, if you keep your trust records on computer, be sure to save the information onto other media before you decide to upgrade and discard your computer.  Furthermore, ensure that your financial data is reliably erased (not just deleted!) before you dispose of your accounting computer.