Most accounts are reconciled between two forms of documentation. The classic example is with a checking account. You keep a running account of the checks you write in your check ledger and when the bank statement is produced at the end of the month, you reconcile the two to make sure that all transactions have cleared, interest is tabulated, and that no surprising charges have occurred. This is a two-way reconciliation.
Attorneys have an additional layer of reconciliation that must be performed. They are required to hold client funds in trust and account for their disbursements and payments of those funds. These funds cannot be used for bank or credit card fees or to pay another client’s fees.
There are three components of a reconciliation report:
Trust Ledger: This is the record of all transactions occurring in the account. Monies deposited or checks written do not all clear on the dates they are recorded, which is why the reconciliation process is crucial for accuracy.
Client Ledger: The client ledger contains all transactions for each client and lists them by matter. These individual reports when added together make up the total trust account. Each client must have access to their own ledger for account transparency.
Bank Statement: This is the report generated by the bank that includes the interest payments. The bank statement will show deposits and withdrawals with dates but the item descriptions lack detail that can be expounded upon in the trust and client ledgers. This is why a bank statement is insufficient on its own for trust accounting.
Proper management of these trust accounts is crucial for several reasons.
Client trust: Complete transparency and proper statements are crucial for establishing and maintaining client trust. Attorneys’ livelihoods depend on client recommendations and word of mouth spreads quickly of a dishonest lawyer. Even if a discrepancy was unintentional, your reputation can be ruined if a client thinks you are trying to deceive them.
Compliance with state regulations: The state bar association requires that attorneys perform three way reconciliations on a regular basis. Know the law for your state and whether you must report quarterly, monthly, or more often. Some states require that reconciliation be performed monthly whether there are any transactions to reconcile or not. Also note your state’s law as to how long you need to store the documentation. For example, South Carolina requires six years of storage, while New Jersey requires seven.
Avoiding an audit: If time is money, an audit is expensive. There is nothing like watching billable hours evaporate while you pore over trust ledgers and statements. The American Bar Association will perform random audits. Proper reconciliation ensures a quick and smooth audit process.
What if reconciliation discovers an error?
In most cases, the error is in recording. Usually the bank statement is correct, so compare the accounts with that in mind. Review each transaction line by line until the accounts match. Once you’ve identified the mistake on one ledger, make sure it is corrected on all three so they match. If a client needs to be informed of an error, be up front about it and let them know as soon as possible.
The subtleties of a trust account are not always explained to law school students in detail. It’s easy to become overwhelmed by all the requirements and reports. There are many avenues you can explore without hiring an on-staff accountant or bookkeeper. An accounting firm like JADDE Financial Solutions can consult with you and determine how best to set up your trust accounting.
We are well versed in attorney trust reconciliation requirements. We can set up automated reporting complete with cloud accounting and statement reconciliation. Stop squinting at excel spreadsheets and manually entering columns of data. Give us a call at 732-625-2734 and we can make your trust account headaches disappear!