As a lawyer, one of the required tasks for managing client funds and billing is Trust Accounting. Each state has its own laws and legal requirements, and failing to follow all of them can have detrimental consequences. The field itself continues to evolve each year, making those who practice within it constantly at risk of falling foul of not keeping up with current regulations and legal requirements. There are a number of Trust Accounting best practices that can help reduce the risk of mismanagement when undertaking these types of accounts.
The majority of federal rules that apply come from the Uniform Principal and Income Act. One of the major things to be aware of is that there are differences between fiduciary accounting income (FAI) and federal taxable income. There are different types of terms used for these accounts (IOLTA, Trust Account and Escrow Account are often interchangeable).
Trust Accounting Rules
- The Attorney’s or Business’s funds cannot be kept in an IOLTA or Escrow account. IOLTA or Escrow account monies belong entirely to the client. Many clients may share one IOLTA account.
- Interest earned on an IOLTA is paid directly to the IOLTA program.
- Substantial amounts of client deposited funds that could pay interest, particularly those held for a long span of time are usually placed in an interest bearing Escrow account. Interest is paid to the client. Large amounts deposited a short period of time that would not generate interest may be deposited in an IOLTA account.
- Funds advanced against future legal fees are typically placed in the IOLTA account.
- Cash deposits, disbursements and client/matter account activity requires record keeping on all IOLTA, Trust and Escrow accounts.
Trust Accounting Best Practices
- Use trust accounting specific software to ensure there is no room for error with a clear audit trail. Older methods like spreadsheets and paper ledger cards leave too much room for error and little or no audit trails.
- Provide a written agreement that specifies how funds are to be distributed, any and all retainer fees and uses of said fees for all clients.
- Monthly management and balancing of all trust accounts should list all activity into and out of the account, along with complete records of those transactions.
- Balance and reconcile your records to the banks records for all transactions into the back account(s).
- Balance and reconcile your records for all funds paid out of the accounts to the bank statement.
- Balance and reconcile your client/matter sub-account totals to the bank account totals.
- Maintain image copies of all checks, deposit slips, bank statement and client engagement letters.
- Request that workflow and e-Payables include an internal authorization form, signed by an attorney to authorize the payment of any IOLTA/Trust/Escrow funds either to the firm or any other third party.
- Separate the printing or writing of the IOLTA/Trust/Escrow funds check from the person who will sign the check through internal procedures.
- Require more than one signature on all checks above a certain payout amount.
- Allow adequate time for deposits to clear in the account before disbursing funds
- The monthly detailed balance should be provided to the clients as part of their bill for each account can help reduce chances of fraud or mismanagement.
For many law firms, the management of Trust Accounts is a major administrative task. Hiring bookkeepers or an accountant is not enough at times to protect yourself from the hazards of mismanagement of Trust Accounts. Funds held for clients must be kept completely separate from the firm’s operational funds. Breaking the rules of managing these accounts (which vary by state) can cause major financial auditing nightmares.
“Simple Mistakes” and oversights in trust accounts are more than annoyances. They can lead to severe disciplinary action or disbarment for the lawyer in charge of the account. One thing remains constant across the board, lawyers need to know the rules that apply to the management of Trust Accounts. Not knowing the changes as they happen will not be a defense if the State Bar finds you violating rules. If your state requires a yearly Trust Accounting Certificate, make sure to check practices so that your firm is clear of infractions.
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