Trust account reconciliation for small law firms

Money a law firm holds for clients — retainers not yet earned, settlement proceeds, funds held for a transaction — is not the firm’s money. State rules of professional conduct, modeled on ABA Model Rule 1.15, require it to be kept separate from the firm’s own funds and accounted for client by client. For many small firms, that means an IOLTA or other client trust account.

The specific requirements — how often to reconcile, which records to keep and for how long — are set by each state. Check your own state’s rules; what follows is the general practice they have in common.

What a three-way reconciliation is

A three-way reconciliation compares three figures as of the same date, and all three must agree:

1. The trust account’s balance per the bank statement, adjusted for deposits in transit and outstanding checks.
2. The balance in the firm’s trust account journal or register.
3. The total of every individual client ledger balance.

Matching the bank to the register — a two-way reconciliation — is not enough, and even the three totals agreeing is not the whole check. One client’s money can quietly pay another client’s disbursement while every total still agrees: the overdrawn client’s ledger simply goes negative, offset by the others. That shows up only when each client ledger is reviewed on its own, so a negative balance on any single client is part of what the reconciliation looks for.

Problems a regular routine catches

• A negative client balance — money paid out for a client beyond what that client has in trust.
• Earned fees left in the trust account, which mixes the firm’s money with clients’.
• Disbursements made against deposits that have not cleared.
• Bank fees or charges drawn from the trust account.
• Old, inactive client balances that need to be resolved rather than carried forward indefinitely.

A monthly routine

Many states expect trust accounts to be reconciled at least monthly or quarterly. Monthly is the practical choice even where the rule is less frequent: the reconciliation is smaller, and a problem is found while it is still a small one. Keep each month’s reconciliation, with the supporting bank statement and client ledger report, as part of the firm’s records.

The attorney remains responsible for the trust account under the rules. An accountant can keep the records current and prepare the reconciliation each month, alongside the firm’s own monthly accounting — see how Tucker CPA works with law firms and attorneys.