Trust Accounting

Bruno's Top Tips for Tip Top Trust Accounting
From the Fall 2010 Journal

Reconcile Yourself to Reconciliations
I performed random audits of trust accounts in the 9A Judicial District (Caswell and Person counties) and the 11th Judicial District (Harnett, Johnston, and Lee counties) last quarter. Of the 60 law firms I audited, 60% were not in compliance with the reconciliation requirements for trust accounts. Sadly, this is not an aberration.

Why do lawyers fail to reconcile?
Most lawyers fail to reconcile their trust accounts because they do not understand how to reconcile. Very typically of late, this lack of understanding is compounded by an overreliance on trust accounting software that readily produces a report called a “Reconciliation Summary” or a report with a name that includes the word “reconciliation.” The report with the seemingly appropriate name creates a false sense of security because, although the report may confirm that the trust account total and the balance shown on the bank statement are consistent, the report does not satisfy the quarterly reconciliation requirements. This article sets forth the requirements of the Rules of Professional Conduct and explains how to reconcile your trust account to the bank statement.

How do you perform a monthly and a quarterly reconciliation?
The Rule 1.15-3(d) requires both quarterly and monthly reconciliations of the trust account balance to the current bank statement for a trust account. However, there is an important distinction between the basic reconciliation that must be done monthly and the more thorough reconciliations that must be done each quarter.

Monthly Reconciliations
Rule 1.15-3(d)(2) states that each month, “the balance of the trust account as shown on the lawyer’s records shall be reconciled with the current bank statement balance of the trust account.” The steps required for this type of reconciliation are not unlike those necessary to balance a personal checking account.

From the ending balance shown on the bank statement for the monthly reporting period, subtract all outstanding checks. To this amount, add all deposits that have not cleared the bank. The resulting balance is the current bank balance.1
Confirm that the current bank balance equals the balance for the trust account as shown on the lawyer’s records for the same date that the bank statement is balanced (if using manual accounting, this balance appears on check stubs or the account register).
Note that the “Reconciliation Summary” produced by accounting software that I reference above will typically satisfy the monthly requirement to reconcile the current bank balance to the total trust account balance.

Quarterly Reconciliations
Rule 1.15-3(d)(1) states that each quarter, “the individual client balances shown on the ledger of a general trust account must be totaled and reconciled with the current bank statement balance for the trust account.” I have added the emphasis to demonstrate the difference between monthly and quarterly reconciliations. The quarterly reconciliations require the extra step of adding up individual balances for each client as shown on the trust account ledger and making sure that this total reconciles to the bank current balance for the month at the end of the quarter. Quarterly reconciliations promote accurate accounting for client funds by (1) ensuring that the running balances for each client, when totaled, equal the total funds on deposit in the trust account and (2) identifying any negative balances.

There is only one additional step required for quarterly reconciliations.

Determine the current bank balance (as explained above).
Total the current individual balances for every client as shown on the client ledgers for the trust account. Accounting software can usually produce a report that satisfies this step. Typical names for such a report include “client trust listing,” “multiple balances report (balances only),” or “custom summary report.”
Confirm that the current bank balance equals the total of current client balances.

The date for balancing the bank statement and the date client balances are totaled must be the same or the account may not reconcile. If reports are generated by computer, this means that the reports must be generated on the same date. It is recommended that the reports be printed simultaneously to avoid a subsequent posting to one report and not the other, thereby affecting reconciliation.

If your trust account records are kept manually, you may use this alternative method of reconciliation:

Add all client balances and outstanding checks. Subtract any outstanding deposits.
The resulting balance should reconcile with the ending balance on the bank statement.

Note that trust account quarterly reconciliation records (whether manual or computer-generated) must list each client’s name and current balance, the total of all client balances, and the current bank balance (with details) for the period. All reconciliation records must be retained for six years to satisfy the recordkeeping requirement in Rule 1.15-3(d). If your software does not allow you to retrieve a hard copy of the reconciliation report at a later date, a hard copy should be printed at the time of reconciliation.

Negative Balances
Negative balances, whether they are discovered in a client balance or in the current bank balance, must be promptly reimbursed or a written explanation (e.g., for an accounting error) must be included in the records for the trust account.

If you have questions about the reconciliation requirements for trust accounts, you can find more information in the Attorney’s Trust Account Handbook, which is posted on the State Bar website (www.ncbar.gov) under the tab for “Programs—Trust Accounting.” You may also call the ethics lawyers or me at the State Bar (919-828-4620).

Endnote
1. Interest earned on a trust account is payable to the State Bar’s Interest on Lawyers’ Trust Accounts (IOLTA) program and, if remitted by the bank each month, does not need to be taken into consideration when determining the current bank balance. However, some banks remit the interest to IOLTA during the month after it is earned. When this occurs, the interest remitted from the prior month (as shown on the bank statement) is subtracted from the balance and the interest earned during the current month is added to the balance. Some banks remit the interest to IOLTA on a quarterly basis. This requires the interest earned during the third month of the quarter to be added to the statement balance and the interest remitted to be subtracted from the statement balance. It is recommended that an IOLTA ledger be maintained for both manual and software accounting when interest is not remitted in the same month that it is earned.