Common Trust Accounting Mistakes and How to Avoid Them
8 Common Trust Accounting Mistakes (and How to Avoid Them)
This article originally appeared on the LawPay blog.
Attorneys who receive retainer fees from their clients take on the role of a fiduciary. Until the attorney has earned and billed for their fees, the funds in that trust account are the property of the client.
Unfortunately, many law schools do a poor job of preparing new lawyers for managing an account like this, and it is not uncommon for attorneys to mismanage the funds in these accounts. The issue is that a misstep could land an attorney in discipline territory with their state bar.
Trust account requirements, many of which are in place to protect clients, can be challenging for attorneys to keep up with—especially when these tasks are added to their daily practice.
Here, we’ve included some of the most common trust accounting mistakes that lawyers commonly make. Hopefully, this will help you avoid them in your firm.
- Failure to keep clients updated and informed
Your clients need to be able to know the amount of money you are holding in the account for them, at any given time. This can help avoid problems and issues early on, and it can prevent disputes regarding how much should be in the account. It also helps you meet your obligation to keep your clients informed on the progress of their case.
Whenever you make a trust account transfer, you need to update the client ledger to indicate what is remaining in the account and then update the client. It’s best to keep the client informed of the work performed, the total amount due, and the remaining balance in the trust.
- Failure to back up daily
When you don’t back up data, you are putting yourself at risk of losing days or even months’ worth of data. Losing data isn’t just a trust accounting mistake; it’s a trust accounting nightmare.
While some regulatory bodies recommend backing up data every month, we don’t believe this is frequent enough. Backing up every day will ensure you don’t have a disaster where you lose weeks or months’ worth of data.
- Commingling personal funds with the trust account
When the funds in a trust account go from client funds to your funds, they need to be removed from the account. Leaving personal funds in the trust can lead to problems. When funds are commingled, it becomes harder to track them accurately, and it can also give the impression of dishonesty.
Some attorneys leave large amounts of personal funds in the trust account as a safeguard against overdrafting. While this practice is tempting, the better, more ethical way of avoiding overdrafts is through proper management of the trust account.
You can, however, have a nominal amount of personal funds in the trust to cover possible bank charges, such as monthly maintenance fees or wire receipt fees when clients wire you funds.
- Listing funds in the account as assets
On your firm’s financial statement, the funds in your trust account should be listed as a current liability, rather than an asset. That way, if your client asks for a refund from the account, you will be able to issue it immediately.
It’s important to have deposit and withdrawal procedures for your trust account procedures. Funds should not move without a good reason.
- Robbing Peter to pay Paul
You should be able to provide the right type of data. Every deposit, withdrawal, and disbursement needs to have the correct date and the amount documented. Be sure to include the correct name on every trust account check.
As a reminder, the money in your trust account is not yours until you earn it. You cannot take money from a client’s trust funds, even just to cover a nominal office expense, such as the electricity bill.
- Not creating a system of checks and balances
The staff that is responsible for deposits to the trust account should not also be responsible for withdrawals and disbursements. Team members should be responsible for balancing the trust accounts.
Don’t ever sign checks or issue approvals without recording the transactions. Doing so will impede your ability to identify and prevent questionable purchases.
Also, make sure you are engaged in the account reconciliation process. For solo practitioners, this practice is easier because you likely balance everything yourself and intimately know of the checks, etc., that are issued under the firm’s name.
- Not assigning a trustworthy and reliable leader
Trust accounting is serious business, and it requires people who are skilled, knowledgeable, and experienced. Having someone detail-oriented whose job is to oversee the account and its daily activity and ensure there are no errors is a good way to avoid the trust accounting mistakes on this list.
By monitoring the trust account daily and keeping it up to date, it will make it easier to identify issues that could have happened by accident. If you catch a mistake early on, it can be rectified right away. Sometimes mistakes that aren’t addressed promptly can turn into much bigger mistakes later on.
- Administering processes manually
Handling a trust account without the help of technology and automation is where many law firms run into trouble. Human error happens, and it can be difficult to completely avoid inaccuracies and meet the many rules and requirements when handling processes manually.
Technology can be your friend. While there is certainly a human element to trust accounting, using the technological tools you have at your disposal can help prevent mistakes.
One great option to consider is incorporating an IOLTA-compliant online payment solution like LawPay into your workflow. This technology can help ensure you’re accepting payments in compliance with your state bar’s trust (IOLTA) account guidelines as well as the American Bar Association (ABA) guidelines.
To learn more about how LawPay can help your firm maintain trust accounting compliance, visit lawpay.com/nysba.