Bookkeepers working with law firms make seven common IOLTA mistakes that trigger audits and penalties: inaccurate recordkeeping, skipped reconciliations, wrong interest allocation, outdated rules, poor client communication, bad software setup, and weak workflows. Daily transaction logging, monthly soft reconciliations, and integrating practice management software like Clio with QuickBooks fix most of them before audits arrive.
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Hello everyone, and welcome back to our Accountants Law Lab. Today we're going to be diving into one of the most critical and most written about topics, probably in my blog posts of all times. I think I've written about this topic the most, and it's IOLTA accounts. That's probably the one thing you think of when you think of working with attorney clients. So if you're a bookkeeper working with those clients, you know that IOLTA stands for Interest on Lawyer Trust Accounts. It's an acronym. And these specialized accounts hold funds temporarily with the interest earned on these accounts going to help support public legal aid and services for those who can't afford it. So it's got a great purpose behind it. These rules vary slightly by jurisdiction. It's kind of like having a million banks in the United States. They all are a little bit different. And this is the same thing with these bank accounts. So different banks have different ways of working with them and different jurisdictions have different rules. They vary slightly. If you go to the American Bar Association, you're gonna see what's typical for the country, but then they can vary by state. And for example, like North Carolina used to be you only had to provide that three-way bank reconciliation quarterly. The state of Florida, you need to have both copies of both sides of a cash check on any money that's deposited into the IOLTA. So it's little things like that that you really want to make sure that you're aware of. And besides the fact that they vary slightly by jurisdiction, the core is always the same. Keep those funds separate from firm funds. Mm-hmm. Maintain meticulous records so that you can ensure transparency with your clients. Mistakes aren't just bookkeeping errors. In the case of an IOLTA account, they usually can lead to audits, which we never want to see. There can be fines if you're found not to be compliant. There's some penalties, and it can go right down to some serious damage to the firm's reputation. You just never want to have your name on that list of people who have had bar infractions. And yes, there's a list. Yes, there is, by different jurisdictions. If you want to go and pop into, you know, your local bar association's website, there's a whole list of people who had an audit, were found to be out of compliance, and the reason behind the out of compliance. It's pretty weird to see, and it's pretty bad to see if you ever see your name on that list. So let's make sure that we can fix any errors proactively and really start to get your clients' books in order. So for a quick foundation, IOLTA isn't your average trust account. It's designed for short-term or small client funds. Interest automatically benefits the community programs. As bookkeepers, your role is huge in this. You're ensuring the compliance for your client. They are busy, they're doing their work. You're ensuring tracking and you're preventing any misuse. Now let's go on to some of the mistakes that we see. And I've been doing this long enough, I can tell you the, the average mistakes that I find. Inaccurate recordkeeping has to be the number one. It tops the list for a reason. Inaccurate or delayed records or delayed recordkeeping— I'll get to it later— is not allowed, so it can create discrepancies that scream audit red flag. Common issues are not recording transactions immediately or failing to detail each client's funds, so including receipts or anything really, purposes behind the transactions or disbursements. To fix it, you have to implement a strict system, record every transaction the moment it happens, maintain individual client ledgers with dates and amounts and descriptions and running balances, and then use the software that supports this with the subledger of each client. It's just going to save you a lot of time, especially if your, your client is audited. You don't want to have to be going back and working through all the customer details to get these lists. You want to have this little tiny mini ledger built into your accounting. I can highly recommend that to you. That's a method that we use. And this creates a crystal clear audit trail. You do it daily, not weekly, unless your client's weekly, you can do it weekly. But if you're a bigger client, definitely do it daily or start getting their firm to put the data in weekly. So mistake number 2, and this is one I've had so many arguments with clients over, failure to reconcile the accounts regularly. So they might do them irregularly. They may think that, well, because it's bank feeds matching, that's reconciling, right? Right. Well, it's not. I've heard every excuse. The bank feed matches it automatically, and I didn't know QuickBooks had a process for this. So some of the stories. But in reality, bank feeds can help, but a true reconciliation compares your books, including the client ledgers, to bank statements. It's called a 3-way bank reconciliation. You get your bank records, your firm ledger, your client ledgers. Skipping these steps It lets errors snowball. We never want to see that. So how do you fix that? Well, reconciling monthly at a minimum. Don't let it get far behind. If you have to, in some of the bigger firms, we call it soft reconciling. We soft reconcile weekly. There can be bank errors. It can be the bank side that's causing the error. Maybe the client transferred the wrong amount and you— You were told they were going to transfer one amount. They booked it into Clio, for example, one amount, and then When it hits the bank, they transpose the numbers. So those are the things you want to fix. And then any unauthorized transactions— this is why you want to stay on top of this, because if the bank account ever got hacked, it would be detrimental to the firm. Set your calendar with some reminders and treat this as a non-negotiable. Interest isn't yours. So when we're talking about interest allocation, I've seen it a lot of times where the bookkeeper will book it in and out of interest expense or in and out of interest income. It should never land itself on the profit and loss. It should always be an interest clearing account as a sub-liability account on your in your books. It sits right underneath all your client accounts. Why do we want to do this? It's the only way you can really reconcile it. And I have seen banks that'll actually have put the money in and that didn't get swept out. You need to keep an eye on that. It should always zero out. And some banks put it in one month, take it out of another. It's not a great system. So how do you fix it? You create that clearing account, other current liability under the trust parent, post the interest there, and make sure it's swept out. Mistake number 4, not staying updated on the rules and regulations. You have to stay on top of the rules and regulations. A lot of them change January 1st, but you should stay involved, stay in touch, look it up, get your name in there, get an email of any updates. It's really important to subscribe to the BAR updates. Stay on top of it, read their newsletters, and stay on top of some good legal accounting resources like our blog. It's really important to stay on top of things. Don't neglect client communications. Really, really, really important. In some states it's required. You have to communicate with the client even if there's no work being performed and no money's moving. You still have to let the client know that the money is there and within like 45 days. Like in California, you have to keep that communication open. And it's really important because nothing's worse if you work with an attorney, you give them a bunch of money as a retainer, and then you don't hear from them and you're like, is anything even happening in my case? Keeping that line of communication open will keep for happy clients. So remember that. Make sure you provide regular updates on the funds. Make sure the deposits are in, the disbursements are in, the balances are accurate, everything ties back to matching the bank account. And respond promptly to questions. Document all communications. Make sure they're clear, consistent, so if you are audited in some back date, you can pull that up because you might not remember the circumstance that surrounded the reasoning behind something being challenged or inaccurate. Mm-hmm. So make sure you do that. Mistake number 6 is overlooking proper software and setup tools. Don't skip out on the Clio or the LeanLaw or whatever product you want to use. It's so important. Don't just use QuickBooks. It's not meant for that. Unless you're a personal injury attorney and you get one big chunk in and you divvy it out every month, it's really not worth it. You're going to save time and the cost of the software is negligible. So really important, have that set up, have it integrate with QuickBooks. Or zero. And the last mistake is ignoring overall best practices and just not setting up a system for this work. Be proactive auditing your own records. You know, the biggest challenge or overreaching mistake is treating IOLTA as just another bank account. It's not. It has a really important function. It's not the lawyer's money until they've earned it. So adopt best practices, separate accounts, make sure the funds that are in there are just trust accounts, trust funds. And then train the team, train the people who are touching the money, make sure you have a really good proper workflow to really nail down and lock down those funds. So managing IOLTA accounts correctly protects your attorney clients. It upholds the professional integrity of the firm and keeps you out of trouble during audits. You don't get a lot of time when they come knocking at your door with an audit. You have like a turnaround time of 7 to 14 days. So these 7 mistakes, if you can avoid them, will put you in a higher level of a bookkeeping professional with your client. Super important. It'll keep your client happy, let 'em sleep at night, and deliver peace of mind. So hope this was helpful. If you want more information, there's plenty of stuff on IOLTA accounts in this blog. Until next week, we'll see you then. Bye now. Bye.
