In this instructional video, the speaker addresses legal bookkeepers and attorneys about the critical importance of proper trust account management in law firms. He defines trust accounts as holding client pre‑payment funds that must be kept separate from operating funds and explains the bar’s strict oversight, including the risk of audits and disciplinary actions. The speaker highlights common mismanagement issues, such as attorneys leaving earned money in trust out of fear of errors, which can quickly cause imbalances. He cites statistics that roughly 25% of lawyers face bar audits and that trust‑related violations account for about 15% of disciplinary actions, potentially leading to monetary penalties or disbarment. The core compliance requirements are detailed: use of a dedicated IOLTA or similar trust bank account, regular three‑way reconciliations (bank statement, QuickBooks, and liability ledger), and meticulous transaction record‑keeping with notes. The speaker recommends best practices, including specialized trust‑account software (e.g., Clio, LeanLaw), hiring professionals to clean up discrepancies, establishing cash‑handling procedures, and staying current with jurisdiction‑specific rules. He warns that even minor reconciliation discrepancies are unacceptable. Finally, he anticipates increased AI‑driven audits, urging firms to adopt modern technology and proactive processes to protect reputation and client relationships.
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This week I'm just gonna talk a little bit about trust accounting because it's definitely, if you're a legal bookkeeper, it's gonna be your number one item that you wanna talk to the attorney about and ask a lot of questions. There's few things that are vital to running a successful law firm as much as having an effective trust account management system in place. It plays a pivotal role in ensuring ethical compliance. So, What trust account is, you're holding funds that don't belong to you. They're your client's funds and they're prepayments basically for work that you're gonna do in the future. And the Bar Association has the heavy hammer here that makes sure that everything is held compliantly and that you don't misappropriate any funds, any funds at all. So unfortunately there's been some statistics recently that are a little bit troubling. There's a trend of mismanagement with trust accounting. And sometimes it's just the fact of not deliberate mismanagement, but a lot of times it's just the attorneys maybe don't move the money outta trust. They're afraid to make a mistake. They don't wanna have, they don't wanna move the money out because they're afraid that they're not accurate. Their, their trust account becomes out of balance very quickly, very, especially if they don't have a tool in place to track it like a Clio or a LeanLaw. And what happens is a lot of times they leave it in place and I've heard it called a little buffer or I just didn't move it because I wanna make sure that have enough money in that account. So when I do have to move money for other clients, but you can't keep money there if you've earned it. That's the thing. So sometimes the out-of-compliance piece is just a matter of that. The money's sitting in trust, they haven't moved the funds even though they've earned it. And that is also making your account out of, out of balance, out of compliance with the bar, and it can be a heavy, heavy-duty problem. So Uh, 25%, uh, approximately 25% of lawyers that face disciplinary actions, uh, and that relates to any mismanagement that happens annually. So 25% of all attorneys at some point will face a bar audit and will have to explain what is little snippet window that the bar decides is gonna audit you, what was in that fund. So if you have $10,375 in that bank account, You need to account for all of that with all the different people that, that money that you're holding grouped together equals that amount. And that's the thing we have to make sure that we do. It's an interesting concept because it is something that we see a lot of times. The attorney will say, well, I just put the money in there and I let it— I used all— I always bill myself when I do the billing. I just leave it zero. I apply all the funds, and so it's zero. And maybe once in a while it's not that way, but I don't really need to track it. You do. You do, because the bar can come and say, I want to know what was in the account on the 15th of the month, and then if you do it in the beginning of the month and you clear it, but then there's money from the current month, there's still an accounting that has to take place. So for compliance— and I'm just going to go over a few of the key compliance requirements— you need to keep a complete separation of the client funds. And you have to keep it separate from the operating. So it has to be the funds that come in that are trust-related, that are gonna be held in trust, have to be in a trust-type bank account, IOLTA bank account, something of that nature. You have to regularly reconcile this bank account. You can't discard it and say, ah, I don't really care about it. I'm gonna take all those funds every month anyway, so I'm not even gonna track that in my bank, on my QuickBooks. Yes, you have to track it. And just balancing it on QuickBooks is not a way that That's not reconciled. You need the 3-way reconciliation. So you need to have— show the balance that's in the bank account plus or minus any transactions in transit that happen while, you know, the end of the month ended and then you've got some uncleared checks or uncleared deposits. And then you have to match that up to the trust bank account balance in QuickBooks. And then also that liability, the ledger account, all the individual ledger accounts that equal that total, all of that has to equal. And we like to break it out on the— as a liability account, sub-liability accounts of a master funds held in trust liability account, and we collapse it and make sure that that balance matches the bank balance on the books. And then you want to have a detailed record keeping of all the transactions. If somebody happens to put a deposit that was supposed to go into trust into operating, and you have to make a few transactions to show that properly on the books, lots of notes, because the borrower might coming, calling and wanting to reconcile you, but it's not gonna say, let's do it for yesterday's date. It's gonna pick a date and you better have notes in there to understand what happened if that happened to be the case that somebody put the bank, put the money in the wrong bank account. So non-compliance of trust and the rules around trust account for 15% of all disciplinary actions against lawyers. So the bar will, will put a disciplinary action against the attorney, and some of them can be very, very stringent. It could actually put their professional license at risk. The consequences can be monetary, but it could also lead to disbarment. So you have to know that there's quite a few different scenarios there. You just want to make sure that everything is done properly. How do we fix this? Best practice, make sure it's reconciled. If it's not reconciled and you know it and there's something wrong with it and you don't know how to fix it, hire a professional like one of us that can You know, the advising attorney, you got to hire me. Make sure it's correct. You got to blow that whole balance sheet up for the all dates and do it by year and figure out when was the last time it balanced, and then go from there cleaning. Don't go— don't go backward to clean it. Figure out the starting point, the last time it balanced, and go forward. Ask the attorney, where do you keep your 3-way bank reconciliation? A lot of them look at you like deer in headlights. They didn't realize that that's part of their compliance piece. California in particular has very strict rules, so you really want to make sure that wherever your attorneys practicing law, you look up those rules, uh, use specialized software. You get a software like LeanLaw, you put that money in and then you can't take more money out than it was put in. So you're protecting yourself there. So it's really important to do. So having those practices in place, if there's cash coming into the office, have a cash process too for your staff. So there's no impropriety or chance of anybody keeping any of the cash and it doesn't make it in the bank, especially when you're talking about client funds. Mm-hmm. You know, there's a heightened amount of regulatory scrutiny. I can just imagine with AI we might be seeing more audits instead of less as these things start to speed up and we're able to do some of this stuff very, very in an automated way. So law firms need to prioritize tracking trust. They need to be diligent about their trust management and account management and use modern technology to assist you to make sure that you can Mitigate any chance of a mistake. Really important, don't ever reconcile the bank account and say, oh, it's off by $2 and throw that in reconciliation discrepancy. Shouldn't do it overall, but when it comes to trust, it's a no-no. Never do it. Find that $2. Being proactive is ultimately gonna build a stronger reputation for the law firm, and it's also gonna foster a stronger relationship between you and the attorney. I hope that helps, and we'll see you all next week. Bye now. Bye.
