Linda Artesani shows how to reconcile a law firm's IOLTA trust account using LeanLaw and QuickBooks Online. She finds a $747.50 discrepancy caused by a misposted retainer for client Seth David, moves it to the operating account, and uncovers a second $5,000 error. Misaligned trust accounts can lead to disbarment.
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Hi there, Linda Artesani, Artesani Bookkeeping. So this week's story with the blog post is about a couple of attorneys that misappropriated their IOLTA account, their trust account, and they use the funds. Don't forget, the funds that are in an IOLTA account are funds that don't belong to the attorney. They have to work to earn that money. So the client prepays, it's— those deposits are put into the IOLTA, the trust account, bank account. And then the money gets moved when the attorney has earned the revenue, worked for it, invoiced for it, and then to pay the invoice, you take the money out of IOLTA, you move it into operating. It's that simple. But it can get a little complex and tangled when you've got multiple people. So you've got this one bank account with All these clients' money in it, and you have to make sure you track it to the penny. And yes, I mean the penny. So you want to find a good bookkeeper that tracks it to the penny. It's one of the services we provide, and we help law firms all the time with IOLTA accounts that are just a mess. My business partner Sarah and I are really good at figuring these things out. So if you have that messy books, please call us. We can help you. But I'm going off track here a little bit. I wanted to just show you in my preferred app of LeanLaw and the app QuickBooks Online Advanced, how do you figure it out when you get a client? If you're a bookkeeper and accountant, you get this client file and you're like, why is this off? How do you figure it out? How do you start to strategize what went wrong and fix it? So let me share my screen. So one of the first steps we do to find where the issue is, is we pull up a balance sheet. So you just come over here to Reports. Reports, and then you come into the regular report section, grab your balance sheet. So it's just under here under Reports. And we grab the balance sheet here. And then we— if I'm reconciling July, I don't want to show all dates. So I will go to end of last month. Always accrual basis. And then I will come over here and do it by month. And I just like to do that to see month over month. Now, We can see here, my bank balance is $39,548.85. And then my trust account balances— this is why I love LeanLaw. It's not hidden and not all piled up in this $2,300. It's actually like an accordion. It's there to see the individual accounts in the activity. This is going to show the balances. I can click on it to see the activity to see how those balances came about. If I collapse this I can see that the balance in my IOLTA account, my trust account, is $38,801.35. That's not the same as the amount that's up here, $39,548. So I'm off. When I did the calculation, I found I was off by $747.50. One of the things I do is I'll come over here and do a search to find $747.50, and I found that really quickly. But let me pop over to LeanLaw just to show you another way to see this. So I click on the Billing tab, and that exposes the Trust tab. And then you can see, here's my totals. Sometimes I've seen it where this top header doesn't equal all the client balances. I have seen that in some accounts. Sometimes people don't know where to put something, so they'll book it into the header account. And then there's a few other reasons why this could happen. And the bank balance is clearly overstated. We want to see all 3 of this. This is your 3-way reconciliation, right? Your bank balance that you will reconcile with your bank and your bank statements. This is your bank statement piece. Will match the total of the liability totals and also the individual. So that's the 3-way reconciliation. So let's go back and we found that in this search, we found that there's a problem with Seth David's account. What's going on? So I know that there's, there's been a transaction that was a retainer. This is just pulling up the 740, 750. So he probably paid like $3,000 or $4,000 as a retainer, which I can clearly see that the issue is with Seth. So I can come over here. Type in Seth and then really blow out his whole account to see where the issue is in the account. I can pull up the whole trust. So I can click here in the trust, trust report here and see the ins and the outs and see the $747.50 that's giving me trouble. Now I know that my IOLTA account has too much money in it. So you can see that he gave me— here's the deposit for the retainer. Here's the invoice, I mean the check to pay the retainer to move the money out. And I can see that there's been, you know, here's his ins and outs. So Of his account. If this is a little bit hard to understand, you can always come over to this tab over here and come into your accounting. I like to see the register view sometimes. So disregard, this is a test file. So it might look like there's a lot of junk in here. And I'll just type in Seth. If you have the number, and I can come into the register. Sometimes it's easier to see in the register the money in and the money out. It makes it easier. But I know there's a problem here. And sometimes this search will really show the problem. It's if you have one small amount like this, sometimes it's multiple, and this does not work. And you have to really dig in and take your bank account here, take this, you would collapse it just down to July and take the— if I come to the $2,300 and expand it again, and just go through one at a time, all these amounts that are inside of lien law in the trust, right? Without just sets, I would come through and Some companies I work with, they have like 2,000 of these open. It's a big job to fix some of these trust accounts, especially if it goes over multiple months. Somebody asked me the other day, where do you know where to start? You start where it was left last reconciled and move forward month over month over month, which is why we like that balance sheet. So I come here and I know that there's a problem in that my account's overstated. So this is where I had an invoice, the client paid me with their trust account, and then this should be in my operating accounts. Let's see what account it's booked to. And it's booked to the IOLTA. So that would cause my IOLTA account to be overstated and equal more. It should have really gone to my operating, right? Now I've been recognized the revenue, it's moved to operating. That's what I should be seeing here. And clearly somebody put it into— it was in undeposited funds and they booked it back into the IOLTA, which is not what we want to see. So if I change this to the operating and save and close it. You know, this is the beauty of working in a cloud-based product. I'm just going to come over here and I'm going to hit refresh to refresh the page to give LeanLaw the signal that something's changed. And now that thing of beauty, all of these are matching. Actually, they're not because I've got $5,000 off here. So my client balances are short $5,000. So I need to find the $5,000. So this is what I'm talking about. So now my bank account matches the liability account, but it doesn't equal the total client balances. So I have to figure out What's wrong with the client balances? Where did the $5,000, which in all likelihood is in an operating account— I got to do the same thing. I got to go do a search. Maybe somebody received a retainer to the operating account instead of the IOLTA bank account. So as you can see, this is the kind of things that happen, and you really have to be that super sleuth, the investigator. I hope this helps you kind of navigate through and how you can start to Really recreate the story of your IOLTA account and balance it. If you get stuck or need help, call us. It's something we specialize in. We love a good balanced IOLTA account. I can tell you that Sarah and I have had like, we want to go have a big party, woo-hoo, when we figured out one that's taken like, you know, the weekend or even longer to figure out. But it's always a good thing. You make your client happy when they're in compliance. You can have some serious repercussions if their IOLTA account is A, mismanaged, you can be disbarred, or B, just messy books. And if you get that audit, you need to make sure that the audit is— you're right there, you can prove out all your numbers. You want to keep good records. It's just crucial. So on that note, I hope you all have a wonderful, wonderful week. If you get a chance and you'd like to join our group, QB Community Live, it's— I'm one of the admins. I co-admin that group, and I'm there to help and support because we really believe together we all succeed. Bye now.
