The Attorney Balancing Act: Correcting Trust Account Mistakes

Hi there, Linda Ardissani, Ardissani Accounting. This week we're going to dive into your typical trust or IOLTA account mistakes, what we see time over time when we dive into some of these files and how you can start to figure out where they are. We start to develop patterns and then we can start to figure out how to clean it up. So we'll just start just here before I get into showing the file and how I would dig through it. Common mistakes Probably the number one common mistake, which I understand where it comes from, because it comes from attorneys start out, they start out really small, branching out on their own new firm, start with a spreadsheet. Makes sense, right? Just put the balance, put the trust account balance on the front and start to build up maybe individual trust tabs for each client. As you're starting out, you don't want to spend money on software. I understand that completely. But what happens is it starts to get very unruly. So you start to create all these accounts in these tabs and it starts to get really bigger and bigger and bigger. And then all of a sudden you're, you're doing this work maybe in the middle of the night. Maybe you're working at 10:30 and you're trying to reconcile your trust accounting, and then there's transactions happening and you're trying to navigate through the waters of just doing this manual entry. Manual entry usually happens, especially if you end up doing this in the evening. You'll find that you can have many mistakes because you get distracted. Maybe your kids come in the room or, you know, somebody, your spouse calls you for dinner and you're trying to do this work at night because you're busy at your job and you don't have time to do it. So that's where it first starts. I often said I'm going to put a t-shirt out that says stop the spreadsheet, because that's typically what attorneys start out doing. I mean, it makes sense, logical sense. They know how to use Excel and it's very simple. The next thing that happens is an attorney is using software for their tracking of their time and their billing and doing legal billing, and they use this software that's external. So like the software that doesn't integrate at all, like time slips. Or something that's just— maybe they're using Clio and it's not connected at all to QuickBooks, so they want to keep it siloed in its own little place. And then they're in this software and they're doing their transactions. And as they're doing their transactions, they're, oh, I got to close this account out. I need to get the retainer, you know, apply the retainer to the invoice. And they do all that work in Clio or in PracticePanther or in LeanLaw, and then they never make the transfer. So the thing about LeanLaw, what it really works well in Clio because they connect to QuickBooks, Now you can notice that maybe the bank balance is higher than the amount that's in the trust account, and that's caused because you created all the transactions in the external software, but you didn't actually physically move the funds. So that's a big one that happens a lot. So that's when we see a lot— the trust account not being balanced. I've had clients come to me saying, oh, do I need to do that? I didn't realize I needed to do that. I thought because it's connected to the bank feed, it's okay. Oh, as accountants, we go, oh no, because we know that the trust account— I mean, the bank feed isn't always perfect. We've had some pretty crazy things happen with bank fees. I've had people have duplicate transactions. If they had a transaction, say your family law, and you process $250 maybe with 3 different clients, as it comes in the bank feed, the bank feed may only recognize one, and then you're losing out because you're thinking it's reconciled, but it's not. So how do we figure out how to fix this and how do we figure out how to find these things? So I'm going to take you into QuickBooks. I'm going to show you how I track and figure out where these mistakes happen and then try to fix them. So I'm going to show you where they are in the account. I'll give you a little bit of tips on how to fix them and how we could correct some of the errors. So usually you have to look at balances in the trust account, balance in the liability, and where it differs. Finding that starting point. Key, and then figuring out maybe month over month where it goes wrong and what needs to be fixed. And sometimes, many times when we dig into a trust account, we find money for the client because they didn't move the money over. And we've had clients where we've told them $30,000, $40,000, you need to move over, you've earned it, you never moved it over to operating. It's sitting in trust, but it's been earned and you made the invoices, but you just never moved the funds. And then we become that accountant hero. Let me share my screen. I'll show you how to do this. So here we are in the QuickBooks demo file. And typically, if was a client, I would go right over to— I always pull financials up first. So I would come over to the reports. I'm going to grab the balance sheet. So I want to find out— this person already told me there's something wrong with their trust, and I want to find out what it is. So I'm just going to grab the balance sheet, and I'm going to go to all dates. So I'm going to slide right up here to all dates, and then I'm going to pick cash basis, run the report, and then I'm also going to come over here and total by year. So I'm going to try to figure out exactly where the issue is. And what year? So calendar years. I happen to know that this happens to be calendar year. We just did one with the calendar year was a fiscal year was different. So you'd want to do that. So this particular firm started in 2019. So I know I don't have to go back too, too far. And then what I'm going to do in here is I'm going to see that they've got multiple trust accounts here. So I've got my total and I'm just going to collapse some of the minutia here to kind of make this a little easier to look at and to compare, especially with on the screen now. And then here's my trust account. Now, if they're using a lien law, they should— and they've got 2 trust accounts, I should see 2 trust headers, one for the trust bank account, one for the IOLTA. I want to see real estate trust, one for the IOLTA. So there should be 2 here. So I've got client trust liabilities, and I'm just going to collapse the amounts here underneath. Actually, I'm going to go here and collapse them all. And then I'm just going to look further down and see, and they don't have that. So I already know there's an issue because if they're using lien law, they have 2 trust accounts. They should have 2 trust parent accounts, one for the IOLTA, one for the real estate trust. So that's a problem right there in itself that they're combined. And now I'm going to go over here and look, and here's my balance. And I'm going to see my trust account balance here is $58,535, and the balance in the trust here was pre the real estate is $58,535. So it balances. So I'm good for 2019. Now I've got an idea where my scope is going to be. Second here, the total trust is $43,000 for December, $43,042.35. And I'm going to go over here, $43,000. Beautiful. I'm going over here to August through— January through August, and I see $131,000. So I'm looking at the total now because there's 2 accounts. And I see there's something funky going on here with the negative, right? There's no way their bank account is negative. They'd be in some serious trust trouble. So I know there's a problem here, but $131,090.90. And then I come over here and it's $46,000. So I've got a significant problem. So now I know I'm dealing with 2021. So what I'm going to do here is I'm just going to come over here and go to this year. So this fiscal year, this calendar, this calendar year, and find out what month it started. I'm going to come in here and go right to the— this calendar year till the end of last month, because that's where it's been reconciled to. And I'm going to do it by month. So it would total only, and I'm going to change it to months. I'm just going to hit Cash and run the report. And then just like we did earlier, I'm going to close down the operating and I'm just going to close down some of these accounts so I can see exactly where the trust had its issues. So get rid of credit cards and I'm just going to collapse the trust account here. And we can see here's the balance, $43,042, and it aligns with the balance in the trust. So beautiful. We're all lined up, we're matching. And then as we come over here, we see here's the beginning of the issue with the negative account in the real estate. There's $4,000 here. If I click it, I'm going to see the problem was a check and it was a check to Seth David. And it looks like it's maybe a payment to pay the— let's open it up. It looks like it's a payment of an invoice. So it's monies earned by the law firm and they use lien law. So they had created an invoice in lien law. And they had processed it with a trust payment. But clearly, when they processed it, it didn't record the payment in the correct bank account because you wouldn't have a negative balance here. So we need to look at why this check is coming out of trust. If it was being paid, this whole transaction has issues. So we need to go into Seth's account in LeanLaw and really drill down on it. So that's where we would dig in if we were trying to figure out what's wrong here. But obviously there's more of a problem here because as we come into February, we can see that in February the trust account balance is $138,038. And as we come down here, if we roll this up, it's only $60,000. So we're off by like $80,000. So we're going to need to dig into the IOLTA to figure out what happened here that this is so overstated, or what didn't happen here. It's really, really investigating what didn't happen in the trust. Because we're only down to $60. So something's either coded to the wrong account or it is not booked in properly. And we can go into the bank account. So if the bank account's reconciled, then you know that the transactions inside that account are correct. Now you need to figure out why they're not being pulled into the— into the banking— into the liability accounts properly. And it could be a matter of any of these could be— the deposits could be wrong. They— maybe these were deposits for Seth that belonged in that real estate trust, and that's why that negative one came out of there. We really have to figure out why and what happened. So you've got some things here that the law firm, you've got $78,000. It could be that deposit that's in the wrong place, the wrong bank account. We really have to just go through this line by line by line to figure out exactly where the issues are. And it could be a multiple of reasons. Like I mentioned earlier, whenever there's 2 trust accounts, it's very much a possibility that you're going to see some of those transactions processing out of the wrong bank account. Because we usually will put them into an undeposited fund account. Now, one of the best practices that I can share with you is if you have multiple trust accounts, you really want to make sure that the workflow— once you figure all this out, the workflow should be every time you process a trust payment on an invoice for revenue earned, so for, for Income earned by the law firm, do it one at a time. In fact, most of the states require not a grouping. They want one transaction per— one transfer per transaction from the bank, and they want to make sure that those transactions are properly booked in. So you're tracking it line by line by line. So what you want to do is you want to make sure that in lien law that you have it a one-for-one transfer for each transaction. Every time you process a transaction, you put it— send it directly. And so bypass undeposited funds. You will be so happy that you did. So it's one transaction. So if someone pays, it goes right over to the next account. The next person pays, it goes right into the, into the bank as a one-off. So when you do the transfers, you do the transfers as individual. You make sure you mark it down. States usually require that. So if I'm moving money from Mr. Smith's trust account to pay for Mr. Smith's invoice, I move the money over for that. That if I'm going to Mr. Jones or Ms. Jones, I'm going to do that transfer. So it keeps the books super squeaky clean. And you don't have these issues where you're grouping deposits and like the old days where you take, you know, 5 or 6 checks to the bank on Friday. You're eliminating that happening where you're not grouping them right or they're going into the wrong bank account. Those are the typical issues. Maybe you collect a retainer and somebody puts it into the operating. That's a whole nother transaction that you have to account for. So I hope this was helpful. I hope that, um, if, you know, if you're interested in me digging into like figuring out exactly, I can do individual, uh, individual recordings on how to fix each different type and how I find it and how we fix it. The issue is I don't have bank statements, so it's hard for me to make a fake bank statement to be able to show you that the bank statement doesn't align. But we can at least dig in and I can tell you that it— this is what happened here and these are the steps to fix it, because there's so many ways that the IOLTA account or the trust account can go wrong. And this is just a way that this— basically, this video is just to show you how we kind of target in and look at that balance sheet and dig out and find that sweet spot, that starting point. Once you find it, it's just a matter of really digging back in. You could unreconcile everything and go month over month. That sometimes works, especially if you're looking at a scenario where it's in the current fiscal year and it's not that far back and you're not detangling a lot of months. A lot of times it's just the way it's been booked in. It's booked into the wrong bank account. A lot of times it's maybe the money didn't move and it's just a scenario where they did the transactions in the software and they never moved the funds. Maybe the deposit was put in the wrong bank. There's just so many ways that it can go wrong. Those are the typical normal ones that we look for first. We see patterns and then we start to go forward. And if you need help on this kind of work, reach out. This is the work that we do. We really enjoy doing it. We've been doing it for many, many accounts, many, many law firms. We've been pretty successful in digging through and figuring out where the trust account went awry. We've detangled all the way back to 2015 on some accounts. We've just worked through it month over month. It is time-consuming, but it gives that attorney that feeling that they can sleep at night, and that's our job. It's something we really enjoy doing. So if you're in that place where you found my video and you're sitting there with a messy IOLTA and you don't know where to start, Reach out, we can help you. And on that note, if you enjoyed the video, hit a thumbs up. If you want to subscribe to keep following me, hit the subscribe button. I'd love for you to follow me, and I will see you all on the next video, which is Halloween. Oh my goodness, see you next week. Bye now.