Sarah Prevost explains IOLTA requirements and common trust accounting mistakes law firms make: commingling funds, wrong deposits, overdrafts, and poor record-keeping. She walks through fixes like separate liability accounts for each client, monthly reconciliations, dual signatures, and specialized software like Clio or Xero to prevent errors and audits.
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Hello and happy March. Welcome back. We can't escape this topic no matter what with this particular niche that I'm in, and it's trust accounting. So trust accounting is one of the most critical and really the high-stake responsibility of a law firm. Mishandling trust client funds in a trust account or in your IOLTA accounts can lead to disbarment, which is a really serious penalty. Also loss of reputation. I kind of talked about reputation last month. So with proper practices, you can ensure compliance and protect your clients' funds and protect their trust with them entrusting their funds with you. So today we're going to cover what an IOLTA is some key regulations, some common pitfalls and how to avoid them, and some essential bookkeeping tools like Clio. We'll talk a little bit about audits and recordkeeping and also staff training and more. So let's safeguard your practice. So what is an IOLTA? So if you're here, especially as a bookkeeper, and you're like, I found this page and I know this is a lot of information, what the heck is an IOLTA? So IOLTA is just an acronym. It And it stands for Interest on Lawyers' Trust Accounts. It's where small or short-term client-held funds are pooled and they generate interest, and the interest goes to legal aid programs, helping those who can't afford legal services. The system turns idle funds into a public good, which is really a wonderful concept, right around the IOLTA funds. So you'll see interest in, interest out, and you clear that through, and you have to track it 'cause sometimes it doesn't always clear through properly. And it really helps the public. It does require strict compliance. Lawyers must place their eligible funds and manage them transparently. Transparency is key. So I do share a great resource, which is a link in the article that goes with this video. In my case, the software made an interactive map with state-by-state bar rules. So if you're working with clients all over the country, if you're an attorney and you're working in different areas, you can click and it takes you right to where the IOLTA rules are. And I think there's only a couple states that the clicking doesn't work, one of which is Florida. Regulations demand that you segregate the client funds from your personal and operating accounts, so there's no commingling, there's complete separation. You have to maintain accurate detailed records of every single transaction, money into the trust and money out of the trust. Non-compliant risks can be severe, such as a disciplinary action or a bar fine, or you can lose your license to practice law. So always check with your state bar rules. Use that map, check the state bar rules first, learn them inside and out for wherever you are practicing law. And so there's some Some common mistakes and how to avoid them. Common pitfalls can include commingling the funds. The worst egregious ones are like you don't have enough money for payroll and you take money out of trust. That's stealing. So right there is wrong. But you can accidentally commingle funds. Seen this happen on more than one occasion. You get the trust deposit, you deposit it into the wrong bank account. Instead of putting it in the trust account, you put it in the operating. And there's quite the fancy little transaction to get that money out of operating And into trust. You can transfer it easily, but in the accounting, it's a very intricate transaction to get that moved over. So you want to really stick with using the IOLTA accounts only. You don't want ever any insufficient records. Make sure you have all your detailed ledgers, and we recommend having the liability accounts placed like a client trust liability or funds held in trust for account number 1234. For example, and then you sub down by the person's name, all the accounts and matters. If you have multiple matters, you can have Linda Artesani Trust Estate Planning, Divorce, or whatever. You want that all planned down so that you separate the matters underneath the client. So it's a header account, and then you place it in the client name and then the matter name. So you really want that hierarchy on your books. That's really important because you want to be able to track these detailed ledgers and you want to do regular reconciliations. So when you You roll all those accounts up to that main header account again, that balance should match the bank balance at all times. And that's what the bar will be looking at if there is an audit. So it's very critical that you take care of that. You never ever want to overdraw an NIOLTA account, especially if you're closing one to open another. You have to really make sure that you have it nailed down. Every transaction is in the records when you actually move the funds over. And it's not so much of moving the funds from Bank A to Bank B. Because you have to move them out of all those individual ledgers up into the next bank account and into the same individual ledger. So there is a bit of work there because every bank account should have its own parent liability account to offset it and then their own ledger accounts. So you can have multiple bank accounts and then you have multiple client trust ledger accounts. I hope you can follow that. It's easier to demonstrate than to talk you through it, but it's very important that you have it that way. So best practice is maintain separate ledgers per client for independent tracking, reconcile monthly, compare the ledgers to the bank statements, implement internal controls like dual signatures or limited access. There should be checks and balances to protect you against fraud. I see this sometimes where the bookkeeper's given the opportunity to make the transfers from the IOLTA to the operating. It should always be done by a member of the partnership of the law firm. It should not be delegated down into someone who could actually maybe steal the funds. So you really don't— you really need to make sure that the checks and balances are in place. It's a best practice to keep it that way. And then you want to use specialized software to automate the ledgers, automate the transactions, automate the reconciliations and the reporting to reduce errors. We even have with Live Flow, which is an additional software that connects to QuickBooks connects to Clio and it produces a beautiful 3-way bank reconciliation. It's actually named after our firm, The Proper Trust. So look for that if you want to look for a way to automate moving those figures into a spreadsheet where you can track and do the official 3-way bank reconciliation is super important. You want to be able to have software that integrates well with Clio or Xero, and it's just going to streamline your trust accounting effortlessly. It makes life a lot easier. There's ways of doing it in QuickBooks only. Don't recommend it. It's a very manual, wonky process that if you miss one step is going to make your balances off. So we always recommend software. And then you want someone's eyes on to audit the work of the person doing the trust, especially if you have an outside firm. That's a good place to have somebody auditing what's the work that's happening inside the office. And it's just really to catch Any issues that are happening. So you want to do a thorough, regular review. Even if you have an outsourced accounting firm, you want to very once in a while pull up a balance sheet, collapse the numbers, and make sure that they match up. Really important. External oversight should be required and should be unbiased. So it's just to really ensure compliance and demonstrate accountability. Our firm does a lot of work with immigration firms. There's a lot of cash coming in and out. There should be a documented procedure for handling that cash. That money's coming in, it's coming in as cash. There should be a procedure where multiple people have to sign off so that cash in front of somebody's hands can't be stolen, especially in a case of that would be heartbreaking. So it's important to have workflows in place. If you're not sure, you can always hire an outside firm. That's the work we do where you can let us look at your workflow processes and give you ideas of some policies and procedures to put in place to ensure that you keep compliance in your books. You want to keep detailed, organized records. Nobody can be perfect, but you want to make sure you document if something goes wrong or if something gets put in the wrong account. Document, organize your records of everything— deposits, checks, the purposes. Use consistent procedures. So you don't want a million different ones. You want one fine-tuned workflow. And then make sure you have backups of your data. Train your staff thoroughly on exactly the process you want. Create great SOPs for that, and then cover the fundamentals. Sometimes you have people doing just pieces of the work of handling the work and the money that's along the way. It's nice for them to understand big picture, so if one part of the workflow breaks down, it can ruin the rest of the workflow. Cover the fundamentals. You have hands-on procedures and ongoing updates overseeing the work that's being done. You want to foster open communications for a compliance culture in your firm. So I hope this was helpful. It's a broad overview. There's tons of videos and articles inside the blog here that can help you with all of these things, but hopefully the little map will help you. And if you have any questions or comments, please feel free to reach out. And until next month, we'll see you then. Bye now.
