Trust Accounting Pitfalls

Hi there, Linda Artesani, Artesani Accounting. This week's blog and accompanying video is Law Firm Trust Accounting Pitfalls. Where can an accountant or an attorney kind of trip themselves up and have their trust account come out of that, out of balance? So if you're not familiar with trust accounting, you may run across somebody who has an IOLTA account. And IOLTA stands for Interest on Lawyer Trust Accounts. So it's the money that's generated in a law firm bank account that goes to a special fund, and that's used to help poor people and people who can't afford legal counsel. So that money sweeps in and sweeps out. So it's really key and important to track that money so that you make sure that it actually does happen, that it comes in and out. I've seen it where a bank may forget to— they might give you the interest and forget to sweep it out. And it's really on you as the attorney Or the accountant that works for the attorney or the bookkeeper to let the attorney know that this money's there and they have to go and get in contact with the bank and say, hey, you forgot to sweep this money out. So it's important to note that if you're looking at a trust account, there's a separation between the monies that the law firm has and it's their money that they run for their overhead and other items. And then the money that's being held in trust for other people. So a retainer Is money that the attorney receives upfront before they've even worked on a file or a matter or case. So when you're looking at that from that perspective, that money gets put into IOLTA or the trust account. It doesn't mean it's their money yet. They're just holding it as a prepayment, basically. So lawyers have to follow strict accounting rules to protect the client money and to avoid these trust accounting pitfalls. So probably the number one pitfall that I find with working with attorneys, especially new clients, is that they don't track and accurately keep records of the money that's being held in the account. So it's not their money. And there's specific guidelines, general errors that you have to— there's rules around what you need to keep accurate records of. You have to keep records of the money coming in. You have to keep record of who paid you that money. You You have to keep record of any expenses paid out of that account. Some jurisdictions allow you to pay out of IOLTA if it's for the case or matter. And then also, you know, you have to make sure that if you get in a messy situation, that it's fixed and properly documented, because if it's not properly documented, if you do get audited, it can bring you a world of hurt. You want to make sure that this money is kept in a specific account separate from monies that are part of the law firm. Another place that I see attorneys get a little bit tripped up, and it's a definite pitfall, is when an attorney will commingle the funds. So you're never permitted to commingle IOLTA or trust funds for any other purposes in the law firm. So if you're running low on cash and you need to pay your payroll, you can't use that money. You have to find another source, another way to pay your employees or staff. It's just never allowed. And you have to have a good understanding of this, and you have to have good documentation that will accompany the funds as they come in and out. And each, each state has their own specific rules on the trust accounting and what they need to do. In the state of Florida, you have to have a copy of both sides of the check, and then you really have to document when you transfer that money into your account the whole flow of you've earned it and then you're applying the retainer. It's really super important to do that. The last pitfalls I'd like to discuss is when an attorney tries to do it themselves and they're really not familiar with trust accounting. Apparently it's not a topic that's high on the list in law school when they're learning how to be an attorney. So they try to do it themselves or they hire a person that's not really experienced in the industry, and then it becomes a giant mess. And it's not that they commingled or did any of the things wrong other than they didn't track it properly. They didn't file the proper workflows, they didn't have the proper documentation. And, you know, an audit can come randomly on you. You don't even have to have someone call and complain. It can be just a random audit, and you want to have all your ducks in a row so that your documents and documentation and your paperwork is perfect. All the money in the software, the reports will come out of the software, it will match that 3-way reconciliation that is critical in Working with attorneys. So hiring a proper bookkeeper or an accountant is paramount. You want to make sure you have somebody that understands exactly what's involved in doing this kind of work. And that's where you might want to give me a call. So a nice segue into that. But there's plenty of people out there. We have an amazing group of accountants and bookkeepers in our group, the Accountants Law Lab, that are those people. They're experts. They're continually striving to learn the industry and learn more about law firm accounting. You can call our firm. We do bookkeeping and accounting here. And if you are interested, please reach out. I have— we'll have a link to how you can contact me on my website through the blog post. And on that note, please hit the subscribe button if you want to continue to hear these videos and learn more from me about legal accounting. And I hope you all have a wonderful, wonderful week. Bye now.