The only source of truth as to what is in your Trust account is the Trust account – at the bank!  The most common mistakes we find every month, relate to deposits or checks in the Trust that someone forgot to enter into the PMS.  Not only does this make the trust account in total wrong in your PMS, but on an individual level as well.

If you forget to enter a deposit into your PMS, then your client has funds that are not showing as retainer.  When it’s time to run bills, this client will be passed over, because you will think they do not have funds to pay.  This reduces earned income to your firm and affects cash flow.

This will cause your PMS to show that your client has more funds then they actually do. We have seen many times, where a client is refunded the “balance of the retainer”, only to then discover that a check out to a 3rd party had not been recorded, and the client has been refunded more than they are actually owed.  Not a good situation.

The IOLTA account should be set up so that any wire fees and bank charges for the IOLTA, hit the Operating account instead of being deducted from the Trust account.  If bank fees are pulled from IOLTA, client’s trust funds are usually being used to cover those fees.  We also see this being booked incorrectly as the company’s “Bank Fee Expense”, which then throws your 3-way reconciliation out of balance.  These fees still need to be booked against the IOLTA Liability account, which most accountants do not understand.

IOLTA rules are very specific about co-mingling.  Once fees have been earned, they need to be moved out of Trust.  Trust cannot be used as a “savings account” of firm funds.  They can only be used for client funds of current clients.

Lingering balances is one of the items bar audits will be looking for. Unearned balances need to be refunded if work for the client is complete.  Many states have escheat laws in place that require unclaimed funds to be sent to the state on the client’s behalf. 

We often see inexperienced accountants booking the interest earned in the IOLTA account as “Interest Income” to the company and booking the payment of interest out to the state as an “Interest Expense” of the firm. These are not your funds and should not be booked as operational transactions of your business. Correct handling is to book both deposit and payment interest to the IOLTA Liability account. Inaccurate accounting of this interest is often a reason IOLTA accounts do not reconcile.

We’ve seen firms who don’t even have checks for their Trust account, so they transfer the money from Trust to Operating, and then write the check from the Operating account.  That is a huge no-no, and you would definitely be looking at a sanction if caught doing that!  Trust funds can only be moved from Trust to Operating if earned.  Refunds and payments to third parties MUST happen directly from the Trust account.

A typical scenario we see is payroll is due before billing is done, so a firm will move a big lump sum to Operating of “estimated billings”, and then true it up when billings are completed.  This would not pass audit.  Proper process is to (1) issue the invoice, (2) pay the invoice using Trust funds in the PMS, and then (3) transfer earned funds to Operating. 

Even the most meticulous office staff makes mistakes. We perform a three-way IOLTA reconciliation every month on every client. Even our very best firms have one or more mistakes every single month. Very often, the mistakes we find are where the firm owes themselves money! They book the payment in the practice management system, but never transfer the funds at the bank. If they only relied on what their PMS said, they would believe they’d been paid.  It’s only through a reconciliation to the bank, that these mistakes are discovered.