The trust account reconciliation checklist

In most trust account cases that end badly, the money was still in the account. What was missing was the reconciliation that would have shown it.

A three-way reconciliation puts three numbers side by side as of one date: the trust ledger balance, the total of every individual client ledger, and the bank statement. All three have to agree. Two of the three proves nothing, because a schedule built by copying the bank total will always match it.

What each of the three numbers represents

The bank statement is the outside record, and it shows what cleared rather than what was written. Outstanding checks and deposits in transit sit between the statement and your books, which is why the reconciliation is done as of a stated date instead of an approximate one. The trust ledger is the firm's running record of every receipt, every disbursement, and every fee transfer. The client ledgers are the individual matter balances. When those three line up, you can show that the money in the bank equals the money owed to clients, matter by matter.

The comparison is only worth doing if the client ledgers were built independently. If the schedule total is entered as the trust ledger balance and then compared to itself, you have a report that agrees with itself every month while the problem it exists to catch sits untouched underneath.

The preparer and the reviewer are two different people

Whoever keeps the books should not be the only person who checks them. In a solo practice that usually means an outside bookkeeper, a contract accountant, or another attorney who reads the completed reconciliation each month. The review is more than a signature. The reviewer confirms that outstanding items are listed, that anything that did not tie carries a written explanation, and that every fee transfer has a basis in the file. Put the reviewer's name and the date on the reconciliation itself, because that line is the evidence that someone other than the preparer looked at it.

The order that keeps the work honest

Start with the bank statement and reconcile it to the trust ledger, clearing outstanding checks and deposits in transit one at a time. Then total the individual client ledgers and compare that total to the trust ledger. When the totals agree, spot check the matters that moved during the month: pull the deposit, the disbursement, or the fee transfer and confirm it is supported. When the totals disagree, look for the smallest unit of difference rather than the largest. A transaction posted to the wrong matter is far more common than a systemic failure, and it takes less time to find.

If the reconciliation is already behind, do not start with the current month. Work backward from the oldest unbalanced period and close one month at a time before moving forward. Reconstructing a year of trust activity in a single sitting is how firms introduce new errors and lose track of which corrections were approved. Bank statements from earlier periods are usually retrievable on request, sometimes for a fee, and a copy carrying the bank's own date is better evidence than a balance typed from memory. Once the backlog is closed, the monthly routine keeps it closed, and the record of having caught up is worth keeping in case the sequence is ever questioned.

When one client ledger will not tie

Do not adjust the client ledger to force agreement. That turns a bookkeeping problem into a records problem, and the adjustment is the first thing a bar auditor will ask about. Work backward through the matter instead. The usual causes are a disbursement posted to the wrong client, a fee transfer recorded on the trust ledger but not on the client ledger, a check written from the operating account against money held in trust, an uncleared item from an earlier period that nobody investigated, or a deposit credited to the wrong matter. Once you find it, correct it with a dated entry, note who approved the correction, and keep the explanation with that month's reconciliation.

What to keep, and how long to keep it

Keep the completed reconciliation with both names and dates, the bank statement it was built from, the trust ledger balance, the client ledger schedule, the list of outstanding items, and the written explanation for anything that did not tie. Trust record retention periods are set by your jurisdiction, and most states measure them in years rather than months, so assume the record will be requested long after the month it covers. A reconciliation that cannot be produced on request is treated much like one that was never prepared.

A reconciliation also says nothing on its own about whether the transactions behind it were proper. A ledger can balance and still contain a fee transfer taken too early or a disbursement that never had client authorization. That is why the monthly routine pairs the reconciliation with a short look at the largest and most unusual entries: new fee transfers, disbursements above a set amount, and anything that moved money into the operating account. Ten minutes spent reading those entries is what separates a firm that knows its trust account is in order from one that knows only that the numbers add up.

The patterns that show up in bar audits

• A reconciliation prepared and reviewed by the same person, with nothing on the page showing that anyone else looked at it.
• A client ledger schedule whose total is copied from the trust ledger balance, so the two always agree and neither one serves as an independent check.
• Outstanding checks that have been outstanding for more than a year and were never investigated, cleared, or explained.
• Fee transfers taken before the work was completed or before the client was billed, with no invoice or fee agreement behind them.
• Negative client ledger balances carried across several months without a written explanation or a correction.

Monthly reconciliation checklist

• Pull the bank statement for the closed month and list every uncleared item with its date and amount.
• Post interest and bank fees to the trust ledger, and confirm any earned portion was transferred to the operating account.
• Compare every trust account disbursement to its supporting invoice, fee agreement, or client authorization.
• Total the individual client ledgers and compare that total to the trust ledger balance.
• Check each client ledger that moved during the month for transactions posted to the wrong matter.
• Confirm no client ledger shows a negative balance, and resolve any that does before the month closes.
• Verify every fee transfer has an invoice behind it and that the amount transferred matches the invoice.
• List outstanding items older than 90 days and follow up on each one.
• Have someone other than the preparer review the reconciliation and sign it with the date.
• File the reconciliation, the bank statement, the ledger schedule, and any correction notes together.
• Log the review in whatever record your firm keeps for recurring controls, so the sequence of months is visible.
• Set next month's date before you leave the desk, and put it on the calendar of the person who reviews it.