July 2007
Keep Up with Your Trust Account and Keep Out of Trouble
by Cheryl M. Heuett
In July 2006, “Ask the Auditor” addressed what to expect during the random examination of a trust account. This column focuses on one of the most common and serious violations found during the random exam: failing to maintain complete records. This violation is very broad, because there are so many components to keeping complete records, and in order to be in compliance with RPC 1.15A and B, you must have all the components in place and in order.
The first thing an auditor checks in a random examination is whether all the money in the trust account can be allocated to clients. A lawyer’s inability to do that is a sign of poor record-keeping. In determining whether all trust account funds are properly allocated, the auditor reviews the bank statement, check register, client ledgers, and reconciliations.
Check register
RPC 1.15B(a)(1) requires a lawyer to keep a check register documenting each transaction that occurs in the trust account. The check register must be detailed enough that anyone looking at it would be able to understand all the transactions in it. Unfortunately, some lawyers simply note a check number and amount. The rule requires more information than that. Even if there were no rule, the best practice for maintaining any check register would be to include: the amount of the transaction, the client on whose behalf the funds were received or disbursed, the date the transaction occurred, the check or other reference number, the type of transaction (e.g., deposit, wire transfer), who the funds were paid to or from, and a running balance.
Client ledgers
In addition to a check register, RPC 1.15B(a)(2) requires lawyers to maintain client ledgers. Think of a client ledger as a check register that contains transactions for only one client. Client ledgers must contain the same information about the transaction as the check register and must also include a running balance.
If you are using some type of computerized record-keeping system, you will usually make only one entry into the check register. Your system will then also record the transaction onto the client ledger. If you are keeping your records in a manual system, you must make two entries for every transaction — one to your check register and one to your specific client ledger. For any correction you make to your trust account check register, you must also make an adjustment to that same entry in the client ledger. The WSBA auditors have conducted several examinations recently where the attorneys had no client ledgers and were not able to say for whom they were holding funds.
Reconciliations
Quite often in random examinations, auditors find that lawyers keep check registers and client ledgers but do not reconcile them to each other on a regular basis or, even worse, do not reconcile them at all. The reconciliations are part of keeping complete records and are necessary to ensure that any mistakes are caught. Every month you need to perform a reconciliation of (1) your check register to your bank statement and (2) your client ledgers to your reconciled check register.
Check register to bank statement
The reconciliation of the check register to the bank statement consists of comparing items on the bank statement to the items on your check register. If there are any differences, you need to determine why. Did the bank make a mistake? Did you forget to record a transaction? Sometimes when your reconciliation is off, it’s because the bank incorrectly keyed the amount of the check or deposit into the system. Or maybe the error occurred because you entered the amount of the transaction into your system incorrectly. You should make the adjustment to your check register or note the difference on your reconciliation report and have the bank correct any errors found.
Client ledgers to reconciled check register
After the bank statement and check register are reconciled, you then need to reconcile your client ledgers to the check register. Add together all the client ledger balances. Compare this number to the balance of your check register. These numbers should match if there are no mistakes. If the numbers do not match, you need to locate and correct any discrepancies. This reconciliation should be done the same day you perform your bank-statement reconciliation. That way, your reconciliation reports show how the bank statement, check register, and client ledgers all tie together. Remember that the total of all the client ledgers at any point in time should always match the balance of the trust-account check register.
Tips for good record-keeping
1. Record transactions in your register and client ledgers as they occur. This is especially important if you are using a manual record-keeping system or are doing after-the-fact bookkeeping in a computerized system. You will never remember as much about that transaction later as you know at the time you have the file open and are writing the check. Your register is much more likely to be complete if you enter the information about the transaction at the time you write the check or fill out the deposit slip.
2. Write client names and/or matter numbers on disbursement checks and deposit slips. In case something happens to you or your records, you will be able to obtain copies of the cancelled checks and deposit slips from the bank and reconstruct your account.
3. Recalculate the balance in the register and ledgers after each entry. You will always know the IOLTA and client ledger balances and will be less likely to overdraw your account.
4. Reconcile your accounts every month, even if there is little or no activity. If you don’t look at your bank statement every month, you are likely to miss unexpected bank fees, bank errors, or fraudulent activity on your account.
5. Have written proof that you reconcile your accounts and ledgers. If you use a manual system, you can use the form provided on the back of your bank statement for the check-register reconciliation. At the same time, make a list of your clients with their balances, total them, and attach that to your bank statement.
6. Don’t keep everything in your head. If you should die or become incapacitated, someone will need to step in and make sure all the funds in the trust account are disbursed appropriately. This will be nearly impossible if you have no records.
Correcting the violation
If a random examination of your records reveals you have failed to keep complete records, correcting that violation can be time-consuming and costly. If you are not keeping a check register, you need to create one. Sometimes it is necessary to order copies of checks and deposited items from the bank in order to recreate your check register and reconcile it to the bank statement.
If you have not been reconciling your bank statements, check register, and client ledgers, you must determine correct balances and begin reconciling on a regular basis. It sometimes takes months of staff time to go back through all transactions to make sure they have been posted to the correct client. In some instances, you may need to hire outside bookkeeping services to help. You may have funds in your account that you are never able to identify by client. These might even be funds that are due to you, but unless you keep good enough records to show entitlement to them, any unidentified funds in your trust account must be remitted to the State of Washington Department of Revenue Unclaimed Property Division.
If you are having problems getting your accounts to reconcile, or have questions about trust-account records, please feel free to contact the WSBA Audit Department by calling 800-945-WSBA (9722) or 206-443-WSBA (9722). The auditors will be glad to talk to you about any problems you have and can offer suggestions on how to find and correct discrepancies during the reconciliation process.
Cheryl Heuett is a WSBA auditor. She performs random examinations and educates attorneys about trust account rules and regulations.
