Are You Ready for a Trust Account Audit?

It’s just a typical Tuesday morning when a letter from the state Supreme Court arrives and says, “The Office of Attorney Ethics conducts a program for random inspection of attorneys’ records to determine compliance with the recordkeeping provisions of the Rule of Professional Conduct 1.15.  Your firm has been randomly selected for a compliance audit under the program.”  The auditors will be reviewing the past 24 months of records including bank statements, reconciliations and 3-way match documents.  Are you prepared?

No one looks forward to a trust account audit, but if you are doing all of the following, you can rest easy that you’re in the clear.  And, in the event of an audit, you’ll be ready to provide everything necessary to make it as simple as it can be.

First, let’s talk about what to do on a routine basis:

  • Record all deposits or disbursements from client trust accounts
  • Maintain client ledgers, individually–even if using a single pooled trust account.
  • Every month:
      • Reconcile the trust bank register to the bank statement
      • Review all uncleared checks and contact recipients who have not cashed their checks
      • Produce a 3-way match document which clearly shows the bank statement matches the check register and the total of your individual trust ledgers

And, of course, the DO NOT’s:

  • Do not commingle trust account funds with firm funds
  • Do not use client funds for firm or personal reasons (misappropriation)
  • Do not overdraft individual client ledgers

Simplify Your Trust Audit Experience

What are some other ways you can check to see if you are audit ready? We’ve compiled a short list you can start implementing today.

  1. Start with a solid foundation

We talked about starting 2023 with a solid trust accounting foundation in our January blog. Click here for a refresher.

  1. Maintain a separate client trust ledger

Ethics rules require keeping an individual ledger for each client so specific funds can be identified. Make sure you have the ability to do this —if you are just starting out it could be a simple spreadsheet or accounting system such as QuickBooks. There are great practice management software packages available today to help you manage these funds and stay in ethical compliance.

  1. Include a trust summary on your invoices

This is simple, and your practice management system should have this feature. You have a duty to notify your clients how and when you used their funds and to keep detailed and accurate records. Below is a sample of what you should include on an invoice where client trust funds were used.

  1. Manage credit card payments and fees appropriately

If your credit card company allows for credit card fees for trust payments to be deducted from your operating account, you should always use this option. If not, you must keep a reserve in your IOLTA account to cover these fees and then properly record them when entering the deposit. You also need to move money from operating to trust to cover this withdraw of fees.

Side Note: This is the one exception to the rule regarding lawyers depositing their own funds into IOLTA accounts: It is acceptable for them to deposit a nominal amount of their own funds into the IOLTA account to cover the payment of bank fees, including credit card fees.

  1. Conduct three-way trust reconciliations monthly

A three-way reconciliation demonstrates that your IOLTA bank balance matches your trust checkbook balance and they both match the sum of all of the individual client ledger balances. Many accountants do not understand three-way reconciliations. That’s no excuse for your lack of understanding. You have fiduciary responsibilities, and you cannot delegate this responsibility.

  1. Manage flat fees proactively

Not all flat fees are created equal. This fee may be deposited in the trust account until earned or, upon full disclosure and client consent (in your fee agreement), may be treated as earned upon receipt and deposited in the operating account. This is a common practice for criminal cases. In some states, even litigation tasks billed as flat-fee tasks and clearly communicated in your fee agreement can be earned upon receipt. Check your individual state’s ethics rules.

Best practice tip: Upon receipt of the money, create a flat-fee invoice, apply the payment and provide the client with a copy of the invoice.

If your flat fee is for work that involves multiple steps, like bankruptcy filings, then it is better to deposit the flat fee into a client’s trust account and withdraw when reaching specific events or milestones — again, as outlined in your fee agreement.

We all know how important good trust practices are and intend to keep pristine records.  In the real world, though, things go wrong.  A client may use the wrong credit card link and deposit their trust funds into your operating account.  You may make a deposit at the bank and use the wrong deposit ticket or write a check from the wrong checkbook.  It’s important to establish checks and balances to identify when things go wrong and correct them in a timely fashion.  We have helped 100’s of firms implement fail-safe trust accounting procedures.

Need help with your trust accounting? CPN Legal’s team has 20+ experts ready to help. Contact Nicole Tedford at