5 Key Points to Successful Trust Account Management

This is a guest post by Paul Garibian, president of Nota.

IOLTA accounts can be complex. The mechanics of receiving and holding client funds require consistent oversight and a well-defined process for proper oversight. Well-optimized processes and controls can help reduce risk and conserve firm resources. 

Unfortunately, IOLTA complexity is frequently correlated with the busier times for firm business — when your firm is attending to client matters is when your process for IOLTA management needs to perform at its best. 

Here are five key areas that are critical to building efficient processes and controls.

1. Firm efficiency

You and your firm’s attorneys are busy. Trust accounting is critical to get right, but it is not revenue-generating. Optimizing firm efficiency involves finding balance between specialization, accountability, and oversight in your trust accounting process. 

Specialization

Maintaining a centralized trust accounting process provides efficiency in the form of role specialization. The benefits of specialization can often be achieved with the addition of just one more person, either full-time or part-time, assigned to IOLTA reconciliation. Specialization allows you and your team to invest time and training on your tools for your banking, client matter management and accounting software, as well as allowing a thorough understanding of the reconciliation process.

Accountability  

It is important to assign accountability for activities and outcomes in your trust accounting process. A best practice here is to minimize shared tasks or actions, assign one name for one task and a process for assigning back-up or coverage for when someone is out of the office. But as solo practitioners know, accountability may well reside with just one person — you. Regardless of your firm’s size, you can always benefit from documenting a well-defined process. A written process, or control, is a pragmatic way to hold you and your team accountable. This will also serve you well if you experience turnover in any key roles.

Oversight 

In addition to defining roles and outcomes, it is necessary to define proper segregation of duties. The simplest framework to apply is to designate a “Preparer” and an “Approver” for management of your 3-way reconciliation. It is also important to review your toolset across banking, client matter management, and accounting software. Look to configure your software and platforms to mirror this “Preparer” and “Approver” framework through proper management of user entitlements in each tool. Wherever possible, apply the principle of “least privilege” when granting system access to users so that each individual has the minimum level of access required to perform his or her job functions. Your system administrator for each tool should be removed from responsibility for the 3-way reconciliation process when possible. 

2. Report generation

A key component to any good trust account management system is the capability and discipline to generate reconciliation reports on a regular schedule. A good practice is to run your reconciliation reports monthly to align with your bank statement. This creates the best opportunity to stay on top of your trust account management and quickly catch any errors or oversight.

There are a few criteria to consider in evaluating your reporting capabilities: 

• Can I run a client ledger at any time to meet a client request?

• Can I run a client ledger at month-end to keep a consistent process?

• Does my client matter reporting capture proper notes to help reconcile at the transaction level?

• Does my reporting show how my client ledger ties out to my bank account?
  

3. Reconciliation process and troubleshooting

To perform a reconciliation, you should ensure your IOLTA bank balance equals the sum of your individual client ledgers and the amount in your trust ledger accounting book balance. If these three balances are not equal, then there is an error in one of your ledgers that needs to be addressed. You should evaluate how capable your trust accounting process is in identifying and resolving out-of-balance occurrences. 

Your bank account is the source of truth when troubleshooting. Consider whether your tools and processes allow you to review each transaction in and out of your IOLTA so that you can ensure that each transaction was recorded properly to the right client in the right amount in your client ledgers and in your trust ledger account book balance. When your balances do not reconcile it is most likely because a transaction was entered incorrectly, assigned to the wrong client or omitted from one of your ledgers.

While most errors occur when making entries into one of your ledgers, it is also very important to account for and track uncleared or unposted transactions to your IOLTA balance.  Common examples of these types of transactions are checks written and not yet cleared from your IOLTA account as well as pending deposits not yet posted to the account. Below are three tips for IOLTA account management:

1. Know your IOLTA/IOLA “total balance” which is typically the ending balance from the previous business day plus or minus any transactions that posted real-time on the current day. Remember this balance typically does not account for pending transactions, or transactions initiated but not yet presented or cleared with your bank. 
   

2. Know the “available balance” which is the amount that can be used for withdrawals, transfers, and payments net of pending transactions. 
   

3. Adjust your client ledger and trust ledger to reflect the pending transactions.
   

Finally, ensure your process includes record retention for each client matter — bank transactions and accounting should be in order and quickly accessible for review and ideally retained for 7 years or longer in accordance with your state’s requirements. 

4. Controls and safeguards

A process is only as good as its oversight.  Your trust account management process needs to include a mechanism to flag or notify those in an oversight capacity of an out-of-balance condition. Proper escalation and awareness allow small problems to be addressed in a timely manner before they become big ones. 

To determine if your trust account management process controls are sufficient and reliable, ask:

• Who has access to each tool and software in the management of my IOLTA/IOLA and in the performance of trust account reconciliation? 

• Have I segregated system administrator duties — those who can grant/remove access from the individuals performing reconciliation? 

• Does my banking software and trust accounting software allow for user management with different rights and privileges within the application?

• Does my software have an audit trail — a recording of which user performs each activity and when? 

5. Compliance

Best practice in trust account reconciliation calls for performing this process consistently on a periodic basis, typically monthly or quarterly as dictated by your state. The more frequently reconciliation is performed, the better, as it is always best to be prepared to respond to any client or auditor inquiries with up-to-date client ledgers that you are confident are reconciled with your bank balance and trust ledger.

While evaluating your trust account management process, ask yourself:

• Does my process support consistent, repeatable and verifiable 3-way reconciliation of my IOLTA/IOLA account, client ledger, and trust accounting balance? 

• Are my tools for banking and trust accounting software simple and easy to use to support proper integration across the three critical sources of truth in your bank statement, client ledger, and accounting balance? 
  

Trust account management is a big responsibility; your best bet is to invest in the right tools and processes that support efficiency, accountability and oversight. 

About Nota by M&T Bank

Trust accounting can be time-consuming. Every minute an attorney spends managing an IOLTA/IOLA account is a minute they can’t spend practicing law. At the same time, the protection and proper management of client funds is incredibly important. Mismanagement of client funds is a common reason why legal professionals face disciplinary action, potentially including disbarment. 

At Nota, we’re helping attorneys manage their IOLTA/IOLA accounts by closing the loop between the bank account and the client ledger. Our mission is to help attorneys feel more organized and at peace with trust accounting. The process is complex, but it doesn’t have to be.      

Book a no-obligation demo today and see how Nota can help you spend more time practicing law and less time managing your IOLTA/IOLA account.

1 Keep in mind, states’ rules governing IOLTA accounts differ with respect to who can access, manage, and transact upon such accounts, so you should consult your state’s specific rules for guidance.

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References to “IOLTA” or “Interest on Lawyers Trust Account” shall be interpreted to include “IOLA,” or “Interest on Lawyer Account,” and “IOTA,” or “Interest on Trust Account,” as applicable in a particular state.

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