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The Importance of Internal Controls in Ensuring IOLTA/Trust Account Audit Compliance
July 7, 2023
Maintaining trust accounts is one of the most critical responsibilities of a law firm owner. An Interest on Lawyer Trust Account (IOLTA) is a protected account designed to safeguard client funds. It is required that these accounts maintain impeccable records of deposits and withdrawals of client funds. Failing to comply with the bookkeeping regulations set forth by the State Bar has serious consequences. Trust account errors are one of the most common forms of legal malpractice, leading to suspension or disbarment. In this blog, we will discuss the top five common mistakes in IOLTA/trust account audits and how to avoid them.
Mistake 1:
Failing to Reconcile Regularly The primary purpose of trust account audits is to identify discrepancies between a trust account’s recorded transactions and actual balances. Failure to reconcile regularly may lead to significant auditing issues. Reconciling should occur every month using bank statements provided by the financial institution.
How to Avoid This Mistake: Develop a reconciliation schedule, and stick to it. Maintain a detailed reconciliation record, noting any comments or discrepancies for each transaction.
Mistake 2:
Co-mingling client funds with Law Firm funds Co-mingling is the mixing of client funds with the law firm’s account for operational expenses and fees. Law Firm owners must ensure that “earned” fees for services rendered are separated from “unearned” funds belonging to clients.
How to Avoid This Mistake: Depositing client funds directly into a trust account and keeping business and operating expenses entirely separate.
Mistake 3:
Failing to reconcile online payment systems Online platforms like PayPal or credit card processing systems have become widely accepted means of transferring trust account funds. However, account reconciliation should not omit these accounts. Failure to do so may lead to significant discrepancies.
How to Avoid This Mistake: Allocate adequate resources to maintain thorough records, including all online payment systems.
Mistake 4:
Failure to Realize “Inactive” Accounts Count. Inactive accounts are those with no transactions over a specific period. These accounts may lack activity but must have equal attention during audits as active accounts.
How to Avoid This Mistake: Track the status of all accounts, examine inactive accounts, and maintain accurate data to avoid issues.
Mistake 5:
Misinterpretation of Trust Account Rules Trust account rules are detailed, and every state may adopt different protocols; thus, law firm owners must understand the specific requirements. Misinterpretation of guidelines may lead to inadequate recording and reporting of transactions and bring unwanted consequences.
How to Avoid This Mistake: Access and read the state’s trust account rules and participate in continuing legal education to keep abreast of updates.
Conclusion:
Maintaining accurate records, separating client funds from business finances, and staying current on regulations is the key to successful trust account management. As an attorney, maintaining accounts for clients’ funds requires a deep understanding of how crucial these accounts are; failure to keep impeccable records may lead to severe consequences. Avoid these common mistakes and maintain impeccable trust account management.
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