Law firm bookkeeping: the document checklist

Client trust money — IOLTA in most US states, a client account elsewhere — is money the firm holds but does not own. It cannot be commingled with operating funds, cannot go negative for any individual client even if the account as a whole is positive, and must be reconciled three ways: bank statement, trust ledger, and the sum of individual client ledgers, every single month.

That three-way reconciliation is the deliverable. If you take on a law firm, be clear with yourself about whether you are prepared to own it.

Request every month

The trust documents are non-negotiable and non-deferrable.

• Trust / IOLTA bank statement, complete with all pages and cleared cheque images
• Operating account bank statements
• Individual client ledger detail from the practice management system
• Trust deposit records showing which client each deposit belongs to
• Trust disbursement records with client and purpose
• Retainer agreements for any new matters, showing the fee arrangement
• Invoices issued to clients, showing fees, costs advanced and trust applied
• Costs advanced on behalf of clients — filing fees, experts, court reporters, records
• Credit card statements
• Payroll reports, including any partner draws or guaranteed payments
• Referral fee arrangements paid or received
• Contingency case settlement statements, where applicable

Request quarterly or annually

• Monthly, without exception: the three-way trust reconciliation, documented and retained.
• Quarterly: partner draw and distribution summaries.
• Annually: unclaimed trust balances review and any escheatment obligation.
• Annually: malpractice insurance and bar compliance renewals.
• Annually: W-9s and 1099s for experts, contract attorneys and vendors.

Ask before you onboard

These are the questions that decide whether you have priced the engagement correctly. Ask them on the first call, not in month three.

• How many trust accounts, and in which jurisdictions?
• Which practice management system holds the client ledgers?
• Who currently performs the three-way reconciliation, and can I see the last one?
• Are there contingency matters, and how are costs advanced treated?
• Are retainers evergreen, flat fee, or true trust deposits?
• Has the trust account ever been out of balance? What happened?
• What are your state bar's specific trust accounting requirements?
• Who is responsible if there is a trust discrepancy — and is that in the engagement letter?

Traps that catch bookkeepers new to law firms

Bank fees hitting the trust account. Most jurisdictions require the firm to cover trust account fees from operating funds. A bank fee deducted from trust is an immediate, if small, commingling problem, and banks do it by default unless told otherwise.

Earned fees left sitting in trust. Once fees are earned and invoiced, they must be transferred out of trust promptly. Leaving them there is as much a violation as taking them too early.

Flat fees treated as trust money. Whether a flat fee is earned on receipt or must sit in trust until work is performed varies by jurisdiction and by how the fee agreement is worded. Read the agreement; do not assume.

Costs advanced booked as expenses. Filing fees and expert costs paid on a client's behalf and later recoverable are receivables, not firm expenses. Booking them as expenses understates both assets and profit.

Taking on the trust account without saying so. Be explicit in the engagement letter about whether the three-way reconciliation is in scope. If it is, do it every month without fail. If it is not, say so in writing and make sure the firm knows who is.