Law Firm Trust Accounting Pitfalls
An IOLTA/Trust account is an account that lawyers use to hold client's up front deposits, which are more commonly know in the industry as retainers, until the money is earned. It is at that time that the funds are transferred to the attorney's operating account to be applied to any open invoices.
The monies held in trust are not subject to the claims of the lawyer's creditors. Separation of clients’ funds and lawyer assets (operating funds) is critical so that the money in the account can never be used by the attorney only transferred when earned. This prohibits the lawyer from using it for their own benefit, or for the benefit of any other person, and it prescribes the usage for the account.
IOLTA stands for Interest on Lawyer Trust Account and IOLA stands for Interest on Lawyer Account and they are the same, with different names. Most states use the IOLTA name, except for New York, which has its own naming schemes, uses the IOLA.
Lawyers must follow strict accounting rules to protect client money and avoid trust accounting pitfalls.
Common Trust Accounting Mistakes:
The attorney fails to keep accurate records and documentation:
There are some IOLTA accounting errors that are easily corrected, and there are others that could be more complicated. For general errors, make sure you’re keeping accurate records and following the local bar association requirements for how to track your accounting. For more complicated errors, consult an accounting professional. The bottom line is that you want to maintain awareness around your IOLTA accounting so you can easily correct any mistakes.
The attorney commingles the funds:
It is not permitted to commingle or use IOLTA/trust funds for other purposes, such as operating expenses, outside investments, or personal expenses. You must account for all trust/IOLTA funds that pass through your hands. In order to do this, you need to track how you spend those funds and have a good understanding of the documentation that accompanies funds. It doesn't hurt to learn about the best practices for the day-to-day tasks of managing funds.
The attorney failed to consult a Trust Accounting expert:
The importance of a well-kept trust account should not be underestimated. The law is a self-regulated profession and a lot of the responsibility of tracking the income is borne by the attorney. Hiring the right bookkeeper is important for an attorney to manage their books with precision and accuracy. Tracking your trust balance can be done with a QuickBooks Online on access ledger system.
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