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Trust/IOLTA Accounting Audit

For those of you who use trust accounting, would you be adequately prepared to pass a surprise audit on your trust accounting records? If you have been audited recently, could you share your thoughts on the process and what you think is the best way to be adequately prepared for a trust account audit?


  • Adam LillyAdam Lilly Cumming, Georgia

    What do you mean by "pass"? That seems like it could encompass anything from best practices to not being disbarred.

  • via Email
    What I mean by "pass" is best practices such as having detailed ledgers for
    each client, having proper audit trails, and bank reconciliations and 3-way
    bank reconciliations that are correct.
  • I was just audited earlier this month. Since I was in court when he arrived, we made an appointment for the next week; I spent a good chunk of the intervening weekend making sure my books were in order.

    The 3-way reconciliation (mine is an Excel Spreadsheet) is the best method; I use Quickbooks and Practice Panther, which isn't great for trust accounting. The basic spreadsheet takes your individual client balances, and then your bank statement +/- outstanding transactions, which should match both your bank book (Quickbooks) and the client ledgers.

    I had some balancing issues, so I added to the reconciliation to show last month's balances, and the debits or credits for each client, which was very useful to find "stray" transactions. There were a few places my account just wouldn't balance, so I made "Accounting Adjustments" (these are for a few cents, never more than a dollar or two). (Note: I was an Accounting major, so this is fun for me...)

    However, the best advice is to keep on top of it by reconciling every month, and make your entries in your client ledgers contemporaneously.

  • via Email
    Thank you for your comments and advice!
  • The best way to be prepared for an audit is to properly maintain your books at all times and not have to 'prepare' for an audit, per se. My practice is focused on real estate (buyer/seller and lender) and guardianships, where I maintain at any one time literally dozens of accounts and sub accounts which contain other peoples' money. I've tried spreadsheets, quicken, then quickbooks, and ended up biting the bullet on a professional legal trust accounting software.

    The old-timers that taught me how to practice, did it with index cards but those days are gone (happily). Unless you're using something that's made to track money the way that lawyers are supposed to, you're probably not performing a proper 3-way reconciliation. It's not enough that you reconcile your account each month from the statement if you're not 100% sure (and able to show an auditor) that each clients' money adds up correctly to what it should, like the old index cards would.

    (Not meaning this to be a commercial, but I highly recommend CosmoLex).


  • via Email
    Thank you for your advice! I have some questions.
    What was the major problem with using Quickbooks for your law practice?
    Do you do most of the bookkeeping for your practice?
    Would you recommend outsourcing the bookkeeping function?

  • I am a one-man operation and do all the bookkeeping. Quickbooks/quicken don't let you (at least I never figured it out adequately) do a 3-way reconciliation to keep ledger cards for each client's money that are in the same bank account. I am afraid to outsource bookkeeping because I'm paranoid . I actually have some help around the office but nobody but me touches the banking.

  • via Email
    Do you find that Cosmolex has enough accounting capabilities to do the
    business accounting needs for your practice such as adjusting journal
    entries for depreciation, accounts payable/receivable, etc.?
    In other words, do you think Cosmolex has enough features to be the only
    accounting program needed for a law practice?
  • Absolutely. I have been using it for my business accounting for a while now. I don't have to worry about not being an accountant since it's pre-designed for lawyers. It also allows for time billing and invoicing, so it's one-stop shopping for my small practice. (looks like this became a commercial after all).

  • paulspitzpaulspitz Cincinnati, OH ✭✭

    You can do trust accounting in Quickbooks, but since QB isn't designed for law firms, incorporating trust accounting is kind of awkward. The Minnesota Bar Association has a pretty good guide for doing trust accounting in Quickbooks, and once you get the hang of it, it's pretty easy. That being said, it's still a workaround. The law practice management programs should have it hardwired. I use Clio, which has trust accounting baked in. The downside, of course, is that it doesn't provide accounting for my law firm as a whole, so I still have to use QB to track my revenue and expenses. I do have an account set up in QB for my trust account, and I track money flowing in and out at a treetop level. This serves two purposes. One, I can reconcile my account when the statements come in. Two, it serves as a quick eyeball check that I haven't made mistakes. I should be able to look at QB and see that the balance of the trust account is X. Then I can look at Clio and see that the balance is X. Then I can log into my online banking and verify that the balance is X there, too. If I don't have all three match, I know that I probably made a mistake.

  • via Email
    Thanks for your comments! I have some questions for you:

    Do you find that it is easy to sync Clio with Quickbooks so that with the
    two combined, it is able to cover more of your law practice accounting

    Also, after syncing Clio with QB, is the 3-way Bank Reconciliation easier
    to accomplish?
  • paulspitzpaulspitz Cincinnati, OH ✭✭

    If you can sync Clio with QB, I don't know anything about it.

  • I started using trustbooks.com approximately 6 months ago...I have left behind spreadsheets and reduced my reconciliations to 7 minutes per month for a high volume transactional practice.

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