Category Archives: Client Trust Accounting
IOLTA Myths: There’s No Such Thing As “Cleared”
We’ve all been taught that we need to wait until funds “clear” to distribute them. How do I know when “clear”?
As attorneys, we take CLEs from time to time, and some of those have to be about ethics. So, to get our ethics credits, we often look for practical CLEs we can put to good use in the real world, like trust accounting CLEs. Now in those trust accounting CLEs, the presenter always – almost without fail – reminds us that we need to wait for funds to “clear” into our trust accounts before we’re allowed to take those funds back out.
Unfortunately, what most of those CLEs aren’t teaching us is that “cleared” funds are a myth.
What are “cleared” funds?
Understanding what “cleared” funds are – and aren’t – is critical to understanding why most attorneys’ concept of “cleared” funds is a myth. “Cleared” funds are simply money that is in the bank account and available for withdrawal. When funds aren’t available for withdrawal – for example, you just deposited them five minutes ago – they’re pending. Then, once they become available, they’re “cleared”. Most deposits “clear” within one business day.
Unfortunately, “cleared” does not mean that those funds are there to stay. “Cleared” does not mean that funds won’t get unilaterally and unexpectedly yanked back out of your bank account. It does not mean the funds are somehow settled and irrevocable. All it means is that the bank is willing to let you spend that money.
And that’s what makes both the myth and the legend about “cleared” funds: All that we’ve learned about banking and trust accounting implies that “cleared” funds are somehow safe and protected in our account, and they’re there to stay. They’re not.
Some funds really do “clear,” in the permanent sense.
Now that we know what “cleared” really means, let’s take a step back and see what funds, if any, really do “clear” into our accounts permanently. In other words, let’s first look at the kinds of deposits that can’t get yanked back without any warning, consent, or approval. Because luckily, there are a few.
Wire Transfers. Once a wire appears in your account, it’s there to stay. This is one reason savvy attorneys insist on wires for large trust deposits and for deposits of settlement funds. There’s no risk that your depositor will develop buyer’s remorse, yank the funds back out without warning, and leave your trust account with a negative balance while your bank reports you to the state bar.
Cash. Cash is another kind of deposit that is in your bank account to stay – or at least, it won’t be removed from your bank account without your knowledge or approval. Of course, cash deposits are at risk while they’re in transit, so many attorneys tend to stay away from them, despite cash being a great and otherwise secure medium for trust deposits. They’re also inconvenient for many clients.
Cashier’s Check. These are almost as good as cash. I say “almost,” because there is a small chance that a payor can cancel a cashier’s check in transit, before it’s deposited. But, once deposited into your trust account, the funds are safe and secure, and the payor can’t stop payment or cancel the cashier’s check to yank the funds back out.
What deposits are at risk, even after they “clear”?
As mentioned, some deposits are at risk of disappearing from your account without any warning or approval. When this happens, you may find your IOLTA balance negative, and your bank making a mandatory report to the state bar. Unfortunately, these are some of the most common payment methods that attorneys accept into their trust accounts.
Checks. Whether they’re personal checks or business checks, accepting checks as trust deposits does put your firm at some risk. Whether you wait three business days, two weeks, or a month after the check “clears” before distributing those trust funds back out, you can never guarantee the bank won’t yank those funds back out of your account without telling you. This can happen when the check is fraudulent, or simply when the payor gets buyer’s remorse and puts a stop payment on it. So, accepting trust payments via check always comes with some risk.
Credit Cards. You’ve probably disputed charges on your credit card, and you’ve probably gotten your money back pretty much every time. Well, when clients pay you with a credit card, they can dispute the charge, and they usually get their money back, too. And it doesn’t just happen with buyer’s remorse; scammers can use stolen credit cards to steal tens of thousands from your trust account if you’re not careful.
How Can I Keep My IOLTA and Trust Funds Safe?
We’ll be taking a look at this question in our next few posts. So, be sure to check back here (on our blog) regularly, and also be sure to sign up for our newsletter to make sure you don’t miss a post.
Reconciling Client Trust Accounts In Clio
Performing an ethics-compliant, three-way trust accounting reconciliation in Clio is easy when done correctly.
Step 1: Ensure Your Individual Clio Trust Balances Match Your Bank Statement
First, make sure you’ve received your bank statement for the month. Reconciling with Clio works best when you receive a paper or PDF bank statement, rather than a download of transaction listings. Using the actual bank statement, it is easier to compare balances.
Print a Trust Listing Report. In Clio, select the tab for Reports, then click Trust Listing. Settings for the report should be as follows:
- Uncheck “Show clients with zero balance”
- Select the button for “All Clients”
- Select Practice Area: All
- Select Date Range: Custom: Leave the start date blank, and set the end date as the date of your statement
- Output Format: CSV
- Click “Generate Report”
The report will automatically download, and you can typically find it in your downloads folder. Move it to your trust reconciliation file, and save it there. Now open it.
If you have more than one trust account, you’ll have to delete all the other trust accounts from this report, so that only the trust balances for the account you’re reconciling remain. If you don’t have more than one trust account, skip this paragraph. To do this, sort Column B (the Account column) A > Z. (Place your cursor in Column B; click the Data tab; and click the 
button.) Delete all lines in the spreadsheet that contain any account other than the one currently being reconciled. Do you agree with me that it would be nice if Clio’s report feature would let us select a certain account so we don’t have to do this deletion step? Please email them and let them know.
In Cell E1, enter the following formula: =SUM(D:D) Hit enter. The number Excel spits out in the cell should equal the Ending Balance on your bank statement. When it does, the first of your three reconciliations is complete.
Step 2: Ensure Your Bank Account Activity Report Matches Your Bank Statement.
Print a Bank Account Activity Report. In Clio, select the tab for Reports, then click Bank Account Activity. Prepare your report with the following settings:
- Trust Accounts: Select “Specific Account,” and choose the correct account
- Select Practice Area: All
- Select Date Range: Last Month (unless your bank statement doesn’t run with the calendar month, in which you’ll select “Custom” and enter the same dates as your bank statement)
- Check the box for “Include Opening Balance”
- Do not check the box for “Display Matter to Matter Transfer Transactions”
- Output Format: PDF
Click “Generate Report” to download it, move it to your reconciliations folder, and open it. Ensure that the opening balance matches the opening balance on your bank statement. Ensure the closing balance also matches your statement. Finally, check to ensure that all transactions showing on your bank statement appear on your report (which they should, if the opening and closing balances match).
Step 3: Ensure Your Bank Account Activity Report Balance Matches Your Trust Ledger Balance
If you’ve performed the two steps above and the ending balances match, then this step is already complete: compare the total balance on your Trust Ledger Report (which was calculated in Cell E1 in Step 1) with the ending balance in your Bank Account Activity Report. When these two balances match, your three-way reconciliation is complete.
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Skepsis would love to perform your monthly trust reconciliations for you, whether or not you’re using Clio. Please email email us at [email protected]. Gain more great insights by subscribing to our newsletter below.
Intro To Double Entry Trust Accounting For Attorneys
To exercise attorney competence in the management of client trust accounting, a basic understanding of the double entry accounting system is helpful. In a double entry accounting system, every transaction is entered into the company’s books twice: once as a credit in one account, and once as a debit in another account. If the debits and credits are entered correctly, they will equal one another, or balance out, at the end of each accounting period; if the debits and credits do not balance out, then there is an error somewhere in the accounting.
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