Which IOLTA mistakes are you making that could put your law license at risk?

This month on the Skepsis blog, we’re focusing on trust accounting.

Asking an attorney to properly handle and account for IOLTA trust funds is like asking my 10-year-old to drive to the store. Sure, she’s studious, and book smart, and can take and pass a test – but she knows nothing about actually driving. I’m setting her up for failure if I just hand her the keys and tell her to get going.

And yet, that’s exactly what our state bars require us to do each and every day to maintain our privilege to practice law. We had a few classes in law school; we took an ethics portion of the bar exam; and we have the written rules of the road in the RPCs. But how do we actually drive that trust account?

At Skepsis, we’ve seen just about every mistake in the book, and the good news is there are some common themes. Why’s that good news? Because if you understand those common themes, you’ll be well on your way to steering clear of trust accounting trouble.

5. Entering IOLTA transfers as, well…. transfers.

When is a transfer between bank accounts not a transfer? When it’s a transfer into or out of IOLTA, of course. And yet, many attorneys (and frighteningly just as many professional bookkeepers and accountants) happily enter transfers on their books all day every day. A few weeks down the road, your IOLTA accounting is off by a few thousand. Years down the road, it can be off by tens or even hundreds of thousands of dollars.

What these attorneys and accountants don’t understand is that a transfer between IOLTA and operating is not a transfer. It’s two completely separate transactions, and it needs to be entered as such on your books. So, be careful about how you enter transfers between operating and IOLTA in your bookkeeping software, because recording a “transfer” is a classic trap for the unwary.

4. Sharing your bank login.

It is basic online security: no sharing login information. But all too frequently, attorneys will share their banking information with other attorneys, non-attorney staff, and their bookkeepers. This is a big no-no.

Why’s it so bad to share? First, some would argue that sharing banking login information is a violation of an attorney’s duties of both confidentiality and competency. Because there’s no point in putting a password on an account if the password gets distributed. Second, if your bank account allows transfers or withdrawals from trust, you’re arguably violating the RPCs requiring that only licensed attorneys handle trust funds. Third, from a practical standpoint, you don’t want the FBI to trace that offshore account that was embezzling funds from the firm back to you, just because your login was used to transfer all that money. In other words, the audit trail that individual logins provide is just as important as the security features.

Instead, any staff member that needs access to banking or other financial information must have their own login. Most banks will allow you to add extra logins to your online banking accounts for free. Others will charge a nominal monthly fee if that staff or bookkeeper login requires bill pay or any other access, beyond nust read-only. Individual online banking logins are typically simple and quick to set up, so there’s no excuse for sharing. This is one situation where sharing is NOT caring.

3. Failing to timely return client trust funds at the end of an engagement.

When you run a law firm, completing a project for a client isn’t as easy as a simple goodbye. Instead, as attorneys, we have ethical and insurance obligations we have to fulfill each time we close a matter. And one of the most important of those is returning client trust funds.

Returning client trust funds is so important that a disgruntled client can use failing to timely return funds as a basis for a bar complaint. We know, we’ve seen it happen.

And yet, most attorneys, when we take a peek at their books, have at least a few hundred dollars, if not several thousand, of “stale” trust account money just sitting there in their trust bank account. “Stale” money is any money that should have been returned to the client at least 30 days prior. In most cases, our diagnostics and cleanups find funds that are up to several years old!

One of the best ways to avoid this trust accounting mistake is with a formal matter closing procedure that staff and attorneys follow each and every time a case closes. And of course, that checklist should include a step where any client funds are returned. We’ve put one together and shared it here to help get you started.

Another important step to take is an easy one, and typically takes no more than three minutes each month. That is: When you receive your IOLTA 3-way reports each month, glance through the list of clients with funds in trust. You’ll find that clients with closed matters will catch your eye, and remind you that you’d better get those client funds back asap.

2. Failing to maintain required IOLTA backup documents.

If you haven’t done so recently, we recommend perusing RPC 1.15A and B. (You can find WA 1.15A here, and WA 1.15B here.) As you do, take note of the long list of backup documents we’re required to maintain, most of which is enumerated in 1.15B. Is your law firm keeping all that backup documentation? If they are, and if you were audited by the state bar, or grilled by a client, do you know how to dig it up quickly and easily? Or, would you have to go back to your bank to request some of it, and wait several agonizing weeks for the bank to respond?

Most attorneys don’t maintain the required backup documents. Which is a shame, because most of the electronic accounting software, including Xero and QBO, both allow you to attach backup documents directly to each and every transaction. That way, if a state bar or client were to inquire about that check you wrote out of IOLTA for $1,000, you’d simply pull up the transaction in your bookkeeping software, and BAM! There’s a copy of the check.

With almost infinite data storage at our fingertips, and simple tools to get critical backup documents in an electronic format, there’s no excuse these days for failing to maintain proper backup documentation for your IOLTA transactions. You don’t even have to scan it all in – just snap a quick photo with your phone. There’s even software that will help you snap the image and upload it all at once, saving huge time. However you do it, be sure to get your backup documentation saved in your books.

1. Skipping or short-cutting IOLTA 3-way reconciliations.

One of the first things we do here at Skepsis when considering working with a new client is ask to review their IOLTA 3-ways. More often than not, the response is a blank stare. Some attorneys are confident enough to ask what a 3-way is. It’s an extremely rare occasion when an attorney actually has done an IOLTA 3-way reconciliation.

And yet, this reconciliation is expressly required by the RPCs. See RPC 1.15A(h)(6). What’s more, it’s required “as often as bank statements are generated,” or at least quarterly. Well, most of our bank statements generate monthly, so that means we need to be completing our IOLTA 3-ways monthly, too.

We understand; reconciling can be complicated, especially when you need to go back several years to get caught up. This is one situation where investing in a professional accountant, experienced in trust accounting, can save you big-time in time, money, and headaches. And working with an accountant to get your 3-ways together doesn’t mean you’re stuck with them. Many law firm accountants, including Skepsis, will offer a clean-up to get you all caught up with your 3-ways, setting you up for success to do them yourself moving forward.

Whatever works best for you, we can’t emphasize enough: The number one trust accounting mistake is not doing IOLTA 3-way reconciliations each and every month. Don’t put your law license at risk. Get your 3-ways done every month.

We’re here to help.

Avoiding trust mistakes isn’t always easy. And avoiding that number one mistake can be time consuming. We know, because we do IOLTA 3-ways and fully RPC-compliant trust accounting for dozens of attorneys each and every month, freeing up attorney time to do what those attorneys do best: helping their clients.

Skepsis offers fully RPC-compliant trust accounting for attorneys. I founded Skepsis because, as an attorney myself, I found it extremely difficult to find bookkeepers and accountants who understood and could execute my own trust obligations under the RPCs. I interviewed dozens of professional bookkeepers and accountants for my own law firm, all of whom professed experience and even expertise in law firm trust accounting, only to discover that each and every one of them was making at least one of the top five mistakes above; and most were making all of them.

At Skepsis, our clients sleep better knowing their trust accounts are RPC-compliant. Book your IOLTA evaluation today to find out how your trust accounting measures up, and what you need to do to get your trust accounting fully RPC compliant.