The Trust Account Report You Probably Aren’t Doing (that You Absolutely Need To)

One of the most difficult yet critical tasks that lawyers have to deal with is reconciling all of our various ledgers. Unlike other businesses, we can’t just compare our bank balance to our check register and track down checks and deposits that have not yet cleared.

Lawyers must also keep individual client ledgers for trust accounts. Many states require lawyers to reconcile each of those client ledgers and with their bank balance and (of course completely balanced) check register. This is called three-way reconciliation.

How to Do a Three-Way Reconciliation

In most cases, lawyers do three-way reconciliations with a clunky combination of manual tools. Massachusetts, which requires three-way reconciliation, has a manual form you can use. There are three components:

1. Reconcile your bank statement with your general ledger, subtracting checks and adding deposits that haven’t cleared as of the date of your statement, and put that number on the three-way reconciliation worksheet
2. Add up all your client ledgers up through the date of your bank statement and put that number on the three-way reconciliation worksheet.
3. Put your general ledger balance on the three-way reconciliation worksheet. When you’re done with that, all three numbers should match.

The problem with this manual approach, of course, is that it is cumbersome and there is a pretty high chance of error.

A better, more reliable option is to use software that has three-way reconciliation baked in. This makes it much more simple to do your monthly three-way reconciliation, especially if you have a lot of client ledgers. It takes the place of all of that manual report-shuffling and eliminates the possibility of manual error creeping in.

Here is how to do a three-way reconciliation with CosmoLex, which is practice-management software built for lawyers that includes a full accounting solution with three-way reconciliation.

Like most practice management software, CosmoLex will let you generate a list of all your open matters, complete with trust account details. These are your client ledgers.

And you are, hopefully, familiar with what your book-balance report typically looks like in whatever software you are currently using. In Cosmolex, it looks like this.

Without a three-way reconciliation report, you would need to manually move those reports around, keep your bank statement handy, and hope for the best. In Cosmolex, you just select your trust account, pick the date of the bank statement you’d like to balance your account against, choose a sort method, and then generate the three-way reconciliation report in one click. You will end up with a report that looks like this:

Three Way Reconciliation Report

No manual worksheet, far greater level of detail, and far less chance of error.

Which States Require Three-Way Reconciliation?

State	Reconciliation Required?	Language from or Reference to Rule Requiring Reconciliation
Alabama	Yes	Rule 1.15(e)9 of the Alabama Rules of Professional Conduct requires monthly trial balances and quarterly reconciliations of trust accounts to be kept on file for six years after termination of representation.
Arizona	Yes	Arizona Supreme Court Rule 43(b)(2)(C) requires “a monthly three-way reconciliation of the client ledgers, trust account general ledger or register, and the trust account bank statement.”
Illinois	Yes	Rule 1.15(a)7 of the Illinois Rules of Professional Conduct requires reconciliation reports on at least a quarterly basis.
Iowa	Yes	Iowa Court Rule 45.2(3) address 3-way reconciliation requirements.
Massachusetts	Yes	Massachusetts Rule of Professional Conduct 1.15(f) requires three-way reconciliation
Missouri	Yes	Missouri Supreme Court Rule 4-1.15(a)(7) address 3-way reconciliation requirements.
New Jersey	Yes	Rule 1:21-6(H), called the New Jersey Recordkeeping Rule, requires three-way reconciliation.
South Carolina	Yes	Rule 417, SCACR (Financial Recordkeeping) requires monthly reconciliations, and records should be kept for six years after termination of the relationship with the client.
Alaska	No	N/A
Arkansas	No	N/A
California	Yes	The Board of Governors of the California State Bar have promulgated standards pursuant to Rule 4-100 of the Rules of Professional Conduct that require that attorneys reconcile the written ledger for each client, the bank journal, and all bank statements.
Colorado	No	N/A
Connecticut	Yes	Connecticut’s Statewide Grievance Committee randomly selects attorney accounts for inspection and audit and, during the audit, will perform a three-way reconciliation. Connecticut explains how to do a three-way reconciliation here.
Delaware	No	N/A
Florida	Yes	Rule 5-1.2(d) of the Rules Regulating the Florida Bar requires monthly reconciliation between bank balances, general ledgers, and individual trust ledgers.
Georgia	No	N/A
Hawaii	Yes	Rule 4(c)(8) of the Rules Governing Trust Accounting requires “copies of all monthly trust account reconciliations and all records showing, at least quarterly, a listing of all clients for whom the lawyer holds money in any client trust account, with each client’s related balance, the grand total of which equals the reconciled trust account balance on the bank statement covering the same period.”
Idaho	No	N/A
Indiana	No	N/A
Kansas	No	N/A
Kentucky	No	N/A
Louisiana	Yes	Rule 1.15(f) of the Louisiana Rules of Professional Conduct states “[a] lawyer shall subject all client trust accounts to a reconciliation process at least quarterly, and shall maintain records of the reconciliation as mandated by this rule.”
Maine	No	N/A
Maryland	Yes	The Maryland Procedural Rules – Attorney Trust Accounts, Rule 16-606.1(b) requires monthly reconciliations. “An attorney shall cause to be created a monthly reconciliation of all attorney trust account records, client matter records, records of funds of the attorney held in an attorney trust account as permitted by Rule 16-607 b, and the adjusted month-end financial institution statement balance. The adjusted month-end financial institution statement balance is computed by adding subsequent deposits to and subtracting subsequent disbursements from the financial institution’s month-end statement balance.”
Michigan	No	N/A
Minnesota	No	N/A
Mississippi	Yes	Although Mississippi’s Rules of Professional Conduct do not explicitly state that three-way reconciliation is necessary, the state bar association provides guidance stating that such a reconciliation is required.
Montana	Yes	Montana Supreme Court Rules on Trust Account Maintenance and Audit Requirements Rule 5(C) requires three-way reconciliation
Nebraska	No	N/A
Nevada	No	N/A
New Hampshire	Yes	Rule 50(B) of the Rules of the Supreme Court of New Hampshire require three-way reconciliation.
New Mexico	Yes	Rule 17-204(A)(7) of the New Mexico Annotated Rules requires “written reconciliations made at least quarterly of the checkbook balance, the bank statement balance, and the client trust ledger sheet balances.”
New York	No	N/A
North Carolina	Yes	North Carolina Rule of Professional Conduct Rule 1.15-3(d) requires quarterly three-way reconciliation.
North Dakota	No	N/A
Ohio	Yes	Rule 1.15(a) of the Ohio Rules of Professional Conduct requires monthly three-way reconciliation.
Oklahoma	No	N/A
Oregon	No	N/A
Pennsylvania	Yes	Rule 1.15(c)(4) of the Pennsylvania Rules of Professional Conduct requires monthly three-way reconciliation.
Rhode Island	No	N/A
South Dakota	No	N/A
Tennessee	Yes	Formal Ethics Opinion 89-F-121 requires three-way reconciliation.
Texas	No	N/A
Utah	No	N/A
Vermont	Yes	Although not explicitly stated in Rule 1.15 of the Vermont Rules of Professional Responsibility The Vermont Professional Responsibility Program advises that three-way reconciliation is required monthly.
Virginia	Yes	Rule 1.15(f) (4)-(5) of the Virginia Rules of Professional Conduct requires quarterly three-way reconciliation.
Washington	Yes	Rule 1.15(h)(6) of the Washington Rules of Professional Conduct requires three-way reconciliation “as often as bank statements are generated or at least quarterly.”
West Virginia	No	N/A
Wisconsin	Yes	Rule 1.15(f)(1)(g) of the Wisconsin Rules of Professional Conduct requires three-way on a reconciliation “on a regular and periodic basis not less frequently than every 30 days.”
Wyoming	Yes	Rule 1.15(g)(3) of The Wyoming Rules of Professional conduct requires three-way reconciliation at least quarterly.

Featured image: “Business and financial graph and figure report on desk in the office” from Shutterstock.

The Trust Account Report You Probably Aren’t Doing (that You Absolutely Need To) was originally published on Lawyerist.com.

Source: https://lawyerist.com/98308/the-trust-account-report-you-probably-arent-doing-that-you-absolutely-need-to/