Early Detection of Erroneous Bookkeeping Entries In Trust Account Records: Part 2

Posted on Posted in Bookkeeping, For Law Firms

The key to appropriately managing a client trust account is having a system in place that will alert the attorney as soon as possible that a transaction may have been entered erroneously.  Several simple, monthly checks will help you discover errors quickly.  In Part 1 of this series, we considered the importance of ensuring that the total balance in the trust bank account always matches the total balance in the client trust liability account.  Here, we discuss why a credit balance in the Client Trust Liability account, or a debit balance in the Trust Bank Account, is a big red flag.

There’s no more effective way to attract a state bar audit than to have a negative balance in your client trust account.  Luckily, this is easy to protect against: ensure that all bookkeeping staff always check the bank account balance before making any withdrawal from the trust bank account.  Also, the only person with signing authority on the account should be the responsible attorney, so that the responsible attorney can double-check the account balance, and ensure available funds, before signing any checks issued from the trust bank account.[1]

Attorneys can help their bookkeeping staff to keep track of current daily trust account balances by ensuring that the firm’s accounting software is configured to automatically download bank transaction information each day.  These are typically called “Bank Feeds.”  Some attorneys are hesitant to provide bookkeepers with access to bank feeds, because they believe they will have to divulge their bank usernames and passwords; nothing could be farther from the truth!  The best systems, such as Xero, allow you to set up bank feeds in your bookkeeping software, and then simply grant access to your books (and the current balance information) to the bookkeeper as appropriate.  Other systems do not allow this customized access,[2] but most banks will allow you to set up read-only access to online banking, using separate login information, so that bookkeepers can access accounts but not touch any money in those accounts.  Then, your bookkeeper can set up bank feeds in the firm’s bookkeeping software using those special read-only login credentials.

[1] The ABA Model Rules for Client Trust Account Records, Rule 2(a), requires that an admitted attorney, or a person under the attorney’s direct supervision, may be an authorized signatory on a client trust account.

[2] QuickBooks desktop software is an example.

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