Five trust account mistakes auditors keep finding

What firms tell us after an audit

Before any firm goes live on Filebird, Lukas and his team check every trust balance. We also ask what the firm’s last trust audit raised. The same five issues come up again and again, whatever the firm’s size or practice area.

None of this is legal advice, and trust rules differ between jurisdictions. These are patterns. The fix for each one starts with your law society or state bar’s rules for your trust account (IOLTA in the US).

The pattern is much the same in Australia and the US, despite the differences in the rules. A firm with an IOLTA account in Ohio and a firm with a trust account in Victoria tend to trip over the same five things, because the routines around trust money fail in the same ways.

The five mistakes

1. Late reconciliations. The work was done, but weeks after the deadline, often because month end clashed with leave or a busy settlement period.

2. Reconciliations nobody signed. The bookkeeper reconciled correctly, but the responsible principal never reviewed and signed the report, so there is no evidence of supervision.

3. A client ledger in debit. Money was paid out for one client before their funds had cleared, which means another client’s money covered it, even if only for a day.

4. Unexplained differences carried forward. A small difference appears, nobody can explain it, and it rolls forward month after month until everyone stops seeing it.

5. Costs transferred too early. Money moved from trust to the office account to pay an invoice before the required notice or authority was in place.

None of these needs bad intent. Each one usually starts with a single busy week and becomes normal because nothing flags it. That is why the fix is a routine that checks for them every day, not a reminder once a year.

Most firms that receive one of these findings have also had a clean audit in the past. The routine worked while the same people were in the same roles, then someone left, went on leave or changed jobs, and nobody picked up the part of the routine they had been carrying in their head.

Why they keep happening

Each of these is a process problem, not a knowledge problem. The people involved usually know the rules. What fails is the routine around them: one person holds all the knowledge, the deadline lands in a busy week, or a payment is urgent and the check gets skipped.

The audit findings I hear about are rarely about someone not knowing a rule. They are about a routine that only worked when one person was in the office.

Nina Kovac, Bookkeeper, Northbank Law

Fixing the routine usually makes audits faster as well. When every month has a signed reconciliation and a short note on each exception, the auditor asks fewer questions and the firm spends less time answering them.

Growth makes it worse. A routine that works for one bookkeeper and two principals often breaks when the firm doubles in size, because more people can receive and pay money and fewer of them know the rules well.

What each one looks like in the records

Each mistake leaves a trace you can look for before the auditor does.

• Late reconciliations: the report is dated weeks after the month it covers, or some months have no report at all.

• Missing sign-off: reports exist, but there is no signature, date or name for the reviewing principal.

• A ledger in debit: a client ledger shows a negative balance, even for a single day, usually just after a payment.

• Carried-forward differences: the same small unexplained amount appears on several months’ reports.

• Early transfers: a transfer to the office account is dated before the invoice was issued or before the notice period ended.

A quarterly self-check against this list takes about an hour. Pick three months at random, pull the reports and look for each trace.

Use the results to fix the routine rather than the month. If a reconciliation was late because month end clashed with leave, the fix is a backup who can run it, not a reminder to try harder next time.

If you find a problem

If a check turns up one of these issues, deal with it straight away and write down what you did. Correct the records, restore any shortfall from the firm’s own funds if a client’s money was used, and note the cause and the fix.

Some issues must be reported to your regulator, sometimes within a short time. Whether a particular issue is reportable depends on your rules, so check with your law society or state bar, and get advice if you are unsure. Finding and fixing a problem yourself is almost always better than having an auditor find it.

Keep a record of every problem you find and fix, even the small ones. It shows an auditor that the firm checks its own work, and it gives you a history to look back on when the same issue appears again.

Building the routine

• Reconcile daily and sign monthly. Filebird runs three-way reconciliation every day, so month end becomes a review.

• Name a backup for the bookkeeper and for the signing principal, and check that the backup can actually do the job.

• Treat any unexplained difference as urgent, however small, and write down what you found.

• Check the client ledger balance and cleared funds before every trust payment.

• Write your jurisdiction’s transfer rules into your billing procedure, step by step.

I review everything we publish about trust accounting, but your rules are the ones that apply to you. If something is unclear, ask your law society or state bar before the audit, not after it.