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We Are Reconciled: IOLTA acCounts

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Last week, I wrote about the importance of maintaining client contact and of maintaining order surrounding client files, and your docket. As I said then, and as remains true now, this is a topic of primary concern for our clients. Another common issue that we encounter (and it’s at least in the top three of queries) respects IOLTA accounting, generally. Very generally. In fact, the question we most often receive with respect to IOLTA accounting is “What is IOLTA accounting (all about)”?

Of course, this seems like a rather simple question, one that every attorney should know, right? Why can’t these folks recite to me what an IOLTA account is and means, by rote, off the tops of their heads, especially after having studied for the MPRE, any number of years ago? Well, consideration of the sources for our clients explains away the why behind our question about the question. Most of our clients come straight out of law school to start their own firm. Most of the rest of our clients are leaving a small firm, or large firm, to start their own law firms. The former never really learned about IOLTA accounting in law school (despite the best intentions of the faceless panel that produces the MPRE examination); the latter never really needed to know anything about IOLTA accounting, because another department within the firm took care of all of that.

The most immediate need, then, for our clients, is the provision of general information about IOLTA accounting, plus an array of resources to access, for more information. Since we get questions respecting IOLTA accounting so often, we have developed a templated email response for those queries; but, we have not made the information included in that email generally available, online; that is the purpose of this blog post, to change that, to make that information more generally available.

The “IOLTA” acronym of which we speak stands for “Interest on Lawyers’ Trust Accounts”. The very basic nature of an IOLTA account is that it is, in essence, an escrow account, for the deposit of unearned client funds, interest accruing to charity, ultimately. That’s fairly well-known, if not often well-articulated. Then there’s “three-way reconciliation”, which concept (ultimately merely a regular check on the balance of your accounts) causes much consternation. So, What is three-way reconciliation? Well, it “requires lawyers to keep records of reconciliation (balancing) of the client ledgers, bank charges ledger, check register and bank statements. The ‘three-way’ reconciliation requires the lawyer to add all of the individual client ledgers and the ledger for bank charges and compare the total of the ledgers to the balance in the check register. Both amounts should be the same. If they are not, the basic records (the bank statements, the client ledgers, the bank charges ledger and the check register) need to be checked for mistakes and corrected. When both amounts are the same the lawyer goes on to reconcile this amount against the bank statement in the usual manner that any checkbook would be balanced”. Just came up with that off the top of my head. What? No, not really. I can’t keep it straight enough to explain three-way reconciliation the same way twice. But, that’s why we have the internet for: so we don’t have to memorize anything ever again–so we don’t have to think, even. The above statement is taken from Dan Crane’s excellent 2003 article on IOLTA accounting “Records for Other People’s Money”. (I really should bring that description around with me on a note card.)

And this underscores my point. There are plenty of IOLTA resources out there. It’s a matter of accessing those resources. The best thing that you can do with respect to IOLTA accounting is to access the available information, and to learn as much as you can. Then, create a system for managing your IOLTA accounting, and follow, in addition to the ethical rules, your own, internal rules, which should include regular three-way reconciliation. If you went to law school because you hated math, like me, hire an accountant to help you; just make certain that you understand the process yourself, and that you oversee everything your accountant does, to vet his process for errors. The best time to learn and to create your system is when you are establishing your law firm. If that is the position you find yourself in, create your processes now, before you get busy; otherwise, you’ll never get to it, and your ad hoc establishment will be bound to have holes. We’ll proceed here as follows: first, we’ll talk about available resources; second, we’ll discuss, in a limited way, the establishment of process.

As with any ethical questions for Massachusetts attorneys, your number one stopping point is the Massachusetts Rules of Professional Conduct. Rule 1.15 covers trust accounting, including IOLTA accounting, specifically, in section (g). While it may seem obvious, even to non-attorneys, that the first place to look should be the rules of professional conduct, we still receive questions that are explicitly answered in the rules; so, it is clear that not everyone is taking a first glance. As a supplement to the rules, review, additionally, the articles that the Board of Bar Overseers makes available at its articles archive website. If you sort those articles by category, you’ll find no less than six pieces addressing trust accounting. Another primary source for information is the Massachusetts Interest on Lawyers’ Trust Accounts website. From the homepage, you can find out more about the Massachusetts IOLTA program, contact the IOLTA Committee, see where the interest earned goes and find the list of approved IOLTA depositories. If you click on the “For Attorneys” tab, you can review a comprehensive FAQ section; from this tab, you can also access the prevailing version of the IOLTA Guidelines, as well as the useful long-form booklet, “Managing Clients’ Funds and Avoiding Ethical Problems”, which document includes samples of ledgers and template forms. We also make IOLTA resources available through our LOMAP Lending Library; four titles, in particular: “The ABA Guide to Lawyer Trust Accounts” (ABA, 1996), “Client Trust Accounts” (MCLE, 2007), “Managing Client Trust Accounts: Rules, Regulations and Common Sense” (Washington State Bar Association, 2003) and “Maintaining a Trust Account Using Quickbooks” (Computer Technology Services, Inc., 2004). In addition to the books availa
ble through our lending library, we also make available to interested parties two standalone documents: LOMAP Director Rodney Dowell’s “Three-Way Reconciliation of IOLTA Accounts in Quickbooks 2007 Simple Start Edition” and James Bolan’s “Uh Oh!! IOLTA Accounts and Escrow Accounts”. Both of those documents may be accessed at this website. Finally, there is an excellent program regularly put on by the MCLE, entitled, “How to Make Money and Stay Out of Trouble”, which is a must-attend event for attorneys seeking to tighten the screws on their trust accounting, or to institute appropriate trust accounting protocols. Check the MCLE website, or contact the good folks over there, for upcoming dates and times.

Much of the issue of the set-up and maintenance of IOLTA and trust accounts is addressed in the material resources relayed above, most especially those from the Massachusetts IOLTA Committee. Keep in mind, though, that, in 2010, you can do much more electronic recordkeeping and record generation than you could even five years ago; and, this general progression has come to include within its reach an applied ease to trust accounting. Account maintenance and records reporting can be accomplished through general accounting programs fitted to an attorney’s purposes, or through accounting software built for attorneys. References above have been made to resources available for the conversion of Quickbooks, a general accounting software program, to an IOLTA accounting system, on a level. Law practice management software systems, built for attorneys (options we have addressed previously at the LOMAP blog, here) generally have more readily accessible (i.e.–requiring of less fine-tuning, working around and out) trust accounting programs, which are built into their general financial management tools, with financial management platforms being add-ons, at additional cost, to the base package for these sorts of holistic practice caretaking systems. Of course, there are standalone, attorney-centric accounting programs as well, if you don’t have, don’t want, or don’t want to convert to, a full-fledged practice management program; some of those options are outlined within our posting covering practice management system choices, as well. In the modern world, much of your IOLTA account management and recordkeeping will be done electronically. Determine what you are required to do by the rules, and create an electronic system that works for you, using some of the tools outlined herein, or some others, that you may find more valuable.

In addition to the above, I will leave you with a few simple tips that will end up saving you much trouble in the long run: (1) deposit a nominal amount of your own money into your IOLTA account in order to cover unexpected bank charges; (2) use distinctly different colored checks for your operating account and for your IOLTA account, in order to help you to differentiate between the two; and (3) although the rules require bimonthly reconciliations, you should reconcile your accounts every month–consider that the longer you wait between reconciliations, the larger space of time and the more information you are left to comb through, should an error be detected.

Now, let’s all get out there and organize our IOLTA accounting. Remember, there’s no “I” in IOLTA . . . Oh, wait . . . that’s the wrong speech . . .

. . .


CATEGORIES: Client Relations | Law Firm Management | Law Practice Startup | Planning | Risk Management | Technology
TAGS: iolta

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