Handling Discrepancies in Law Firm Reconciliation
- Irvine Bookkeeping
- 1 day ago
- 6 min read
As an attorney or administrator of a law company, you know that keeping the books in order is just as important as winning cases. Making sure that your books are correct and follow the rules is one of the most important parts of law firm accounting. This is especially true for trust accounts like IOLTA. How do you handle trust account inconsistencies found during the reconciliation process, though? If you don't fix these mistakes the right way, they can cause problems, raise worries about compliance, and even lead to punishments. This piece will help you handle law firm reconciliation issues clearly and with confidence. It will do this by giving you useful tips, examples, and advice that you can use to keep your firm's finances in order. This guide is meant to make IOLTA reconciliation and bookkeeping for law firms easy to understand and do, no matter if you work alone or for a big company.
What Are Discrepancies in Law Firm Reconciliation?
Comparing your law firm's financial records (like bank bills) with your own books to make sure they match is called reconciliation. This is often done by matching up trust accounts and operating accounts in law companies, like Interest on Lawyers Trust Accounts (IOLTA). When the numbers don't match up, like when the amount in your IOLTA account doesn't match up with your books, this is called a trust account discrepancy.
Discrepancies can stem from various sources:
Data entry errors (e.g., mistyping a transaction amount)
Missing transactions (e.g., a client payment not recorded)
Bank fees or interest not accounted for
Timing differences (e.g., checks not yet cleared)
Fraud or unauthorized withdrawals (rare but serious)
IOLTA reconciliation is very important for law companies because these accounts hold client money and bad management can be against state bar rules. Let's look at how to successfully find and fix these problems.
Why Do Trust Account Discrepancies Matter for Law Firms?
Question: Why can’t I just ignore small discrepancies in my trust account?
Ignoring even small problems with a trust account can lead to big problems. There are strict moral and legal rules that guide IOLTA accounts, and mistakes can cause:
Compliance Violations: State law associations need IOLTA reconciliation to be done correctly. Mistakes could lead to reports or punishments.
Client Trust Issues: If you mess up with client money, it can hurt their trust in you and your image.
Financial Losses: Differences that aren't resolved could be signs of bigger problems, like fraud or costs that weren't recorded.
For instance, let's say you find a $500 mistake in your IOLTA account. It might not seem important, but it could mean that a client refund or bank fee wasn't registered. If you don't fix these mistakes, they will add up and make law firm settlement harder and riskier.
Common Causes of Discrepancies in Law Firm Reconciliation
Understanding the root causes of trust account discrepancies is the first step to resolving them. Here are the most common culprits:
Cause | Description |
Data Entry Errors | Mistyping amounts, duplicating transactions, or entering incorrect dates. |
Unrecorded Transactions | Missing client payments, refunds, or bank fees in your bookkeeping software. |
Timing Differences | Checks or deposits not yet cleared by the bank during reconciliation. |
Bank Errors | Rare, but banks may misprocess transactions or apply incorrect fees. |
Software Sync Issues | Accounting software failing to sync properly with bank feeds. |
Fraud or Theft | Unauthorized withdrawals or misappropriation of funds (a worst-case scenario). |
For example, a law company in Irvine, California, found a $1,200 mistake in their IOLTA reconciliation. They looked into it and found that a client's retainer payment was entered twice in QuickBooks because of a mistake made when entering it by hand. The problem was fixed by getting rid of the duplicate record.
How to Deal with Trust Account Problems Step-by-Step
When you spot a discrepancy during law firm reconciliation, don’t panic. Follow this structured process to identify and resolve the issue:
Step 1: Verify Your Records
Start by gathering all relevant documents:
Bank statements for the trust account
IOLTA ledger or client trust account records
Transaction receipts (e.g., deposits, withdrawals, checks)
Bookkeeping software reports (e.g., QuickBooks or Clio)
Check the amount on your bank statement against the records you keep on hand. Draw attention to any deals that don't make sense. For IOLTA reconciliation, make sure that the balance in each client's record matches the balance in the trust account as a whole.
Tip: Use a three-way reconciliation for IOLTA accounts, which compares:
Bank statement balance
Bookkeeping software balance
Individual client ledger balances
Step 2: Identify the Discrepancy
Pinpoint the source of the error by checking for:
Math Errors: Recalculate totals in your records.
Missing Transactions: Look for unrecorded deposits, withdrawals, or fees.
Timing Issues: Identify outstanding checks or deposits in transit.
Duplicate Entries: Check for transactions entered more than once.
For example, a company found a $300 difference in IOLTA transactions. They saw a service fee that wasn't shown in QuickBooks when they looked at their bank account. The problem was fixed by adding the fee to their books.
Step 3: Correct the Error
Once you’ve identified the cause, make the necessary adjustments:
Fix Data Entry Errors: Correct typos or remove duplicates in your bookkeeping software.
Record Missing Transactions: Add unrecorded fees, payments, or refunds.
Adjust for Timing Differences: Note outstanding checks or deposits in your reconciliation report.
Contact the Bank: If you suspect a bank error, reach out with documentation to request a correction.
Tip: Always document your corrections, including the date, amount, and reason for the change. This creates an audit trail for compliance.
Step 4: Reconcile Again
After you've made the changes, run the comparison again to make sure the numbers still add up. For IOLTA accounting, make sure that the ledger for each client is correct and that the total balance in the trust account matches the balance on the bank statement.
Step 5: Implement Preventive Measures
To avoid future trust account discrepancies, adopt these best practices:
Reconcile Monthly: Perform law firm reconciliation every 30 days to catch errors early.
Use Accounting Software: Tools like QuickBooks or Clio automate transaction tracking and reduce manual errors.
Train Staff: Ensure your team understands IOLTA reconciliation rules and procedures.
Segregate Duties: Assign different staff to handle transactions and reconciliations to prevent fraud.
Hire a Professional: Partner with a bookkeeping service specializing in bookkeeping for law firms to ensure accuracy and compliance.
Question: How often should I reconcile my trust account?
To stay in compliance, state bar groups usually need IOLTA reconciliation every month. Monthly reconciliation also helps you find trust account discrepancies early, which lowers the risk of bigger problems. Set an automatic schedule alert to help you stay on track.
Tools to Simplify Law Firm Reconciliation
Using the right tools can make IOLTA reconciliation and bookkeeping for law firms much easier. Here are some recommended options:
Tool | Features | Best For |
QuickBooks Online | Trust accounting, bank feed sync, reconciliation reports | Small to mid-sized firms |
Clio Manage | IOLTA compliance, client ledger tracking, billing | Firms needing practice management integration |
Xero | Trust account support, automated reconciliations | Firms preferring cloud-based solutions |
A/P and A/R automation, transaction tracking | Streamlining vendor and client payments |
Tip: When choosing software, ensure it supports three-way IOLTA reconciliation and complies with your state’s trust accounting rules.
Question: Can I use Excel for IOLTA reconciliation?
Excel can work for small businesses with simple trust accounts, but it's easy to make mistakes and doesn't have any tools built in. Accounting software like QuickBooks or Clio is better for law firms to use for bookkeeping because it makes sure they follow the rules and speeds up the process.
How Irvine Bookkeeping Can Help with Trust Account Discrepancies
If you have problems with trust account issues that won't go away, don't have time to do monthly reconciliations, or have to follow complicated IOLTA rules, it's time to hire a professional. If you need help with your books, a service that specializes in that can:
Conduct accurate IOLTA reconciliation
Identify and fix errors quickly
Ensure compliance with state bar regulations
Provide financial insights to support your firm’s growth
