How To Ensure Accurate 3-Way Reconciliation Reports
If you administer trust accounts, and most law offices do in one way or another, then you need to know how to generate three-way reconciliation reports. Standard bank reconciliations compare two balances: the book balance and the adjusted bank balance. The book balance is the balance your records show for an account — basically this is your check register. The adjusted bank balance takes the balance shown by the bank, adjusted for checks and deposits that haven’t cleared. When you have a trust account or IOLTA account then you have separate client ledgers for each trust, plus a ledger for bank charges. The sum of these individual ledgers must be the same as the book balance and the adjusted bank balance.
Three-way reconciliation reports ensure that a trust administrator is correctly accounting for all monies entrusted, and that a client’s funds isn’t being used to pay bank fees or another client’s charges. These reports are, if nothing else, a function of good accounting practices. However they serve another purpose: compliance with state trust regulations. Your state almost certainly requires three-way reconciliation reports at specified intervals, such as 30 or 60 days.
It can take hours to generate three-way reconciliation reports if you are trying to do them by hand. Luckily you don’t need to. Dedicated law firm billing software that includes built-in attorney trust accounting functions simplifies your compliance with state trust regulations. It is essential to use software that integrates all billing and trust functions.
Here we see a typical three-way reconciliation report, as generated by CosmoLex cloud-based legal billing software.
The Rules of Professional Conduct for each state bar are typically based on the American Bar Association model rules, and regulations for trust fund management will be found under Rule 1.15 (Safekeeping Property). Each state may have other rules that add to or supersede bar association guidelines. Here are some sample three-way reconciliation rules, but this information should not be considered legal advice. Consult your state’s trust account regulations to find out how often you need to provide three-way reconciliations, and how long you need to keep those documents.
State 3-Way Reconciliation Rules
Alabama: 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. However the commentary goes on to say, “Quarterly reconciliation is recommended only as a minimum requirement; monthly reconciliation is the preferred practice…”
Arizona: 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: Rule 1.15(a)7 of the Illinois Rules of Professional Conduct requires reconciliation reports on at least a quarterly basis.
Iowa: Iowa Court Rule 45.2(3) address 3-way reconciliation requirements.
Missouri: Missouri Supreme Court Rule 4-1.15(a)(7) address 3-way reconciliation requirements.
New Jersey: Rule 1:21-6(H), called the New Jersey Recordkeeping Rule, states attorneys must keep “copies of all records, showing that at least monthly a reconciliation has been made of the cash balance derived from the cash receipts and cash disbursement journal totals, the checkbook balance, the bank statement balance and the client trust ledger sheet balances” for a period of seven years after the event
Rules for South Carolina: Rule 417, SCACR (Financial Recordkeeping) requires monthly reconciliations, and records should be kept for six years after termination of the relationship with the client.