7 Common IOLTA Mistakes Bookkeepers Make with Attorney Clients (And How to Fix Them Before an Audit)

IOLTA, or Interest on Lawyer Trust Accounts, is a specialized account used to manage client funds in the legal profession. This is the most written-about topic on this blog.  These accounts are designed to hold clients' funds that are temporarily in law firms' possession. The interest generated from these accounts is typically used to support law-related public service activities, including legal aid for those who cannot afford it. This system was developed to ensure that client funds are managed responsibly and that the interest benefits the community.

For bookkeepers, managing IOLTA accounts requires understanding the specific regulations and requirements that govern them. Each jurisdiction may have slightly different rules, but the core principles remain the same: client funds must be kept separate from the law firm's funds, accurate records must be maintained, and interest must be appropriately allocated. The goal is to ensure transparency and prevent any misuse of client funds.

Bookkeepers play a crucial role in managing IOLTA accounts, ensuring compliance with regulations, and maintaining the integrity of the legal profession. Mistakes in managing these accounts can lead to significant consequences, including penalties, fines, and damage to the law firm's reputation. Therefore, it is essential for bookkeepers to be well-versed in the intricacies of IOLTA accounts and to implement best practices to avoid common pitfalls.

Common IOLTA Mistakes Bookkeepers Make

Despite the importance of accurate IOLTA management, many bookkeepers make common mistakes that can lead to serious issues. These mistakes often stem from a lack of understanding of the specific requirements and regulations governing IOLTA accounts. By identifying these common mistakes, bookkeepers can take proactive steps to avoid them and ensure compliance.

The first common mistake is inaccurate record-keeping. Proper record keeping is essential for managing IOLTA accounts, ensuring all client funds are accounted for, and providing a clear audit trail. However, many bookkeepers fail to maintain accurate records, leading to discrepancies and potential compliance issues.

Another common mistake is the failure to reconcile accounts regularly. Reconciliation involves comparing the law firm's records with the bank statements to ensure that they match. Without regular reconciliation, discrepancies can go unnoticed, leading to larger issues down the line. Misunderstanding interest allocation is another frequent error. Bookkeepers must ensure that the interest generated by IOLTA accounts is allocated correctly, in accordance with the regulations. Failure to do so can result in penalties and fines.

Mistake 1: Inaccurate Recordkeeping

Inaccurate recordkeeping is one of the most common mistakes that bookkeepers make when managing IOLTA accounts. This mistake can have significant consequences, including discrepancies in records and potential compliance issues. To avoid this mistake, bookkeepers must maintain detailed, accurate records of all transactions involving client funds.

One key aspect of accurate recordkeeping is ensuring that all transactions are recorded in a timely manner. Delays in recording transactions can lead to discrepancies between the law firm's records and the bank statements. Bookkeepers should implement a system to record transactions as soon as they occur, ensuring all information is captured accurately.

Another important aspect of accurate record keeping is maintaining detailed records of each client's funds. This includes recording the amount of funds received, the purpose of the funds, and any disbursements made on behalf of the client. By maintaining detailed records, bookkeepers can ensure that all client funds are accounted for and that there is a clear audit trail.

Mistake 2: Failure to Reconcile Accounts

Failure to reconcile accounts regularly is another common mistake that bookkeepers make when managing IOLTA accounts. I have heard so many excuses for this, such as “isn’t it automatically reconciled when I match my bank feed?” or “I didn’t know there was a process in QuickBooks for that.”  Reconciliation involves comparing the law firm's records with the bank statements to ensure that they match. Without regular reconciliation, discrepancies can go unnoticed, leading to larger issues down the line.

One of the key reasons for regular reconciliation is to identify and resolve discrepancies as soon as they occur. Discrepancies can arise from a variety of sources, including errors in recording transactions, bank errors, and unauthorized transactions. By reconciling accounts regularly, bookkeepers can identify and resolve these discrepancies before they become larger issues.

Another important aspect of reconciliation is ensuring that all transactions are recorded accurately and promptly. Delays in recording transactions can lead to discrepancies between the law firm's records and the bank statements. Bookkeepers should implement a system for recording transactions as soon as they occur and for reconciling accounts on a regular basis.

Mistake 3: Misunderstanding Interest Allocation

Misunderstanding interest allocation is a common mistake that bookkeepers make when managing IOLTA accounts. The interest generated by IOLTA accounts must be allocated correctly, in accordance with the regulations. Failure to do so can result in penalties and fines.

One key aspect of interest allocation is understanding how interest is calculated and allocated. The interest generated by IOLTA accounts is typically used to support law-related public service activities, including legal aid for those who cannot afford it. Bookkeepers must ensure that interest is allocated correctly and that all regulations are complied with.

It is as simple as creating an interest-clearing account. This account is an “other current liability account” and should be placed under the “Funds held in trust” parent account.  And yes, banks make mistakes.  Sometimes the interest sweep fails to happen. This account should be zero at the end of the month (note some banks post it and then sweep it out the following month).

Mistake 4: Not Staying Updated on Regulations

Failing to stay up to date on regulations is another common mistake bookkeepers make when managing IOLTA accounts. The rules governing IOLTA accounts can change over time, and bookkeepers need to stay informed of any changes to ensure compliance.

One key to staying updated on regulations is regularly reviewing the rules and guidelines issued by governing bodies. Each jurisdiction may have slightly different rules, and bookkeepers need to be familiar with the specific requirements in their area. By staying informed of any changes to the regulations, bookkeepers can ensure that their practices remain in compliance.

Mistake 5: Neglecting Client Communication

Neglecting client communication is another common mistake that bookkeepers make when managing IOLTA accounts. Clear and consistent communication with clients is essential for ensuring that all parties are informed and that there is a mutual understanding of the management of the client's funds.

One key aspect of client communication is providing regular updates on the status of their funds. Clients should be informed of any transactions involving their funds, including deposits, disbursements, and interest allocations. By providing regular updates, bookkeepers can ensure that clients are informed and that there are no misunderstandings. This may be a rule in your jurisdiction, ie, California requires notification of balances every 45 days.

Another critical aspect of client communication is addressing any questions or concerns that clients may have. Clients may have questions about managing their funds or the regulations governing IOLTA accounts. Bookkeepers should be prepared to address these questions and provide clear and accurate information.

Tools and Resources for Effective IOLTA Management

There are a variety of tools and resources available to help bookkeepers manage IOLTA accounts effectively. These tools and resources can help bookkeepers maintain accurate records, reconcile accounts, and stay informed of the latest regulations.

One of the most valuable tools for managing IOLTA accounts is accounting software. Many accounting software programs offer features designed explicitly for managing trust accounts, including IOLTA accounts. These features can help bookkeepers maintain accurate records, reconcile accounts, and generate reports. And don’t forget the legal tech software, like Clio.  They help us as bookkeeping professionals keep track of the individual client ledgers as well as preserving their integrity.

Conclusion: Ensuring Compliance and Accuracy in IOLTA Accounts

By following these best practices and utilizing the available tools and resources, bookkeepers can ensure compliance and accuracy in IOLTA accounts. This will help to maintain the integrity of the legal profession and ensure that client funds are managed responsibly.