The comfortable illusion

A three-attorney firm, one IOLTA account, books kept carefully. Every month the bookkeeper reconciles the trust bank statement to the trust ledger, and every month it ties to the penny. The firm believes its trust accounting is clean because the reconciliation says so.

Here's what that reconciliation actually proves: the total is right. It says nothing about whose money the total is. A bank rec can pass forever while, underneath it, one client's funds quietly cover another's.

What the two-way missed

Run the third leg — sum the individual client ledgers and compare — and the picture changes. In our composite: the bank and the trust ledger both show $412,175. But the client ledgers only account for $412,090, and inside them, a $4,200 settlement receipt was posted to the wrong matter. One client ledger is inflated; another — the one whose disbursements already went out — is sitting at negative $4,200.

The $85 difference? Wire fees the bank charged to trust instead of operating. Small, mechanical, and still a form of commingling. A negative client balance plus firm expenses in trust: two reportable-grade problems inside an account that "reconciled" every month.

TRUST BANK TRUST LEDGER CLIENT LEDGERS $412,090 $412,175 — over $412,090 $85 of firm wire fees charged to trust Matter 1062: −$4,200

Exhibit: the two-way rec compares only the first two columns. The violations live in the third.

The fix, step by step

  • Trace the misposted receipt to its source document and move it to the right matter, with a documented correcting entry — not a plug.
  • Refund the $85 of bank fees from operating to trust, then instruct the bank in writing to charge all fees to operating going forward.
  • Rebuild client-level ledgers so every matter's balance is answerable on demand, and nothing sits in trust for closed matters.
  • Run the three-way monthly — bank, trust ledger, client sub-ledgers, same date — and save the workpapers as the audit trail.

What changed

The firm went from "we reconcile monthly" to being able to hand any matter's trust history to the bar on a day's notice. The mechanical fix took a week. The habit — three legs, every month, documented — is the actual product, because the bar doesn't ask whether your total was right. It asks whose money it was.

This teardown is a composite of patterns from real trust-account cleanups, with representative numbers — not a specific firm's file. Trust rules vary by state bar; the three-way discipline is the constant.

When did your trust account last pass all three legs?

If the answer is "we do a bank rec," this teardown is about your firm. We'll run the three-way and show you.

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