If you're a practicing attorney, your IOLTA account isn't just another bank account — it's a fiduciary obligation backed by your license to practice law. Every state bar has strict rules governing how client trust funds must be handled, and violations can result in anything from a formal reprimand to disbarment. Yet in our experience onboarding dozens of law firm clients, we find serious trust accounting errors in roughly seven out of ten firms.
These aren't firms run by careless people. They're busy attorneys doing their best with inadequate systems, outdated processes, or bookkeepers who don't understand the unique requirements of trust accounting. Here are the five most common — and most dangerous — IOLTA reconciliation mistakes we encounter.
Mistake #1: Commingling Firm and Client Funds
This is the cardinal sin of trust accounting, and it's more common than you'd think. Commingling happens when firm operating funds end up in the trust account, or when client trust funds are deposited into the operating account. Sometimes it's an honest mistake — a retainer check deposited to the wrong account. Other times, it's a systemic issue where the firm doesn't have clear deposit procedures.
The fix is straightforward but requires discipline: establish written deposit procedures, train every person who handles incoming funds, and implement a same-day verification process. Every deposit should be matched to a specific client matter before it hits the bank.
Mistake #2: Failing to Reconcile Monthly
Most state bars require monthly reconciliation of trust accounts, yet we regularly encounter firms that reconcile quarterly — or worse, only when they "get around to it." Monthly reconciliation isn't optional, and the longer you go without it, the harder it becomes to identify and correct errors.
A proper monthly reconciliation should take no more than two hours for a firm with moderate trust activity. If it's taking you significantly longer, that's a sign your processes need improvement, not an excuse to do it less often. Set a recurring calendar reminder for the 5th of every month, and treat it as non-negotiable.
Mistake #3: Not Tracking Individual Client Balances
Your IOLTA account has one bank balance but potentially dozens of individual client balances within it. Knowing that your trust account has $150,000 in it is meaningless if you can't tell a client exactly how much of that belongs to them at any given moment.
Every trust transaction must be recorded against a specific client ledger. The sum of all individual client ledgers must equal the bank balance. When these numbers don't match — and they won't if you're not tracking client-level balances — you have a problem that compounds every single month.
We recommend using practice management software with built-in trust accounting (Clio, PracticePanther, or CosmoLex) rather than trying to manage client ledgers in QuickBooks alone. The specialized tools enforce the disciplines that general accounting software doesn't.
Mistake #4: Skipping the Three-Way Reconciliation
A three-way reconciliation is the gold standard of trust accounting. It confirms that three numbers match:
- The adjusted bank statement balance
- The book balance in your accounting software
- The total of all individual client ledger balances
Many firms do a basic bank reconciliation (comparing the bank statement to their books) but skip the third component — reconciling to individual client ledgers. This is where most trust accounting errors hide. A firm can have a perfectly reconciled bank account while individual clients are over- or under-funded, which is still a compliance violation.
Mistake #5: Poor Documentation of Disbursements
Every dollar that leaves your trust account needs a documented reason tied to a specific client matter. "Transfer to operating" is not sufficient documentation. You need to record which client's funds are being disbursed, the specific purpose (earned fees, cost reimbursement, settlement distribution), and authorization from the client where required.
The firms that get into trouble with bar auditors are almost always the ones with sloppy disbursement records. When an auditor asks why $3,500 was transferred out on March 15th, "I think that was for the Johnson case" is not an acceptable answer. You need a paper trail that connects every disbursement to a specific invoice or cost memo.
Building a Compliant Trust Accounting System
The good news is that all five of these mistakes are completely preventable with the right systems in place. Here's what a compliant trust accounting workflow looks like:
- Deposit procedures: Written protocols for who handles deposits, which account receives which types of funds, and same-day verification
- Daily review: A quick 10-minute check of all trust account activity each business day
- Client ledger updates: Real-time recording of all trust transactions against individual client matters
- Monthly three-way reconciliation: Completed by the 5th of the following month, documented and signed
- Disbursement documentation: Every outgoing transaction tied to a client matter with supporting documentation
Don't Wait for the Audit
Bar audits are increasing in frequency across most jurisdictions, and the penalties for trust accounting violations are severe. But beyond compliance, clean trust accounting is simply good business. It builds client trust, reduces errors, and gives you peace of mind that your firm's most sensitive financial obligation is being handled properly.
If you're not confident that your IOLTA reconciliation would survive a bar audit today, it's time to fix that. At CleanBooks, trust accounting compliance is one of our core specialties for law firm clients, and we'd be happy to review your current setup.