Three-way reconciliation under Massachusetts Rule 1.15: a monthly routine for small firms

Massachusetts Rule of Professional Conduct 1.15 requires a three-way reconciliation of a trust account at least every sixty days. For a solo attorney in Quincy or a five-lawyer firm in Plymouth, the hard part is not understanding the rule. It is doing the reconciliation reliably, on schedule, while practicing law.

Here is the routine we use with our law firm clients, step by step. Larsen Bookkeeping reconciles IOLTA accounts monthly, more often than the rule requires, because a difference is far easier to trace when it is a few weeks old.

Before you start: what you need

• The bank statement for the trust account, for the month you are reconciling.
• The check register, with every deposit and disbursement through the statement date.
• The ledger for each client matter, and the ledger for bank fees and charges.
• Last month’s reconciliation report.

Step 1: Adjust the bank balance

Start with the ending balance on the bank statement. Then adjust it for timing:

• Add deposits in transit: deposits recorded in your register that the bank had not posted by the statement date.
• Subtract outstanding checks: checks you have written that have not cleared yet. A check counts against the account until it clears.

The result is the adjusted bank balance.

Step 2: Confirm the check register balance

Make sure every transaction on the statement appears in the register, and that the register’s running balance is correct through the statement date. Bank fees, interest, and any returned items need to be recorded too.

Step 3: Total the client ledgers

Add up the balance of every client matter ledger, plus the bank fees ledger. While you do, look at each matter individually:

• Any negative balance? That means one client’s money was used for another, which the rule prohibits. It needs immediate attention.
• Any balance that should be zero? A closed matter with money still in it may be an earned fee that was never withdrawn, or a refund that was never sent.

Step 4: Compare all three

The adjusted bank balance, the check register balance, and the total of the client ledgers should be identical. When they are, the account reconciles. Prepare and keep the reconciliation report.

Step 5: When they do not match, trace it

Work through the usual suspects in order:

1. A transaction on the statement that never made it into the register.
2. A deposit or disbursement posted to the wrong client matter.
3. A bank fee recorded against a client instead of the bank fees ledger.
4. A check recorded at the wrong amount.
5. A check the bank paid twice.

That last one happens more than you might think. In one recent case, a bank paid the same significant IOLTA check twice, about a week apart. We identified the duplicate withdrawal and notified the attorney, and the funds were restored to the account.

Step 6: Look at the outstanding items

Checks outstanding for months deserve attention. A client or vendor may never have received the payment. Raise anything that needs a decision with the responsible attorney, rather than letting it ride.

Why monthly beats every sixty days

Sixty days is the requirement. Monthly is a habit. When reconciliation happens every month, a discrepancy is one month deep. When it slips, a small difference can sit for years. One firm came to us with an IOLTA account that was off and an error no one could explain. We worked back through about three years of records to find where it began and corrected the reconciliations for the full period.

What Larsen Bookkeeping does each month

• Reconciles your IOLTA account three ways, and traces any difference to its source.
• Sends you the month’s reconciliation reports.
• Gives you a prompt heads-up about anything that needs your decision.
• Keeps the operating books in QuickBooks Online, with client cost reimbursements tracked separately.

The account remains the attorney’s responsibility; the monthly reports let you see whether it reconciles.

Talk it through

Larsen Bookkeeping has worked with law firms for 12 years and serves solo attorneys and small firms in Massachusetts only. If you would like your trust account reconciled every month, request a consultation. Or call 781-924-1489.

Related reading: Three-way IOLTA reconciliation, explained · Bookkeeping for Massachusetts law firms

This article is general education, not legal advice. Consult Rule 1.15 and the Office of Bar Counsel for your obligations.