How Do I Handle Client Trust Accounts Without Creating Compliance Risk?

By Gina Mastromarino, Founder of Brightline CFO · About a 2 minute read

Trust accounting failures are usually sloppiness, not dishonesty. The consequences do not care.

Firms that hold client funds carry an obligation that ordinary bookkeeping does not prepare anyone for. The rules are set by your state bar or licensing body, and the failures that cause trouble are almost always procedural rather than deliberate.

The principles that hold nearly everywhere

• Client funds stay separate from operating funds, always
• Each client ledger is tracked individually, not just the pooled balance
• No client ledger may ever go negative, which means no borrowing between clients
• Earned fees are transferred out promptly and documented when they are
• Three-way reconciliation is performed on a regular schedule

What three-way reconciliation means

The bank statement, the trust account ledger, and the sum of all individual client ledgers must agree. All three, every time. Two out of three agreeing is the condition in which problems live undetected.

Where firms get into trouble

Paying an operating expense from trust because the operating account was short. Leaving earned fees in trust for months. Recording a deposit to the pooled account without allocating it to a client. None of these begin as misconduct, and all of them can end as a bar complaint.

Specific requirements vary by jurisdiction and profession. Confirm the rules that govern your license, because they control over any general guidance.