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Many law firms believe that if their escrow or IOLTA bank balance looks correct, they’re compliant. Unfortunately, that’s one of the most common, and risky, misconceptions in trust accounting.
This is where 3-way reconciliations come in.
A 3-way reconciliation is the process of ensuring that three separate records all match: the escrow/IOLTA bank statement, the trust account balance in your accounting software, and the total of all individual client trust ledgers.
All three must match exactly , not approximately, not “close enough.” If even one does not align, the account is considered out of compliance, even if there is money in the bank.
The American Bar Association and state bar associations require this process because escrow funds do not belong to the firm, each client’s funds must be tracked individually, and firms must prove they are not using one client’s funds to cover another’s.
A standard bank reconciliation only confirms that the bank balance matches your accounting software. It does not confirm that client balances are accurate or that trust liabilities are being tracked properly.
When performing 3-way reconciliations, common issues uncovered include negative client balances, funds disbursed before deposit, unresolved client balances, and timing issues.
Performing 3-way reconciliations monthly reduces audit risk, protects attorneys from personal liability, and ensures ongoing compliance.
Compliance starts with clarity.
If you’d like help ensuring your trust accounts are reconciled correctly each month, email sandra@lazaraccounting.com
Sandra Lazar spent more than 20 years as a CFO. She ran the finances for a company with six retail locations and served as CFO of a real estate investment group. Today, Sandra and her team handle the books and help owners use them to price better, plan cash and grow with confidence.
Book a free Zoom consultation and we’ll look at where your business stands and what would help most.