The purpose of this article is to make lawyers aware of one of the best software programs which can be designed to keep track of every client trust transaction, produce reports required by the standards adopted by the Board of Governors, and perform monthly bank reconciliations. Maintaining these records in the computer and on backup medium provides the added assurance that this vital information will be available for the five year period of retention (from the date of the last disbursement) and can be reproduced on printed media within a matter of minutes.
We recommend that every attorney who handles clients' trust funds obtain a copy of the "Handbook on Client Trust Accounting for California Attorneys," published by the State Bar of California in November 1992. The Handbook clearly explains every phase of client trust accounting and provides excellent examples of the reports required. Also, you should consider obtaining a copy of the August '94 Law Practice Management Review tape just published by Edward Poll (described in this issue) which contains an interview with Judge Ellen Peck of the State Bar who explains the requirements of maintaining client trust accounts.
1) A written "ledger" for each client, setting forth the name of the client and identification of the bank account, the dates of each activity, the amounts received and from whom, the amounts disbursed and to whom, and current balances of funds for each client, each month, or as of any date the report is required;
2) A written "journal" for each client trust account, identifying the name of the account (including the bank and account number), the date of each transaction, each debit and credit to the account, the names of the sources of each deposit and the names of each person receiving a payment, and the current balance in the account;
3) Copies of all bank statements and canceled check for each client trust account;
4) Monthly reconciliation of each of the above items.
5) A Journal of other properties, such as securities, jewelry, valuable coins, art, etc.
QuickBooks will save you time because most information such as payees and sources of settlement funds are entered only one time. The next time you write a check to a payee the name pops up automatically as you type. The program automatically records their name and address so that mailing labels can be generated. If you bill for services on an hourly basis you will be able to take advantage of the accounts receivable and invoicing system included in the package. There is also a payroll package available to take care of payroll processing needs.
The advantage of QuickBooks is that you are able to write checks and record deposits directly on the computer and at the same time record all other aspects of the transaction automatically. By printing the Client Ledger Report in advance of disbursing the checks, and by obtaining your client's signature on the report, you will avoid client conflict and possible overdrafts on your client trust account.
The reporting abilities are amazingly
flexible and allow you to filter information in the reports based upon
multiple criteria you specify. You can immediately generate up-to-date
reports for your entire trust account journal and individual client ledgers
whenever your client or the State Bar calls for the information. Bank reconciliation
reports must be printed each month when the reconciliation is performed
and cannot be easily called up for reprinting without considerable effort.
Also QuickBooks does not require extensive accounting knowledge, but basic
computer and accounting skills will be necessary to set up the books, maintain
them and issue the reports required.
Although a number of good computer software programs are available to assist you in doing client trust accounting, QuickBooks by Intuit stood out as the most flexible and inexpensive program and is available for DOS and Windows. We have spent a number of hours setting up a set of books to maintain client trust accounts using QuickBooks and have confirmed with Intuit and knowledgeable experts on trust accounting that using the formatting which we will describe here briefly will produce all of the reports and maintain all of the records which are required by Rule 4-100. Further, we have prepared a detailed instruction manual and template which will allow you to immediately commence inputting of data and generate reports without having to spend several hours experimenting with different formats. (We will explain how you can obtain this information at the end of this article.)
Client trust accounting is a non-delegable personal responsibility of the attorney. Although you may use staff to assist you, the attorney who receives clients trust funds bears all of the responsibility to account for every penny. QuickBooks is a valuable tool to make this obligation easier and more efficient to fulfill. However, you must take the time to learn how the program works. QuickBooks has excellent instruction manuals and helpful support staff. No matter how good the program, as with any other computer program -"garbage in equals garbage out." Entering data must be done precisely, each entry must be properly categorized, otherwise you cannot get the reports required. If done properly, entry of data need only be entered once (with a few exceptions) and then you will always be able to obtain current up-to-date reports to satisfy all State Bar requirements in a matter of minutes.
Client funds held in trust are a liability of the law firm to the client. These are balance sheet transactions not income and expense transactions. For example, funds received in settlement of a personal injury case are credited to the client's liability account and are not income of the law firm until services are performed and invoiced. Therefore, the accounting records of the law firm should reflect two additional accounts in the law firm chart of accounts. The first account is a bank account entitled: Cash in Bank - Client Trust. The second account is a liability account entitled: Client Trust Liability. In QuickBooks a separate sub-account will be set up under Client Trust Liability for each client matter in which funds will be held in trust. This creates a separate ledger for each and every client matter in further compliance with Rule 4-100.
The important concept here is that
the client funds held in trust must be kept in an entirely separate bank
account and can not be commingled with other law firm funds. However, the
record keeping for client funds will be based solely upon the activity
in the client trust bank account(s) and will produce totally separate accounting
records just for the trust funds. (It is also possible to set up the entire
trust accounting as a separate company, which will only account for the
client trust transactions. If you set up the client trust accounting as
a separate QuickBooks company the client trust bank account and liability
account will not appear on the law firm financial statements. The separate
company setup is not required by the State Bar, but may be useful if you
want to separate the duties of the law firm accounting from the client
The second report printed is the Client Trust Transaction Journal which is a customization of the "Transaction by Date" report. This report lists all transactions in the client trust account. The aggregate balance of each individual Client Ledger should equal the balance listed in the Client Trust Transaction Journal. If they to not agree it is an indication of an error in recording one or more of the transactions. You must reconcile and correct these errors to comply with the state bar rules. (See Figure 4)
Monthly bank reconciliations are almost effortless. After all transactions are entered you select the "Reconcile" activity and complete the following screen (Figure 5). All that is required is simply to mark those items which appear on the bank statement and enter the state bar IOLTA interest credited and remitted.
Interest Income due to the State Bar is accounted for each month when reconciling the trust bank account. A separate sub-account is set up for the IOLTA Interest received and paid. These amount are calculated and reflected on your bank statement.
Property Account Journal Report
A property account journal is merely a list of all property received on behalf of a client and held in trust. It is possible to set up a journal in QuickBooks for this purpose by creating a "Other Current Liability" account for each client, however, it would be simpler to use your word processor or spreadsheet to create this list to report other property held in trust.