Attorneys Can Face State Penalties By Making This Mistake
IOLTA/IOLA Account Management – You don’t know what you don’t know, and while attorneys are some of the sharpest tools in the toolkit, they did not spend countless hours with their head in the books to become an accountant. However, there is one accounting activity that all attorneys should be aware of, especially those attorneys in smaller practices where there isn’t a dedicated team of staff members to manage this activity. This accounting practice we speak of is called IOLTA (Interest on Lawyer Trust Accounts) or IOLA (Interest on Lawyers Accounts).
While IOLTA/IOLA can be a very taxing and time-consuming task, failure to understand how these accounts operate can mean the difference between practicing law and not practicing law. In fact, mismanagement of IOLTA/IOLA accounts is one of the most common ethical violations committed by lawyers.
What is an IOLTA/IOLA account?
IOLTA/IOLA accounts are utilized when money is being held in a trust on behalf of a client. The money in these accounts can indeed garner up interest, and, In some cases, the attorney will have to create a separate account on behalf of the client if the interest becomes increasingly large. Furthermore, IOLTA/IOLA accounts require reconciliation of three different balances from three different sources:
- IOLTA/IOLA bank balance: Originates from an attorney’s bank statement
- Client ledger: Tracks and records all incoming transactions to and outgoing transactions from the IOLTA/IOLA for every single client matter.
- Attorney’s accounting book balance or trust ledger
Attorneys will know when IOLTA/IOLA accounts are reconciled when the IOLTA/IOLA bank balance equals the sum of individual client ledgers and the amount in the trust ledger accounting book balance.
Some reasons why these three balances may not equal each other include:
- A transaction was entered improperly
- A transaction was assigned to the wrong client
- A transaction was excluded from one of the ledgers
Common mistakes made by attorneys
- Co-mingling attorney funds and client money in the same account.
- Poor accounting. A ledger should be kept for each client.
- Spending client funds before services are rendered
- Money is initially advanced and has not been accounted for yet
What can attorneys do to best manage IOLTA/IOLA accounts?
Below is a list of best practices and considerations that attorneys should implement to remain in good standing, while also making this accounting activity more efficient:
- Be aware of the IOLTA/IOLA “total balance” – Ending balance from previous business day +/- any transactions from the current day that posted in real-time
- Be aware of the “available balance” – Amount that can be used for withdrawals, transfers, and payments
- Have the client and trust ledger reflect pending transactions
- Use an IOLTA/IOLA account management software
To truly err on the side of caution, attorneys across the board should implement these practices on a monthly or quarterly basis. Performing this task proactively will allow attorneys to be ready for any client and/or auditor requests. And, of equal importance, proper IOLTA/IOLA account management grants attorneys the opportunity to stay in the clear of disbarment and state penalties.
If you would like to discuss the above topic in greater detail, please do not hesitate to contact Lori Kubic, CPA & Senior Manager at Ryan & Wetmore.
About Lori Kubic
CPA & Senior Manager
Lori Kubic is a Senior Manager at Ryan & Wetmore and leads the firm’s outsourced accounting services team. Since joining the firm in December of 2012, Lori has developed and supervised processes to effectively manage organizations’ accounting systems and records. Her work provides clients with detailed and actionable information on a timely basis.
Read Lori’s full bio.