How to Perform a Quarterly Trust Reconciliation

At the end of every quarter, the NC State Bar requires that “the individual client balances shown on the ledger of a general trust account must be totaled and reconciled with the current bank statement balance for the trust account (Rule 1.15-3(d)(1)).”  This reconciliation process is one of the more important aspects of adhering to the rules on trust accounts.  It is also one of the steps that attorneys frequently fail to follow when trying to comply with the NC State Bar’s rules on maintaining trust accounts.    

Let’s break this rule down and walk through an example, at a very high level, of what the quarterly reconciliation process should look like.  There are three components to the reconciliation process:  the trust ledger, the client ledgers, and the trust bank statement.  A firm’s internal recordkeeping system should track the trust ledger and client ledgers.  The trust ledger shows all the trust activity flowing in and out of a trust account.  This ledger gives the lawyer a summary of all of the transactions from that trust account.  By taking the trust ledger a step further and assigning each transaction to a specific client, the lawyer creates the client ledgers.  Client ledgers group all the trust activity associated for a specific client.  The final component of performing a trust reconciliation is the trust bank statement that is generated by the bank where the trust account exists.  This statement provides third party verification of transactions posting to a trust account.  On a quarterly basis, the NC State Bar requires a lawyer to reconcile the trust bank statement with the client ledgers.    

Here is an example:  assume that a lawyer has three clients with balances in a trust account as of September 30, 2014.  The lawyer should have three separate client ledgers tracking the cash inflow and outflow for these three clients.  At quarter-end, the lawyer will add up the three client ledger balances and reconcile these balances to the bank statement for the trust account. 

Switching to the trust bank statement, a lawyer should start with the ending balance on the trust bank statement and adjust this balance for transactions that have occurred, but have not yet cleared the trust bank statement.  An example of a transaction that has not yet cleared the trust bank statement would be a check written and sent to a payee prior to that month’s end, but the payee has not deposited the check prior to that month’s end.  The check should have been recorded in the client ledger activity, but would not have shown up on the trust bank statement yet.  In a situation like this where an action has occurred but has not yet registered in the bank’s system, the lawyer needs to make an adjustment to reconcile the item against the ending balance reflected on the trust bank statement.  Below is an illustration of how the trust reconciliation should look:

*Note:  In this example, the Trust Ledger Balance at 9/30/14 is not shown.  The assumption is that the Client Ledger Balances at 9/30/14 and the Trust Ledger Balance at 9/30/14 match.  This assumption is made to meet the NC State Bar’s Three Way Reconciliation requirement. 

While this may look straightforward, many attorneys fail to properly perform this step on a quarterly basis.  The NC State Bar only requires that a lawyer perform this level of in-depth reconciliation on a quarterly basis.  On a monthly basis, the NC State Bar requires “the balance of the trust account as shown on the lawyer’s records shall be reconciled with the current bank statement balance for the trust account (Rule 1.15-3(d)(1)).”  The difference between the monthly and quarterly requirements is the level of detail.  On a monthly basis, a lawyer needs to reconcile the trust as a whole or at the trust ledger level.  On a quarterly basis, a lawyer needs to reconcile the trust down to the balances in the client ledgers.  My recommendation is that a lawyer should use software and develop processes where they reconcile down to the client ledgers on a monthly basis.  If it is properly established, this process requires very little, if any, extra time to perform and could potentially prevent a great deal of stress. 

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