You are not nervous to take on an adversary in court, navigate complex litigation, and examine situations in unique ways. Yet, many attorneys have a phobia when it comes to their record-keeping, in particular, three-way reconciliations. For whatever the reason may be (do not like numbers, the concept, or simply time demands), many attorneys neglect their firm accounts and put themselves and clients at risk. Hopefully, the following will help in treating your phobia.

The WHY:

Three-way reconciliations are required for a firm’s Attorney Trust Account and must be performed monthly. If you have multiple Attorney Trust Accounts, each is required to be reconciled. Remember, Attorneys have the following obligations: (1) the duty to maintain records as described in R.1:21-6; (2) the duty to segregate client, third party and/or shared interest funds from the firm’s funds (an Attorney Trust Account is used to accomplish this) as described in RPC 1.15(a); (3) the duty to maintain the integrity of client, third party and/or shared interest funds (please do not borrow funds from your Attorney Trust Account, or disburse them before the collection/clearing of a deposit, its not worth it and there are other means of obtaining a loan); and (4) the duty to account for client and third-party funds in their possession (escrow (ex. real estate), third party (medical bills, settlements, etc.), and shared-interest funds (funds held in dispute pending resolution, personal injury funds, etc.).

All of these obligations may seem intimidating and that is understandable, but if you are following the rule, performing your duties or properly overseeing the person who is, you are positioning yourself in a much better position than if you did not.

The WHO:

All private practice Attorneys (full-time or part-time) are required to have an Attorney Trust Account (not associates if in a firm, but the firm itself). The signatories of the Attorney Trust Account are the responsible part for the account (only NJ Barred Attorneys may be signatories – New Jersey Practice specific). This does not mean you can have an employee of the firm perform the record-keeping (including the three-way reconciliation). However, the signatories will be responsible if their are any deficiencies in the account and could be liable for a disciplinary complaint for failure to supervise and negligent misappropriation if funds go missing, even if the Attorney did not have any involvement in the disappearance of funds. This is because an Attorney may not transfer their obligations to a lay person. If you have a busy practice or do not have time to perform all the record-keeping duties yourself its important for you to be aware of how the records are prepared and understand the process so you are educated and can catch issues.

The WHEN:

Attorney Trust Account three-way reconciliations must be performed monthly (at one point in time it was Quarterly). By performing the monthly, you will be able to catch if their was an over payment or other issue, which should enable you to resolve it quickly and avoid potential discipline. After all, if you are on top of your records and catching things, your limiting your risk. Also, its much easier to ask a client or third-party to return an over-payment if you catch it early.

The WHERE:

You can find what has become known as three-way reconciliations (or triple reconciliations) in the record-keeping rule (R.1:21-6(c)(1)(H)). It reads as follows: “copies of all records, showing that at least monthly a reconciliation has been made of the cash balance derived from the cash receipts and cash disbursement journal totals, the checkbook balance, the bank statement balance and the client trust ledger sheet balances”. This section of the record-keeping rule highlights the importance of maintaining, descriptive, detailed and accurate records, which should make performing your three-way reconciliation less confusing.

The WHAT:

The three-way reconciliation components are as follows:

1.     Book balance;

2.     Bank balance; and

3.     Client trust ledger balance.

When completed it would look like this:

The HOW:

Book balance further explained:

To obtain your book balance you simply take your running checkbook balance (or check register). Your checkbook balance will have listed all transactions that took place in your Attorney Trust Account (at least it should). Nothing more should be required, as this is the true balance of what would be left in the account (outstanding items are already present in this piece (outstanding checks and deposits in transit).

Bank balance further explained:

To obtain your bank balance perform a standard bank reconciliation. Take your bank statements ending bank balance, add any deposits-in-transit (funds deposited but not yet cleared (any deposits-in-transit should be listed individually and dated from when the deposit was made for tracking), subtract any outstanding check amounts (list each individual outstanding check with the date, check number, payee and amount), this should give you your adjusted bank balance and complete this piece. Your adjusted bank balance should match your book balance (for the same date).

Client trust ledger balance explained:

You know those client ledger cards (or sheets) you’ve been diligently maintaining in meticulous fashion? This is where they come into play and this is how you are going to ensure if you are properly accounting for your clients’ funds.

To obtain the final piece of your three-way reconciliation you need those client ledger cards you’ve been maintaining individually (with running balances per client). Any client ledger card that contains a balance at the end of the month that you are reconciling for will need to be listed along with the last transaction date, client name and amount being held. After you have listed these items, total them up (no need to make any adjustments outstanding items are already considered in the ledgers themselves). The big reveal, see if the total number matches your bank balance and book balance. If it does congrats!

But you’re not done yet. Look through your listing of client balances, do you notice any negatives? If you do, you have an issue that needs to be investigated. Negative balance is an indicator that you are using one client’s funds to make up for this shortfall. Therefore, you likely over disbursed to a client or made a mistake (hopefully it’s a mistake) and disbursed funds before receiving funds for said client (or mistakenly deposited funds into a wrong account (check your business account).

Other things to consider:

Did you notice that some of your client balances are old? Like a year or more? Start working on returning them to their rightful owner (unless you are required to hold them for a legal reason (ex. environmental escrow)).

Did you notice some of outstanding checks with dates older than 6 months when performing your bank reconciliation? There probably not going to clear. Reach out to who you sent these checks to and work on resolving them (stop payment, reissue, etc. (check your banks policy on how old a check they will accept)).

Did you notice a deposit-in-transit that is from last month or older or multiple deposits-in-transit that continue to not make sense? You may have a theft issue (key word is may). In my experience old deposits-in-transit are used to balance an account and avoid raising questions because it appears your account is in balance.

Did you forget to list any attorney (or firm funds) that you have in the Attorney Trust Account? This could explain why you are unable to reconcile. Remember your required to maintain a firm ledger card. On the flip side, if you have a lot of personal or firm monies in your Attorney Trust Account (more than is reasonable for banking costs) you likely have a commingling issue.

Unable to identify funds? Thinking you have found money, I mean what else could an overage mean? Think again, there is no such thing as an overage, this is not found money and should not be taken. These funds are “unidentified” and efforts should be made to identify the owner of the funds. If you cannot establish a claim to these funds (with proof) or identify the owner of funds, look into turning them over to the Clerk of the Superior Court, Trust Funds Unit (after an exhaustive search to identify funds).

Have identified funds but cannot locate the owner. Follow the same procedure as unidentified funds, detail your search and consider turning them over to the Clerk of the Superior Court Trust Fund Unit. If the owner shows up at your door, the funds are safe with the Trust Fund Unit and can be released upon an application.

-Will