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- Trust Bank Reconciliations
Last updated: October 2022
Trust bank reconciliations are a key internal control over a law firm’s assets. A reconciliation is proof that there are sufficient funds in trust; it compares what should be in trust based on your books versus what is in the bank account.
Performing monthly reconciliations allows firms to:
- locate mistakes in their books or bank statements early;
- track problematic transactions (e.g., long outstanding transactions, automated pre-authorized debits, bank fees incorrectly incurred on the law firm’s trust accounts and any other bank errors); and
- identify fraud or accounting errors.
What to Include in a Trust Bank Reconciliation Package
All law firm trust accounts, including Separate Interest-Bearing Accounts (SIBA), must be reconciled monthly before the end of the next month (Rule 119.37). The reconciliations must be completed even when there was no activity, or the bank account has a zero balance. The package should include:
- Trust Reconciliation Report
- Client Trust Listing
- Trust Journal
- Trust Bank Statement (Pooled and SIBA)
- Copies of negotiated cheques are included as part of the trust bank statement.
- Trust Transfer Journal
- Electronic Banking Transactions and Records
- Evidence that the reconciliation has been reviewed
How to Review a Trust Bank Reconciliation Package
Trust bank reconciliations are a three-way reconciliation between:
- The trust assets (i.e., the bank balance, adjusted for cheques and deposits that have not yet cleared);
- The trust liabilities (i.e., the client trust listing, which includes records for each client); and
- The book balance (i.e., the trust journal, which includes all receipts, transfers and disbursements).
If there is a discrepancy, it must be identified and investigated.
When completing your trust bank reconciliation, review the following checklists to ensure that you have not missed any important points.
- Are there any outstanding deposits noted? If so, is it a timing difference (i.e., where the funds are deposited on the last day of the month but posted by the bank on the following day)? Outstanding deposits not due to timing differences should be investigated immediately. Pay special attention to reoccurring outstanding deposits carried over from month to month.
- Are there any uncleared cheques? If the cheques are dated within the last 30 days, were the transactions near the statement closing date? If the date exceeds 30 days, determine why the transactions have not cleared.
- Are there any stale-dated cheques listed under the outstanding cheque list? If so, consider re-issuing the cheque(s) to your client(s) or review if the funds qualify for submission to the Law Society (Rule 119.43).
- Are there any bank service charges, bank errors or posting errors? If so, ensure that they have been corrected.
- Are adjustments clearly explained and not simply carried over into the next month?
- Are all negotiated cheques valid and accurate?
- Is there any client file that has been inactive for more than two years? If so, formulate a plan to issue refunds to the client or, after reasonable attempts to locate the client, remit the funds to the Law Society (Rule 119.43).
- Are there any files with large long-standing balances in trust? If so, consider whether it would be appropriate to open a SIBA. Obtain written client authorization prior to opening a SIBA (Rule 119.21(1)(b)).
- Are there any unidentified funds? Is a “suspense account” utilized? If so, the deposit should be immediately tracked to identify the ownership of the funds.
- Is the law firm’s float within the allowable limit of $500? If not, issue a cheque payable to the general account for the excess amount over $500 (Rule 119.22).
- Are there any overdrawn trust accounts (i.e., any overdrawn client ledger card balances)? If so, the trust shortage must be resolved immediately. If the trust shortage was not corrected within seven days of the time the shortage arose or is greater than $2,500, regardless of when corrected, please report to the Law Society in the prescribed filing method (Rule 119.39). Please note: A trust shortage and a physical bank overdraft are two separate things. Just because you don’t have a physical overdraft, doesn’t mean you don’t have a client trust shortage.
- Are there any funds in trust that should be in the general account (i.e., an invoice rendered yet the fees have not been withdrawn from trust)? Money must be withdrawn no later than one month after the law firm is entitled to the funds (Rule 119.28(4)).
- Are all receipts, withdrawals and transfers of trust money, including all transfers between client trust ledgers, included in the Trust Journal (Rule 119.37(2)(d))?
- Does the ending balance of the trust journal agree with the client trust listing and adjusted bank balances?
- Are adjustments clearly explained and not carried over into the next month?
- Are all matter-to-matter transfers approved and accurate?
- Are matter-to-matter transfer documents signed and dated by the lawyer?
When all steps are complete, the Responsible Lawyer should sign and date the reconciliation or show evidence of review.
A law firm must maintain all prescribed financial records in a safe and secure location, retrievable on demand, for a minimum of ten full years. This includes all records required to complete the trust account reconciliation under Rule 119.37.