In North Carolina, the law requires a quarterly three-way trust reconciliation for IOLTA accounts. Understanding what these reconciliations are and why they matter is important for organizations. In this post, we will explore what you should know.
Understanding Three-Way Trust Reconciliation in North Carolina
Ultimately, what we are discussing is nothing more than a means to ensure that a trust’s funds are reconciled and correct.
There are three numbers that must match:
- the bank balance
- the book balance
- the balance by matter
However, what do each of those three numbers mean?
Bank Account Balance (Trust Bank Statement)
Let’s begin with the first and simplest to understand. The bank balance is simply the amount in the bank account on the bank statement’s closing date. Note that if there is an error here, it must be reported to your bank as quickly as possible, as it could be a sign of fraud. If necessary, you may need to examine cleared checks. Any uncleared transactions will also need to be handled.
Book Balance (Trust Ledger)
The book balance is simply the number that you show for any IOLTA account within your financial statements. Note that there should also be a corresponding amount in the associated liability account. The balances must match between these two accounts, as the liability account will come into play should a shortfall occur with the IOLTA account (funds that do not belong to you).
Balance By Matter (Client Ledgers)
The balance by matter is really just a list of funds in the IOLTA account and which client those funds belong to. Note that the balance here should match your book balance perfectly. Any discrepancy must be investigated. Two of the most common reasons for discrepancies include depositing firm funds into the IOLTA account to combat associated fees, and IOLTA interest payments deposited into the account.
What If the Numbers Don’t Match?
If the three numbers discussed above do not match, an investigation must occur. However, your efforts will need to focus on specific areas depending on the account with the discrepancy.
What’s the Challenge?
From the information above, conducting a three-way trust reconciliation seems pretty simple. And, to be clear, it can be so long as reconciliations take place regularly. However, North Carolina only requires reconciliations once per quarter, which provides ample time for things to go wrong and for complications to arise.
While the law might only require quarterly reconciliations, a better practice is to reconcile trusts every two months, or even monthly. By taking a proactive stance and conducting more frequent reconciliations, it becomes possible to ensure accuracy and compliance, while avoiding potentially serious fallout from discrepancies.
Of course, many firms lack the in-house resources to make three-way reconciliation a monthly occurrence. If that sounds similar, we can help.
We can make three-way trust reconciliations as simple as clicking a mouse button. Contact us today to learn more.