How to Fix Trust Account Violations: A Step-by-Step Guide for Law Firms
Updated November 2025
Trust account violations occur when client funds are mishandled, misallocated, or inadequately tracked, resulting in discrepancies between what your bank holds and what your records say you owe clients. Rule 1.15 of the ABA Model Rules of Professional Conduct governs safekeeping of client property, and violations rank among the leading causes of attorney discipline nationwide.
Fixing these violations requires systematic investigation, precise correction, and thorough documentation. This guide covers the exact steps to identify the source of trust account problems, restore balance, and protect your license.
Types of Trust Account Violations
Trust account violations fall into categories based on severity and cause. Understanding which type you're facing determines the correction approach.
Reconciliation Discrepancies
Your bank balance doesn't match your client ledger totals. The money exists somewhere - either in the account or in your records - but the numbers don't align. These discrepancies typically result from posting errors, timing differences, or missed transactions. They're fixable through careful review and adjustment.
Client Ledger Negative Balances
A specific client's ledger shows a negative balance, meaning you've disbursed more for that client than they deposited. The shortage was covered by funds belonging to other clients. This is commingling - a serious violation in every jurisdiction. Correction requires immediate funding and documentation.
Actual Shortages
The bank holds less money than your client ledgers say you owe. Funds are missing. Causes range from theft to bank errors to disbursements that should have come from operating funds. Shortages require immediate replacement, investigation, and potentially bar notification depending on your jurisdiction and the amount.
Record-keeping Failures
Your documentation is incomplete, missing, or disorganized to the point that you cannot demonstrate compliance. The ABA Model Rules on Client Trust Account Records specify exactly what documentation you must maintain. Even if no funds are actually missing, the inability to prove proper handling constitutes a violation. Reconstruction may be necessary.
But even firms with accurate balances are often still exposed - here’s what attorneys overlook. →
Most trust account discrepancies aren't random — they come from specific, preventable causes.
An out-of-balance trust account isn’t just a bookkeeping issue — it’s a ticking compliance time bomb.
How to Fix an Out-Of-Balance Trust Account (Step-By-Step)
Fixing an out-of-balance trust account involves a systematic reconciliation process that focuses on thorough record examination, accurate deposit matching, and swift error correction.
Step 1: Stop the Bleeding
Before investigating the source, prevent additional damage.
Halt Non-Essential Disbursements
Pause any trust disbursements that aren't time-critical until you understand the scope of the problem. Continuing to move money while the account is out of balance risks compounding errors or deepening a shortage.
Secure Current Records
Make copies of your current bank statements, client ledgers, and trust registers. If the violation involves potential fraud or theft, preserve original documents and electronic records before anyone can alter them.
Identify the Reconciliation Gap
Run a three-way reconciliation as of the most recent bank statement date. Calculate the exact discrepancy:
Adjusted bank balance: $______
Client ledger total: $______
Master trust ledger: $______
Discrepancy amount: $______
Knowing the precise gap focuses your investigation.
Step 2: Identify the Source
Trust account discrepancies have identifiable causes. Work through these categories systematically.
Timing Differences
Check deposits in transit and outstanding checks first. A deposit made on the last business day may not appear on your statement. Checks written but not yet cashed affect your book balance but not the bank balance. Calculate whether timing adjustments fully explain the discrepancy. If they do, your accounts aren't actually out of balance - you just need to document the reconciling items.
Posting Errors
Review recent transactions for common mistakes:
Transposition errors ($1,500 recorded as $1,050)
Transactions posted to wrong client ledgers
Duplicate entries or missed entries
Deposits recorded as disbursements (or vice versa)
Transactions posted to trust that belonged in operating
Start with the largest transactions and work down. Errors typically hide in recent activity rather than months-old entries.
Allocation Mistakes
Funds deposited correctly but credited to the wrong client create imbalances between individual ledgers while potentially keeping the total correct. Run a report showing every client balance. Look for unexpected negative balances or balances that seem too high relative to that client's matter activity.
Unauthorized Transactions
Compare every bank transaction against your records. Look for withdrawals, transfers, or fees you didn't authorize or don't recognize. Bank errors happen. Fraud happens. Either requires immediate escalation—to the bank for errors, to appropriate authorities for suspected theft.
Fee Transfers Without Documentation
A common violation source: transferring earned fees from trust to operating without proper documentation showing the fees were actually earned. The trust account shows the disbursement, but no invoice or fee agreement supports it. This looks like misappropriation even when it isn't.
Step 3: Correct the Specific Error Type
Once you've identified the source, apply the appropriate fix.
Fixing Posting Errors
Create correcting journal entries with clear explanations. If you posted $1,500 to Client A when it should have been Client B:
Debit Client A's ledger for $1,500 (reversing the incorrect entry)
Credit Client B's ledger for $1,500 (posting correctly)
Note the date, reason, and your initials on both entries
The master trust ledger balance doesn't change - this is an allocation correction only.
Fixing Negative Client Balances
A negative balance means you've used another client's funds. You have two options:
Collect from the client: If the client owes these funds, invoice immediately and collect. Transfer from operating to trust to cover the shortage until the client pays.
Absorb the cost: If the disbursement was your error (work performed without a sufficient retainer, costs advanced without authorization), replace the funds from your operating account immediately.
Do not leave negative balances unresolved. Every day a negative balance exists, you're technically misappropriating another client's funds.
Fixing Actual Shortages
Replace missing funds immediately from personal or firm operating funds. This isn't optional - client funds must be made whole regardless of how the shortage occurred.
Then investigate the cause:
Bank error: Contact the bank with documentation. They'll investigate and credit your account if the error is theirs.
Internal theft: Engage appropriate professionals - forensic accountants, attorneys, law enforcement as warranted.
Disbursement error: Identify what went wrong and implement controls to prevent recurrence.
Document everything. Your state bar may require disclosure of shortages above certain thresholds or shortages that remained unresolved for specified periods.
Fixing Missing Documentation
Reconstruct records using available sources:
Bank statements show every transaction with dates and amounts
Canceled checks show payees
Deposit slips may indicate client attribution
Fee agreements and invoices support transfers
Email correspondence may confirm client instructions
Create a reconstruction memo documenting your methodology, sources used, and any transactions you couldn't fully verify. This demonstrates good faith effort even where perfect reconstruction isn't possible.
Step 4: Document the Correction
Every correction requires documentation that demonstrates what went wrong, what you did to fix it, and what controls prevent recurrence.
Correction Documentation Should Include:
Date the error was discovered
Date range affected
Nature of the error (posting mistake, negative balance, shortage, etc.)
Exact amounts involved
How the error was identified
Correcting entries made (with dates)
Funds transferred to cure any shortage (with source)
Person who made the correction
Supervisory review and approval
This documentation serves two purposes: it creates an audit trail showing proper remediation, and it provides evidence of your response if the matter ever faces bar scrutiny.
Step 5: Complete a Clean Reconciliation
After corrections, perform a fresh trust account reconciliation to confirm balance.
Verification Checklist:
Bank balance (adjusted for timing items) matches client ledger total
Client ledger total matches master trust ledger
No individual client shows a negative balance
All correcting entries are documented and initialed
Reconciliation is signed and dated
If the accounts still don't balance after your corrections, you haven't found all the errors. Return to Step 2 and continue investigating.
Step 6: Implement Preventive Controls
Fixing today's violation means nothing if the same problem recurs next month. Based on what went wrong, implement targeted controls.
For Posting Errors:
Require a second person to review trust transactions before posting
Use practice management software with built-in client ledger tracking like Clio or MyCase
Reconcile weekly rather than monthly to catch errors faster
For Negative Balances:
Set up alerts when any client balance approaches zero
Require replenishment requests before balances hit threshold
Block disbursements that would create negative balances
For Shortages:
Separate duties: person depositing shouldn't be person disbursing
Require two signatures on trust checks above a threshold amount
Review bank statements within 5 days of receipt
For Documentation Gaps:
Create standardized procedures for every trust transaction type
Use checklists for fee transfers, cost disbursements, and refunds
Maintain matter-level files with supporting documentation
Fixing an out-of-balance trust account requires a precise, step-by-step reconciliation - shortcuts only make things worse.
When You Need Professional Help
Some situations exceed internal capacity to resolve.
Multiple Months Out of Balance
If your trust account has been out of balance for three or more consecutive months, the errors are compounding faster than you're catching them. A forensic review by someone with fresh eyes may identify patterns you're missing.
Shortage Exceeds Operating Reserves
If replacing the shortage would strain your firm financially, you need both accounting help and potentially legal counsel regarding bar notification requirements and timeline.
Suspected Theft
Don't investigate fraud yourself beyond initial preservation of evidence. Engage forensic accountants and attorneys who specialize in these matters. Mishandling a theft investigation can compromise recovery and create additional liability.
Audit Notification Received
If your state bar has notified you of an upcoming trust account audit, professional preparation is worth the investment. You need someone who understands exactly what auditors look for and how to present your records favorably while remaining truthful.
Records Are Missing or Destroyed
Reconstruction from bank records alone is painstaking work requiring expertise. Professionals can often recover more information than you'd expect - and document the reconstruction methodology in ways that satisfy regulators.
The firms that maintain trust account compliance year after year don’t cut corners - they build strong systems.
Bar Notification Requirements
Different jurisdictions have different disclosure requirements for trust account violations. Research your specific state bar rules regarding:
Shortage thresholds: Some states require notification of shortages above certain amounts
Duration triggers: Unresolved discrepancies for specified periods may require disclosure
Self-reporting benefits: Many jurisdictions treat self-reported violations more leniently than discovered violations
Timing requirements: How quickly must you report after discovering a violation?
When in doubt, consult your state bar's ethics hotline or a legal ethics attorney. Self-reporting a violation you've already corrected typically results in far better outcomes than having the same violation discovered during an audit.
➡️ Need help fixing past violations? Explore our trust account cleanup services.
Recovery Timeline Expectations
Minor Posting Errors: Same-day correction once identified. Full reconciliation within one week.
Negative Client Balances: Funds replaced within 48 hours. Investigation and documentation within one week. Prevention controls within 30 days.
Actual Shortages: Funds replaced immediately (same day). Investigation within 30 days. Bar notification per jurisdiction requirements. Control implementation within 60 days.
Recordkeeping Reconstruction: 30-90 days depending on scope. Consider engaging professional help to accelerate timeline.
Not every trust account problem can be fixed internally - knowing when to bring in expert support protects your firm and your license.
Moving Forward After a Violation
A trust account violation doesn't end your career. Attorneys recover from these situations regularly - when they respond appropriately.
The firms that survive trust account problems share common traits: they identify issues quickly through regular reconciliation, they correct problems immediately without hoping they'll resolve themselves, they document everything, and they implement genuine controls rather than just promises to do better.
Your IOLTA compliance depends not on never making mistakes, but on catching mistakes fast, fixing them completely, and demonstrating that your systems prevent recurrence.
Restore Confidence in Your Trust Accounting
At Accounting Atelier, we specialize in helping law firms bring their client trust accounts back into proper alignment. Our trust account cleanup service provides thorough support across the entire reconciliation process - including correcting ledger errors, addressing unreconciled bank statement balances, and preparing full three way reconciliation documentation.
We work closely with your team to uncover the root causes of reconciliation errors, resolve them precisely, and build a clear, audit-ready record across all trust accounting records. Every trust ledger adjustment is handled carefully, giving your firm the confidence to move forward knowing your client funds are fully protected.
Frequently Asked Questions
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A trust account violation occurs when a law firm mishandles client funds held in trust. Violations include commingling client funds with firm money, maintaining negative client balances, failing to reconcile accounts, inadequate recordkeeping, or any discrepancy between bank balances and client ledger totals. Severity ranges from technical errors to potential misappropriation.
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Replace the shortage immediately from your operating account or personal funds. Then investigate whether the client owes these funds (bill and collect) or whether the disbursement was an error you must absorb. Document the correction including date discovered, amount, funding source, and corrective entries. Never leave negative balances unresolved overnight.
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Reporting requirements vary by jurisdiction. Some states require disclosure of shortages above certain thresholds or discrepancies unresolved for specified periods. Self-reporting typically results in more favorable treatment than discovered violations. Check your state bar rules or contact their ethics hotline for specific requirements.
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Simple posting errors can be corrected same-day once identified. Negative balances requiring fund replacement should be resolved within 48 hours. Actual shortages require immediate funding with investigation completed within 30 days. Full recordkeeping reconstruction may take 30-90 days depending on scope and available documentation.
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Common causes include posting errors (wrong amounts, wrong clients), timing differences between bank and book entries, transactions posted to trust that belonged in operating accounts, fee transfers without supporting documentation, allocation mistakes between client matters, and unauthorized transactions including potential fraud.
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Professional help is warranted when accounts have been out of balance for multiple consecutive months, when shortages exceed your ability to replace from operating funds, when theft is suspected, when you've received audit notification, or when records require significant reconstruction. The cost of expertise is minimal compared to bar discipline risk.
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Intentional misappropriation typically results in disbarment. Negligent handling with client harm often results in suspension. Technical violations with prompt correction and demonstrated remediation typically result in private reprimand or no discipline. Your response to discovering a violation significantly affects the outcome.
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Implement controls targeted to what went wrong: dual review for posting errors, balance alerts for negative balance prevention, segregated duties for shortage prevention, and standardized procedures with checklists for documentation gaps. Monthly reconciliation catches problems before they compound into serious violations.
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Maintaining rigorous, up-to-date trust account records protects law firms by:
Demonstrating fiduciary responsibility to regulators and clients
Reducing the risk of errors, fraud, and disputes
Strengthening the firm’s operational foundation and audit readiness Proactive reconciliation isn’t just compliance - it’s an essential pillar of a high-performing legal practice.
