Trust Accounting Mistakes That Cost Law Firms Their License
Updated November 2025
Trust accounting mistakes are the errors in handling client funds that lead to compliance violations, bar investigations, and professional discipline. According to the American Bar Association, mishandling client funds remains one of the leading causes of attorney discipline nationwide. These mistakes rarely stem from intentional misconduct - they result from inadequate systems, unclear processes, and insufficient oversight. Understanding what goes wrong allows you to prevent it.
Mistake #1: Reconciling the Total Without Checking Client Ledgers
A trust account showing a positive balance can still contain serious violations. Firms that check only the total bank balance miss problems hiding at the client level - negative balances on individual ledgers, misallocated funds between clients, or balances that don't match matter activity.
What goes wrong: The firm's trust account holds $75,000 and shows no overdrafts. But one client ledger is negative $4,000, masked by another client's larger balance. The positive total hides commingling that an auditor will find immediately.
The cost: Bar auditors examine client-level detail, not just totals. A three-way reconciliation that only matches bank balance to master ledger—without verifying individual client ledgers - isn't actually reconciliation. It's a compliance gap waiting to surface.
Prevention: Run a client balance report monthly showing every client with funds in trust. Verify no balance is negative. Confirm the sum of individual ledgers equals both your master ledger and your adjusted bank balance. All three must match.
Need a bookkeeper who understands Trust Accounting? See how we help law firms here →
Mistake #2: Treating Earned Fees as Still in Trust
When you complete work and issue an invoice, those fees are earned. Leaving earned fees in the trust account longer than your jurisdiction allows is itself a violation - you're holding firm funds in a client trust account. This is reverse commingling, and it's just as problematic as the standard kind.
What goes wrong: The attorney bills monthly but only transfers earned fees quarterly to reduce transaction volume. For 60-90 days at a time, earned fees that belong to the firm sit in the client trust account.
The cost: Rule 1.15 requires prompt transfer of earned fees. "Prompt" varies by jurisdiction but generally means within days of earning, not months. Auditors view delayed transfers as either ignorance of rules or intentional float - neither reflects well.
Prevention: Transfer earned fees within the timeframe your jurisdiction requires - typically within a few business days of sending the invoice. Document each transfer with the invoice it relates to. Set calendar reminders or automate the process through your practice management system.
Mistake #3: Skipping Reconciliation When Nothing Seems Wrong
The trust account hasn't had any unusual activity. Balances look right. The temptation is to skip formal reconciliation this month and catch up next month. This is how small errors compound into large problems.
What goes wrong: A posting error in January goes undetected. February's transactions build on the incorrect foundation. By April, reconstructing what went wrong requires hours of forensic review—if it's even possible.
The cost: Monthly reconciliation isn't just a best practice - it's a requirement in every jurisdiction. The trust account reconciliation process exists specifically to catch errors before they compound. Skipping it doesn't save time; it creates future time bombs.
Prevention: Reconcile monthly regardless of activity level. Even accounts with no transactions need verification that beginning and ending balances match and that no unexpected fees or interest affected the balance. Document every reconciliation with date and signature.
Mistake #4: Disbursing Against Uncleared Deposits
A client sends a retainer check. The attorney deposits it and immediately begins work, advancing costs from the trust account against the expected balance. The check bounces. Now the costs were paid with other clients' funds.
What goes wrong: The firm treated the deposit as available before it actually cleared. Standard bank holds exist for a reason - they protect against exactly this scenario. Ignoring them creates real liability.
The cost: Disbursing against uncleared funds means using other clients' money if the deposit fails. Even if you replace the funds immediately, the commingling occurred. If the failed deposit is large enough and other client balances were affected, the violation is serious.
Prevention: Wait for deposits to clear before disbursing against them. Establish a firm policy: no disbursements from newly deposited funds until clearance is confirmed. For large deposits, contact the bank directly to verify clearance rather than assuming based on standard hold periods.
Mistake #5: Sloppy Documentation on Disbursements
Every dollar leaving a trust account should tie to supporting documentation: an invoice, a settlement statement, a vendor receipt, written client authorization. When documentation is missing, incomplete, or created after the fact, the disbursement looks improper—even if it wasn't.
What goes wrong: The paralegal processes a cost reimbursement but forgets to attach the receipt. The attorney approves a fee transfer but the invoice isn't linked in the system. Six months later, no one can prove these disbursements were legitimate.
The cost: Bar auditors presume undocumented disbursements are improper until proven otherwise. Reconstructing documentation months later appears suspicious. Even legitimate transactions become audit findings when the paper trail is incomplete.
Prevention: Require documentation before any disbursement processes - not after. Use practice management software like Clio or MyCase that links disbursements to supporting documents automatically. Review disbursement documentation monthly as part of your reconciliation process.
Mistake #6: Manual Processes Without Oversight
The bookkeeper has handled trust accounting for years with no problems. There's no second review because the current process seems to work. Then something goes wrong - an error, a misunderstanding, or worse - and no one catches it until significant damage is done.
What goes wrong: Without oversight, mistakes go undetected. A posting error propagates for months. An employee manipulates records without anyone noticing. By the time problems surface, remediation is expensive and the bar is already involved.
The cost: Separation of duties exists to catch both innocent errors and intentional misconduct. The person making deposits shouldn't be the same person disbursing funds, and neither should reconcile without review. Single points of failure in trust accounting create unnecessary risk.
Prevention: Implement basic controls: different people handle deposits, disbursements, and reconciliation where possible. For solo practitioners, have a CPA or legal bookkeeper review reconciliations quarterly. Create an audit trail that documents who did what and when. Review that trail regularly.
Mistake #7: Ignoring Dormant Balances
Client matters close, but small balances remain in trust. Staff intend to address them later, but later never comes. Funds sit untouched for months or years, creating compliance issues and potential escheatment obligations.
What goes wrong: A $200 balance from a closed matter sits untouched for 18 months. The firm technically owes those funds to the client but hasn't refunded them. Meanwhile, state unclaimed property laws create reporting and remittance obligations the firm isn't meeting.
The cost: Dormant balances suggest inadequate attention to client funds. They also trigger state unclaimed property requirements that vary by jurisdiction. Failure to escheat properly creates additional compliance exposure beyond the trust accounting issues.
Prevention: Run a dormant balance report monthly. Flag any balance with no activity for 90+ days. Investigate each one: Is the matter truly closed? Did the client receive everything owed? Should funds be refunded or escheated? Document your review and resolution.
Mistake #8: Assuming Software Prevents Errors
Legal practice management software provides excellent infrastructure for trust accounting - automated ledgers, reconciliation reports, audit trails. But software records what you enter. It doesn't verify that entries are correct, timely, or complete.
What goes wrong: The firm relies on their software's reconciliation report showing everything matches. But transactions were posted to wrong clients, fees transferred without proper invoicing, and deposits attributed incorrectly. The report shows balance—but the underlying data is wrong.
The cost: Software creates a false sense of security when firms assume automatic means accurate. The trust accounting red flags that auditors catch aren't software failures - they're human errors that software faithfully recorded.
Prevention: Treat software as infrastructure, not oversight. Human review must verify that data entered is accurate, that processes are followed, and that reports reflect reality. Software generates the reconciliation report; a person must confirm it's actually correct.
The Pattern Behind These Mistakes
These eight mistakes share common roots: inadequate systems, insufficient oversight, and treating trust accounting as administrative work rather than compliance obligation.
Firms that avoid trust accounting problems share different traits:
Written procedures for every trust transaction type
Separation of duties appropriate to firm size
Monthly reconciliation without exception
Regular review of dormant balances and documentation
Human oversight of automated processes
The investment in proper systems and oversight is minimal compared to the cost of fixing trust account violations after they occur - or the cost of bar discipline that proper procedures would have prevented.
The Real Cost of Trust Accounting Mistakes
Consequences scale with severity and response time.
Immediate costs: Forensic accounting fees to identify and document problems. Legal fees for bar responses. Staff time diverted from billable work to compliance remediation.
Regulatory costs: Private reprimand, public censure, required audits, fines, suspension, or disbarment depending on severity. Trust account freezes that paralyze firm operations during investigation.
Business costs: Malpractice insurance premium increases or coverage denial. Client departure when compliance issues become known. Reduced firm valuation if selling or merging.
Personal costs: Stress of bar investigation. Reputation damage that follows attorneys throughout their careers. In serious cases, personal liability for client losses.
The firms that avoid these costs aren't lucky - they're systematic. Monthly IOLTA compliance reviews catch problems when they're small and correctable, before they compound into career-threatening violations.
Your Next Step: Legal Bookkeeping Built on Trust Accounting Best Practices
The most dangerous trust accounting mistakes don’t look dangerous - until they are. A single misstep with reconciliation or a misapplied retainer can trigger audits, penalties, and client fallout.
We provide legal bookkeeping services designed for trust compliance, monthly oversight, and audit-ready reporting - so you can focus on practicing law, not second-guessing your books.
Book a discovery call to learn more about our bookkeeping for law firms. Let’s protect your firm from risk while positioning it for growth.
Frequently Asked Questions
-
The most common trust accounting mistakes include failing to reconcile at the client ledger level, delayed transfer of earned fees, skipping monthly reconciliation, disbursing against uncleared deposits, inadequate disbursement documentation, lack of oversight on manual processes, ignoring dormant balances, and over-reliance on software without human verification.
-
Consequences range from required remediation for minor errors to bar discipline for serious violations. Outcomes depend on severity, whether clients were harmed, how quickly errors were corrected, and whether the firm self-reported. Intentional misappropriation typically results in disbarment. Negligent handling may result in suspension, fines, or mandatory audits.
-
Prevention requires written procedures for all trust transactions, separation of duties appropriate to firm size, monthly reconciliation without exception, documentation requirements enforced before disbursements process, regular review of dormant balances, and human oversight of automated systems. Most mistakes result from inadequate systems rather than intentional misconduct.
-
Yes. Every jurisdiction requires regular trust account reconciliation, with monthly being the standard expectation. Some states specify monthly in their rules; others require reconciliation at least as often as statements are generated. Regardless of explicit requirements, monthly reconciliation represents the minimum defensible practice.
-
Software provides infrastructure—automated ledgers, reconciliation reports, audit trails - but cannot prevent violations alone. Software records what users enter without verifying accuracy. Human oversight must confirm data is correct, procedures are followed, and reports reflect reality. Software assists compliance; it doesn't guarantee it.
-
Address errors immediately. Stop any processes that might compound the problem. Identify the source and scope of the error. Make correcting entries with full documentation. Replace any shortage from firm funds. Implement controls to prevent recurrence. Depending on severity and jurisdiction, self-reporting to the bar may be required or advisable.
-
Auditors compare bank statements to client ledgers and master trust records. They examine individual client balances for negatives. They review disbursement documentation for completeness. They look for patterns: late reconciliations, dormant balances, frequent adjustments without explanation, and earned fees remaining in trust. Problems at any point trigger deeper investigation.
-
The attorney is ultimately responsible regardless of who performs bookkeeping tasks. Delegation of trust accounting work to staff, bookkeepers, or software does not transfer compliance responsibility. Partners in firms share responsibility for trust accounting even if one attorney primarily manages it. Bar discipline applies to attorneys, not their staff.
