Part 3 of a discussion on lawyers Three Step Trust Reconciliation.
Step 2: Trust Cash Books and Banks
In Part 2 we saw that Step One requires a high level overview of the trust. Start the trust reconciliation with simply comparing the total trust assets to the total trust liabilities.
Verification
While Step One requires a very high level test to confirm that the trust assets and liabilities correspond, the next steps require internal verification.
Trust Ledger = Trust Cash
We must verify the internal consistency of the reports we rely on.
Now we investigate the trust cash books, the bank reconciliation and the bank statements.
Trust Cash Books & Bank accounts
Money is typically not kept on the premises. A common feature of trust accounting is that the trust assets must be secured. In the event of trust cash, this is done in a banking account.
Most jurisdictions have clear rules on which kind of bank account is allowed for use as a lawyers trust account. Generally these accounts will be at established banks or similar. Make sure that the bank you choose is approved.
Traditionally it was not uncommon for a law firm to manage multiple such trust bank accounts. Either a bank account for each client, or bank accounts per practice area, depending on need and regulation.
Each bank account should match a corresponding cash book in the law firms accounting records. Historically a cash book was a massive hard cover book, with analysis columns, used to capture and reflect cash received and paid out.
Bank Reconciliation
Process and Report
To reconcile, or reconciliation mean both
- a process, where by transactions on one report are matched individually to corresponding items on another report, which results in a report; and
- a document, printed out, confirming the result of the matching process, indicating the balances and transactions outstanding.
Reconciliation Process
Bank Reconciliation refers to a process of comparing the transactions on the cash book with the corresponding transactions on the bank statement. This is a recurring event which closely follows reporting periods such as month ends, or quarters. It can be done weekly, and should not be postponed beyond a quarter.
Regardless of local regulation it is recommended that bank reconciliations are conducted frequently. Not only does it verify that the trust cash book corresponds to the trust bank account, it also acts as an early fraud detection and warning mechanism.
Note that the bank statement reflects transactions “in the real world” as processed by the bank. We can not change the bank statement.
What we can change is the cash book. This means that as the bank statement is inspected, the cash book must be compared one transaction at a time, to make sure the transactions correspond. In the event of transactions which occur on the bank statement and not on the cash book, these must be placed on the cash book. An example would be a direct deposit, or fund transfer. Money has been received, but the client has not informed us of this fact yet. A new receipt must be posted to the client trust ledger account to benefit the client, and update the cash book balance. This is a practical application of the rule of thumb “put it where it isn’t”. Note that all transactions reflected on the bank statement must appear on the cash book.
Cash book transactions may not all reflect on the bank statement. These are shown as outstanding transactions. For example, in the event that a cheque (or check in the USA) is drawn on the trust banking account, this may appear on the cash book, but as it has not been presented to the bank for payment, it does not appear on the bank statement. It is shown as outstanding.
Reconciliation Document
It is an error to assume that the trust cash book and bank statement balances must match. Outstanding transactions will affect these balances.
Only after ALL transactions have been accounted for, either as matching both the cash book and bank statement, or as outstanding, will the balances match.
The result of a successful reconciliation process must be an accurate bank reconciliation report document which confirms the balances.
A bank reconciliation report document should at least contain the following:
- the bank balance (from the bank statement)
- the cash book balance (system generated)
- the difference between the bank balance and the cash book balance
- any outstanding transactions
| Bank Reconciliation Document |
 |
| A screenshot of a bank reconciliation showing the bank balance, the cash book balance, the total of outstanding transactions, and the 0.00 recon result. Outstanding transactions are listed below. |
Note that on an accurate and complete bank reconciliation, the difference should be nil: 0.00 indicates that all transactions are accounted for.
Outstanding transactions represent those transactions which we have entered into the system, which does not yet reflect on the bank statement. Inspect the outstanding items for stale transactions.
Step Two
Comparing cash book and bank balances is itself a process that requires three documents:
- Cash Book
- Reconciliation
- Bank Statement
Trust Cash = Trust Bank +/- Recon
The reconciliation report will indicate and confirm the correspondence of the trust cash book with bank statement balance.
In the event that a bank reconciliation is incomplete or inaccurate, the only conclusion to be drawn is that the cash book does not match up to the bank statement. This means that the first part of the verification process has failed. One of the primary reports used in the trust reconciliation is unreliable, and as a consequence the trust reconciliation has failed.
| Step 1 | Trust Ledger = Trust Cash |
| Step 2 | Trust Cash = Trust Bank +/- Recon |
Verification of the Trust Cash in Step Two, ensures that at least one part of our trust position has been confirmed.
[Part 4 Follows]
–Dynamic