A 3-way reconciliation done wrong is worse than no reconciliation at all.
The Trust Accounting Problem Most Firms Don’t See Coming
Most
law firm compliance issues don’t start with fraud—they start with small
reconciliation errors that go unnoticed. IOLTA accounts require strict
three-way reconciliation between bank balances, book records, and client matter
ledgers.
The
risk is not the absence of reconciliation, but incorrect reconciliation that
appears balanced on the surface but fails audit testing.
State
Bars typically begin reviews by requesting monthly three-way reconciliations.
Missing detail, unsupported adjustments, or mismatched matter ledgers can
quickly escalate into formal audit scrutiny.
For
most firms, the real issue is not intent - it is process consistency and
documentation discipline.
What a Proper Three-Way Reconciliation Looks Like
A
valid reconciliation confirms that the bank statement balance, the accounting
book balance, and the total of all individual client matter ledgers are equal.
The Fix
At
month-end, run a complete matter ledger detail report, reconcile it to both the
bank and book balances, and retain all supporting documentation on a monthly
basis to ensure audit readiness.