In trust accounting, even a small bookkeeping mistake can become a much bigger problem if it goes unnoticed for a few months.
An outstanding cheque, a wrongly recorded transaction, or an incomplete reconciliation might seem minor at first. However, during a Law Society of Alberta (LSA) audit, these issues can make it difficult to show that your firm’s trust records are complete, up to date, and accurate.
The Law Society carries out random and risk-based compliance audits of Alberta law firms, and trust accounting records are a key part of these reviews. Trust accounting rules vary by province and by regulator. This article walks through Alberta’s Law Society (LSA) requirements specifically, though the underlying principles carry over to most other jurisdictions.
The good news is that many common trust accounting mistakes are easy to spot if firms keep their records up to date and check them regularly.
Before we look at the five most common trust accounting errors, it helps to clarify what counts as a trust accounting error under Alberta’s rules.
What Counts as a Trust Accounting Error in Alberta?
In Alberta, a trust accounting error is any mistake or gap in how a law firm handles client trust money that could put it out of compliance with the Law Society’s Financial Rules.
That includes more than just calculation mistakes. Typical trust errors include:
- Reconciliations that don’t balance or aren’t completed on time.
- Trust and operating funds that are commingled, even temporarily.
- Withdrawals or transfers made without proper lawyer approval or supporting documentation.
- Client ledger entries that can’t be traced back to source transactions.
- Records that exist but can’t be produced quickly in a complete, organized form.
An error doesn’t always mean there’s a shortage in the trust account. Even when the numbers ultimately balance, poor processes like late reconciliations, missing approvals, and scattered records can still be flagged during an LSA audit and lead to additional scrutiny, conditions on your trust accounts, or required remedial work.
With that definition in mind, here are five trust accounting errors Alberta law firms commonly make before an LSA audit (and how to avoid them).
1. Your Three-Way Reconciliation Doesn’t Balance
Reconciling a trust account involves more than just comparing your accounting software to your bank statement. Alberta law firms must check three numbers: the adjusted trust bank balance, the client trust listing, and the trust journal. All three must match.
For example, if your adjusted bank balance is $152,500 and your trust journal shows the same, things look fine. But if your client trust listing totals $151,900, you now have a $600 difference to explain.
Perhaps a transaction was entered incorrectly or assigned to the wrong client. These trust account reconciliation errors often have simple causes, but you need to find and explain the difference before the reconciliation is complete.
It becomes much harder to fix these issues if discrepancies carry over from month to month. A $600 difference you notice today might take only a few minutes to track down. But after three months and many more transactions, finding the cause can take much longer.
The Law Society tells firms to clearly explain reconciliation adjustments instead of just carrying them forward to the next month. Doing monthly reconciliations helps you catch bookkeeping mistakes and problem transactions early, before they get harder to track.
2. Reconciliations Are Late or Incomplete
One of the simplest trust accounting errors to avoid is also one that firms often fall behind on.
Under the Law Society’s Financial Rules, Alberta law firms must reconcile their trust accounts no later than the end of the following month. That applies to all trust accounts, including Separate Interest-Bearing Accounts, even when there was no activity or the account had a zero balance.
Finishing the reconciliation is just one step. Firms also need to keep all supporting records, such as:
- The trust reconciliation report
- Client trust listing
- Trust journal
- Electronic banking records
- Proof of review
If you fall behind, catching up can become a much bigger task. Instead of reviewing just one month of recent transactions, your team might have to piece together several months of activity right before an audit. Outdated reconciliations also make it harder to spot discrepancies or check if trust funds match your firm’s obligations.
If your reconciliations are not up to date when an audit starts, the Law Society can require remedial steps, impose conditions on your trust accounts, or, in serious cases, restrict your ability to use those accounts until shortages are resolved and records are current. Staying current with reconciliations helps you avoid this rush and keeps your trust accounts clear all year.
3. Commingling Trust and Operating Funds
There should be a clear line between trust money and the firm’s own money, but everyday transactions can blur that line more easily than you might think.
For example, you finish the work, send the client an invoice, and are entitled to move the right amount out of trust. The work is done, and the money is earned, but if no one makes the transfer, firm money stays in the trust account longer than it should.
Once your firm is entitled to those funds, you must withdraw or transfer them as soon as possible, and no later than one month after the firm is entitled to the funds.
Another example of an issue that may arise if a client or an insurance company sends more than what’s owed, that overpayment should be deposited directly into trust – not into the firm’s operating account, where it then has to be untangled from other operational transactions. The separation of operating and trust bank accounts ensure mistakes such as above are caught in a timely manner and are clearer to amend.
Neither situation usually starts with a complex accounting problem. Often, it’s just a transaction that wasn’t finished. Keeping your books up to date makes it easier to spot and fix these unusual balances before they last for months.
4. Transfers and Withdrawals Don’t Have the Right Documentation
A trust transaction might be recorded correctly in the books but still leave the firm with missing documentation.
Every withdrawal or transfer of trust money needs lawyer approval, and you must keep a record of that approval, either on paper or electronically. Transfers between client trust ledgers also need extra documentation: client instructions and a lawyer-signed transfer record with the date, amount, and the files involved. This record should be ready before the transfer takes place.
Problems often happen during the handoff. One person starts the transaction, a lawyer approves it, and someone else enters it into the accounting system. The money goes to the right place, but the approval or supporting document might not make it into the reconciliation records.
Electronic transactions are no exception. Approval can be given digitally, but you still need to keep the record with the monthly reconciliation.
This is why good trust accounting relies on the process around each transaction, not just on the numbers balancing. A consistent workflow makes it much less likely that documentation will get lost.
5. Your Records Are Correct, But You Can’t Easily Produce Them
You don’t want to find out during an audit that no one knows where last year’s trust records are stored.
Over time, documents can end up in many places. Bank statements might stay in the bank portal, approvals in email, reports in accounting software, and other documents in different folders. Even if everything was done at the time, putting the full record together later can take a lot of time.
Alberta law firms must keep prescribed financial records in a safe, secure location where they can be retrieved on demand for at least ten full years. That includes monthly records such as:
- Bank reconciliations
- Client trust listings
- Trust and general journals
- Trust transfer reports
- Bank statements
- Deposit slips
- Electronic banking records
Proof of review should also be included in the records. Someone may have checked the reconciliation when it was done, but if it wasn’t documented, there’s no way to show it happened.
Having a consistent month-end process solves many of these problems. Instead of searching for documents when needed, the firm ends each month with a complete, organized, and documented reconciliation package that’s easy to find later.
How to Spot Trust Accounting Errors Before an LSA Audit
It’s much easier to fix a trust accounting problem when you’re looking at last month’s transactions, rather than trying to figure out what happened a year ago. That’s why it’s wise to check more than just whether the accounts balance from time to time.
Before an audit, confirm that:
- Monthly reconciliations are complete and current.
- Your adjusted bank balance, client trust listing, and trust journal agree.
- Outstanding cheques or deposits have been investigated.
- Old trust balances have been reviewed.
- Trust transfers have the appropriate supporting documentation.
- Lawyer approvals are documented.
- Bank fees or other charges have been handled correctly.
- Client ledger balances can be traced back to supporting transactions.
- Required monthly records have been retained.
- Review and oversight of each reconciliation is documented.
Treat this as regular financial housekeeping, not just something you do to prepare for an audit. If you keep up with these tasks regularly, getting an audit notice won’t mean a last-minute scramble to put your books together.
Good Trust Accounting Starts Long Before an Audit
When your books are up to date, trust accounting is much easier to manage. Reconcile every month, look into discrepancies right away, keep your records organized, and handle small issues before they grow.
Launchbury Accounting & Bookkeeping Solutions helps professional services and law firms across Canada manage their bookkeeping and financial records, with a deep understanding of the special requirements of law firm trust accounting.