Explain two common sources of inaccuracies that can occur in trust accounts.

Trust Property Management: 7 Trust Accounting Mistakes You Need to Stop Making Now

With a career spaning over 25 years in international hotels, holiday letting management rights as well as receiver’s industries, I have seen many trust property management accounting mistakes that could have been avoided.

Below are the 7 most common mistakes people make in our industry. If you’re guilty of making these mistakes in your business, be sure to correct them before it’s too late.

And if you’re not guilty of any of these, congratulations! However, it’s still important to develop your trust accounting policies and procedures to minimise the possibility of error.

1. Not reconciling daily

One of the most common trust accounting mistakes is not reconciling daily. To maintain the most accurate and up-to-date records, you should make sure your accounts are balanced every day. This way, come mid-month or end of month, you can rest easy knowing that you’re not forgetting something crucial.

Additionally, any discrepancies in your accounts are easier to spot on a daily basis rather than on a monthly basis. This means that mistakes won’t be allowed to snowball and can be rectified more readily.

Similarly, it’s crucial to reconcile your current trust account on a daily basis. This ensures that your data is up-to-date and free of mistakes when you come to end of month rollover. If you are not performing daily reconciliation, you should make this a priority. Alternatively, outsourcing to a specialist hospitality management right bookkeeping provider can be priceless!

2. Not establishing trust-specific rules 

Every property management business should have its own set of trust-specific policies and procedures. They should be formal and detailed to ensure compliant trust accounting and consistency across the business. As part of the procedures, it’s also helpful to develop standardised forms and checklists to minimise any chance of err.

3. Hiring the wrong person for the job

Hiring the wrong person for the job can be detrimental to your business. An inexperienced or underqualified staff member might make some small mistakes in the first few weeks. Over time, these can lead to an assortment of Band-Aid fixes, time wasted during mid-month and end of month and ultimately, a mess of a trust fund.

Rather than spending time and money cleaning up your trust fund in retrospect, it’s always better to spend a little more money by outsourcing to an experienced specialist bookkeeping firm, that has proven trust account management experience.

4. Not knowing the position of your trust accounts

Knowing the exact position of your trust accounts is vital.

Ultimately as the licensee, it’s crucial you know what you’re signing off each month. Any discrepancies will be your responsibility and could potentially cause irreparable damage to your reputation.

5. Misallocating trust funds

While this may seem like a no-brainer. In my time working for a receiver’s firm, I have seen property managers misallocate trust funds to pay off mounting operating expenses or worse the embezzlement of owners’ monies. These discrepancies can not only snowball into a bigger problem but can also result in audit breaches and a potential visit from Fair Trading. Simply put, don’t risk it. Ever.

Likewise, you should never withdraw cash from your trust fund, no matter how insistent your owners or tradies are. This is bad practice and can result in loss of license and hefty penalties from the authorities.

6. Lack of adequate backups

Imagine working on receipting accommodation payments, rent, paying bills and disbursing funds all week, only to have your computer crash. Bam. You’ve lost a whole week’s worth of precious data.

Failing to perform daily back-ups is one of the most common and most avoidable trust accounting mistakes.  So, if you’re sick of manually backing up your data daily, think again. The financial cost of needing to re-enter lost data is far too great if anything ever goes wrong. Performing this simple task each day means you have peace of mind that anything lost can be easily and quickly restored.

7. Disbursing funds before a transaction closes

Another common trust accounting mistake is disbursing funds early. Under no circumstance should disbursement occur before the keys are exchanged and all required paperwork completed. Deals fall through regularly, and last-minute agreements/alterations can often be made. If early disbursement occurs in these instances, numerous time-consuming adjustments would be required.

Early disbursements result in non-compliance and are a major headache for your trust accountant – it’s simply not worth it.

Summary

If you can avoid making these 7 trust property management mistakes in your business, you will be sure to remain compliant and will save yourself a great deal of stress at both mid-month and end of month.

Thanks for reading! I trust you enjoyed this post. If you need to engage a trust account bookkeeping service, which has extensive experience with both HiRUM property management software, and first-hand experience in managing a trust account in the holiday letting industry, feel free to contact us. We would be happy to arrange a chat and answer your questions.

HiRUM’s Trust Accounting Software is renowned in the industry, providing not only precision accounting and transparent record keeping, but our accounting wizards ensure lightning fast speed.

About Steve Bickerton – Bicko’s Bookkeeping

Steve Bickerton, Founding Director of Bicko’s Bookkeeping, comes with a wealth of knowledge within the hospitality industry, with a career spaning over 25 years in International Hotels and Holiday Let Management Rights. His Property Management career culminated in his appointment as General Manager of a holiday let management rights apartment, under management of Australia’s 2nd largest accommodation provider, located on the Gold Coast.

Steve’s passion and vision throughout his time as General Manager, saw this property succeed to be one of the most sough-after places for visitors to stay at on the Gold Coast.

His achievements over 3 years, drove the property’s ranking on TripAdvisor from position 38, to its current position of 3rd. Similarly, its ranking on Booking.com climbed from 7.8 to 8.4. During FY15, the property proudly achieved the number one ranking (for the Gold Coast Region) for its brand within the organisation. While General Manager, Steve also achieved a compliance score of 98% and maintained year on year occupancy in the mid-80% range.

Trust Accounting

SECURITY and BACKUP of your Hirum Property Management System

Understanding Your Trust Account by Lauren Kropp

Trust accounts allow lawyers to charge retainer fees, giving them peace of mind that clients can pay their bills—and as such, most lawyers will use trust accounts at some point in their careers.

Yet even though trust accounts are commonly used, adhering to all the proper bookkeeping protocols is a complex process, rife with compliance pitfalls. Moreover, errors in trust accounting can lead to ethics violations and other unnecessary headaches.

Trust accounting and compliance

Even though the law firm holds the figurative keys to a trust account, the money in the account belongs to the client.[1] This is why there are such strict regulations for how the money in the account must be handled and how the books must be kept.

Trust accounting requirements vary by jurisdiction, and many states conduct random audits to help ensure regulations are being adhered to.

Law firms must generally follow regular reconciliation and reporting schedules for their trust accounts. They must also maintain accurate records and avoid commingling the funds in the trust account with the law firm’s funds or the funds of other clients.[2] Additionally, they must track all deposits and disbursements made with the account.

It’s a lot to keep track of, but it’s important—both for your clients’ peace of mind when they hand over large sums to your firm for work that hasn’t been done yet and for keeping you compliant. If selected for a random audit, your firm needs to be able to produce accurate trust accounting records and reconciliation reports.

4 common errors in trust accounting

Lawyers have a fiduciary duty toward their clients, but common trust accounting errors can at times prevent lawyers from upholding those duties to the fullest extent possible.

Fortunately, once lawyers recognize possible sources of error, they can address the problems with the proper tools. Legal tech has continued to develop to the point where it’s able to provide key support for lawyers with a lot on their plates—and trust accounting is no exception.

1. Splitting information across two systems

Monthly reconciliation and three-way reconciliation—where you cross-reference individual client ledgers, the trust ledger, and your bank statement—are key components of compliant trust accounting.

However, problems can arise if you use separate systems for your billing and accounting. Why? If you use an accounting platform for reconciliation and reporting but your billing system to track retainer balances, a gap emerges. If there’s a mistake in one system, the other may not catch it.

With time, this can lead to inaccurate retainer balances—and overdrafting a client account or having an incorrect balance reflected on an invoice.

2. Not having accurate matter balances available

Having an accurate picture of matter balances is hard to do when your accounting and billing systems are separate platforms.

Part of the issue is that the balance in a trust account isn’t always an accurate reflection of the matter balance. To determine the matter balance, you also need to factor in accounts receivable and works in progress (WIP). This means that you need your billing and accounting systems to speak to one another, or you need to be doing the cross-referencing yourself regularly.

3. Letting retainers deplete

A depleted retainer that catches a law firm by surprise can lead to a real hassle. For example, if a law firm uses two separate systems for billing and accounting and then fails to track WIPs accurately, a retainer can deplete without the team being aware of it.

When the depleted retainer is discovered, the law firm will have some collections work to do.

Although depleted retainers can technically happen with a single-platform billing and accounting system, too, single-platform systems come with safeguards, such as evergreen retainers. When a retainer balance falls below a certain amount, the system can send out an automated reminder to the client to replenish the balance. In this manner, it’s possible to avoid an unpleasant surprise.

4. Not using safeguards on trust accounts

As mentioned above, it’s an ethics violation to commingle funds in a trust account with the law firm’s or other clients’ money. In addition, when a client account is overdrafted, commingling can happen unintentionally when the bank automatically draws the funds required to make up the difference from another client account.

Legal-specific single-platform billing and accounting programs come with safeguards that can help prevent these errors. For instance, if you try to overdraft a client account, your single-platform billing and accounting system won’t let you.

It also won’t let you deposit a check without associating a matter with it. This helps ensure your firm is accurately tracking client funds, as you’re required to do by your state bar.

Avoid errors with single-system billing and accounting

Although attempting to integrate separate billing and accounting systems can seem like a viable workaround, there’s a hidden cost in the effort and risk you take on with such an approach. Using separate systems can mean that mistakes in one system aren’t caught by the other until you have a fully tangled mess on your hands.

Likewise, separate systems can complicate your ability to accurately track matter balances—resulting in depleted retainers, overdrafts, and the commingling of client funds.

Single-system benefits

A single-system legal billing and accounting approach, however, can go a long way toward solving these problems. For instance, when all the information is being entered into a single system, errors can be promptly discovered and reconciled. Moreover, a single system means your team doesn’t lose time or have more opportunities for human error by entering the same data twice (once in each system).

With all the information in one place, your matter balances will accurately reflect any WIPs or accounts receivable. And yes, you can implement evergreen retainers, too.

Finally, a single billing and accounting system that’s legal-specific gives you access to key trust accounting safeguards that prevent the commingling of funds, overdrafts, and deposits not associated with a matter.

For most lawyers, trust accounting is something they have to do on a regular basis—so don’t let it be stressful! Take an approach that helps you stay compliant instead.

References

1. American Bar Association: IOLTA Overview
2. Virginia Bar Association: Rule 1.15 – Professional Guidelines and Rules of Conduct