You make the deposit, write the checks, and the account ledger is zero. Done! Not so fast.
When reconciling the Trust Account often not much attention is paid to the outstanding checks. Keep in mind that the money actually remains in the Trust Account until the check clears the bank. After a certain period (typically six months) the bank that it's drawn on has the legal authority to either pay the check (if there's no current stop payment order) or to decline the check because it is considered 'stale'. A stale check is not an invalid check, but it may be deemed an 'irregular' bill of exchange because of the date. If the bank declines to negotiate the check, the bank's customer cannot fault the bank for wrongfully dishonoring it. If it pays the check, the customer cannot claim the bank shouldn't have paid it if there's no stop order in effect.
You have the option of placing a stop payment order, however you must renew the order every six months until you are reasonably assured the check won't show up. There is a cost for the stop order. If you void and reissue and the original check is paid, your firm is responsible for immediately paying the money into your trust account to cover the check.
Tip: Review the outstanding checks every month as part of your reconciliation. If a check remains outstanding for more than 60 days, make contact with the payee to see if it has been lost. Do not void and reissue until you are certain you have verified that the payee has given you a good address, is expecting the check, and knows the importance of cashing it as soon as it is received.
Too often, the outstanding checks are found in the law office in the clients file. Look there first.
Kathy Pope has 30 years of experience in reconciling trust and operating accounts, as well as conducting trust account audits. As a consultant, Kathy is available to design and implement procedures to assist your firm in improving compliance and documentation. Contact Kathy at 828-674-8282 email email@example.com.
Kathy Pope has 30 years of experience in reconciling trust and operating accounts, as well as conducting trust account audits. As a consultant, Kathy is available to design and implement procedures to assist your firm in improving compliance and documentation.