If you are acting in a fiduciary capacity, such as a guardian, conservator, or trustee, you will be required to maintain fiduciary accounting. It is a fairly simple accounting process. Trusts, for example, divide transactions between principal and income. You will probably need to track funds for the beneficiary, perform regular reconciliations, and keep an audit trail. However, even if you hire an accountant or purchase software to do the basic accounting, as the fiduciary you are responsible for the accounting.
As you perform your fiduciary accounting responsibilities, keep these common mistakes in mind:
- A lack of trust-specific rules. Rules and procedures for handling trust funds are essential for proper fiduciary accounting. All too often, however, the rules or procedures are ignored or non-existent. For example, the allocation of funds between income and principal is significant for trust administration. The trustee must adhere to the terms of the trust document in making such allocations.
- Failing to keep trust accounts separate. Keeping personal or business operating funds separate from trust funds is a basic principle of trust accounting.
- Relying on manual systems. Human error in recording transactions is one is the main causes of accounting mistakes. We all make mistakes, but there should be a system of cross-checks in place to catch and correct errors. Unsecured or manual ledger systems are vulnerable to data loss.
- Lack of adequate backups. Even if a fiduciary does an impeccable job of fiduciary accounting and uses accounting software to prepare or store the data, the computer system may crash. To avoid a disastrous computer crash, simply make it a habit to always back up your data.
- Insufficient resources. Individuals or groups such as small law firms may not have the training, technological services or other resources to keep up the requirements of accurate trust accounting. As a result, they may fall behind in their duties, or rush to prepare documents at the last minute.
- Co-mingling trust funds. In some cases, the fiduciary mixes funds held in trust with the fiduciary's funds. This co-mingling makes it hard to determine which funds belong to the beneficiary. Once funds have been co-mingled, it is difficult to track them. Even if it was an unintentional act, it gives the appearance of impropriety.
- Trust ledger overdrafts. Overdrafts are a common, but avoidable mistake. Again, proper controls and procedures can usually avoid such problems.
- Un-cleared funds. Trust accounts should be reviewed regularly to note any unresolved issues, such as un-cleared funds which are waiting to be deposited into an account.
- Careless bank reconciliation. A bank reconciliation should be completed each month. These should be reviewed by two separate persons to maintain accurate and reliable records.
- Lack of internal controls. Everyone responsible for maintaining fiduciary accounts must use the same accounting procedures follow the same rules for safe and accurate accounts.
For more information about fiduciary accounting or trust administration, please contact us.