Client & Trust Accounts: Keeping Client Money Beyond Question
Money a firm holds on behalf of clients is not the firm's money, and proving that at any moment is a professional obligation — not a bookkeeping preference. Here is what proper segregation of client and trust funds actually requires.
Many professional firms hold money that is not theirs: a law firm holding client funds pending a transaction, a consultancy holding money advanced for disbursements, an agency holding funds on behalf of a principal. The rule governing that money is simple to state and unforgiving in practice — it must be kept provably separate from the firm's own funds, and the firm must be able to demonstrate, at any moment, exactly whose money is whose. Most breaches of that rule are not fraud. They are the slow accumulation of small sloppinesses in a system never designed to keep the two apart.
Segregation is a record, not just an account
Firms often believe that a separate client bank account is the whole of the obligation. It is the start, not the end. Segregation is really about the record: knowing, per client, how much of the pooled client money belongs to them, what came in, what went out, and on whose instruction. A single client account holding money for forty clients is compliant only if you can instantly show each client's individual balance and reconstruct every movement. Without that ledger, the bank account is one number hiding forty positions — and the moment a client asks for their balance or a regulator asks for proof, the absence shows.
How commingling actually happens
The dangerous cases are mundane. A disbursement for client A is paid, in a hurry, from the firm's operating account and never reimbursed from the client ledger. Interest earned on the pooled account is left ambiguous. A client's funds are used — even briefly, even innocently — to cover a firm shortfall over a weekend, on the assumption it will be topped up. Each is a breach, and each is invisible until a reconciliation that never quite happens is finally demanded. The defense is not vigilance; it is a system where client-money movements are structurally separate from firm-money movements and every one is attributed to a person and a reason.
What defensible fund segregation requires
- Per-client balances within the pooled client funds, always current — not derived at year-end.
- Every receipt and disbursement of client money attributed to a person, a client, and a timestamp.
- Client-money transactions kept structurally distinct from the firm's operating transactions.
- Reconciliation of the client ledger to the client bank account on a fixed rhythm, not on demand.
- An audit trail that reconstructs any movement without relying on one person's memory or spreadsheet.
This is the same discipline donors demand of NGOs
Firms sometimes imagine client-fund segregation is a uniquely legal problem, but it is structurally identical to how NGOs must track restricted donor funds: money received for a specific purpose or party, kept separate from general funds, with every movement traceable to its source and sanction. The mechanism that solves one solves the other — funds tagged and segregated at the point of entry, movements attributed, positions always current. It is fund accounting, and it is exactly what a general-purpose bookkeeping setup does worst.
The test to run today
Ask your finance function for the current balance held for a single named client, and how long it takes to produce the full history of that client's money. If the answer involves opening a spreadsheet only one person maintains, or reconstructing from bank statements, your segregation exists on paper but not in practice — and that gap is precisely what an adverse audit finding is made of.
Proper segregation is not a burden a firm carries reluctantly; it is a protection. When client money is tracked as its own attributed, segregated position, the firm can answer the hardest question a regulator asks — instantly and completely — and the partners can sleep knowing the one mistake that ends professional careers is structurally prevented rather than merely hoped against.
Keep client money beyond question
See client and trust funds segregated, per-client balances always current, and every movement attributed — segregation an auditor verifies in minutes.
Explore professional-services operationsFrequently asked questions
Is a separate client bank account enough for fund segregation?
No — it is necessary but not sufficient. A pooled client account holding money for many clients is only compliant if you can show each client's individual balance and reconstruct every movement on demand. Segregation is fundamentally about the per-client ledger and attribution, not just the existence of a separate account.
How does commingling of client and firm money usually happen?
Rarely through fraud — usually through sloppiness: a client disbursement paid from the operating account and never reimbursed, ambiguous handling of interest, or client funds briefly covering a firm shortfall on the assumption of a top-up. Each is a breach that stays invisible until a reconciliation that never quite happens is finally demanded.
What does an auditor or regulator actually ask for?
Proof that client money was never commingled with the firm's — specifically, current per-client balances and the full, attributed history of every movement of client funds. A live per-client ledger reconciled to the bank account on a fixed rhythm answers this in minutes; a spreadsheet maintained by one person does not.
How is this related to NGO donor fund tracking?
It is structurally the same discipline: money received for a specific purpose or party, kept segregated from general funds, with every movement traceable to its source and authorization. Whether it is called client funds, trust money, or restricted donor funds, the solution is fund accounting — tagging and segregating at entry and attributing every movement.
