Trust Shortage

What is a trust shortage?

A trust shortage exists when the money in your client trust account is less than the total of what all clients are owed. The bank balance may look healthy, but if the individual client ledgers add up to more than what is there, you are holding someone else's money short. In most states a shortage is reportable to the bar whether or not anyone intended it, and it is the single fastest route to a disciplinary file.

The ordinary mistakes that create one

Almost no shortage starts as theft. A disbursement goes out against a deposit that has not cleared. An earned fee is transferred twice. A wire fee or returned check is charged to the trust account and absorbed from the pooled balance instead of a specific client. A settlement is paid out before the full deposit lands. Each of these leaves one client's funds covering another's payment, which is the definition of a shortage no matter how briefly it lasts.

Finding it before an auditor does

Only a three-way reconciliation catches a shortage: bank balance, book balance, and the sum of individual client ledgers all compared to one another every month. Two out of three matching proves nothing. When you find a shortage, replenish it immediately from operating funds, document what happened and when, and check your state's self-reporting requirement before deciding how to handle it. Firms that find and fix shortages themselves are treated very differently from firms whose auditor finds one.