Methodology
The Three-Way Standard
Every engagement runs on the same method, named so both of us can hold it accountable. This page is the whole method, the same document an accountant reads before referring a client to us.
The idea
One account, three records, tied together
Your firm's trust money appears in three places. The bank keeps one record: the statement. Your books keep a second: the trust ledger, the firm's own running record of the account. And your clients' funds are tracked individually in a third: a ledger per client or matter, showing whose money sits in the account at any moment.
A three-way reconciliation proves, every month, that all three records agree with each other, not approximately but to the penny. When they agree, the account is under control. When they don't, the difference has a cause, and the method requires finding it before the month closes.
Bank statement
What the bank says happened
Trust ledger
What the firm's books say happened
Client ledgers
Whose money it is, matter by matter
Each record is tied to both of the others, every month. Two matching records prove nothing if the third disagrees.
The standard, in full
Five steps, named
The Three-Way Standard is five controls, run in order, every month. This is the complete list; there is no unpublished part.
Statement-true entry
Trust activity is entered from the official monthly bank statement, never from a bank feed alone. Feeds are a convenience; the statement is the record the bar recognizes.
Three-way tie-out
Bank statement, trust ledger, and every individual client ledger agree to the penny, or the month does not close.
Segregated preparation and review
Your firm moves the money; the practice reconciles it. The party that records is never the party that moves, and that separation exists from the first month. Today the practice is one person, so preparation and review are not yet split: Josh Hsu prepares and signs, the sign-off is timestamped and logged, and the separation that protects your funds is the one above: your firm moves the money, the practice only records it. When a second person joins, preparation and review split between them, and that person is named on the Security page.
Monthly evidence archive
Statements, ledgers, reconciliation reports, and supporting documents are archived every month, mirroring the records that rules like Washington's RPC 1.15B expect a firm to produce.
Exception register
Anything that did not tie is recorded with its cause and its resolution. The register is part of your records, not a private note.
The cadence
The monthly calendar
The standard is a calendar before it is anything else. Business days refer to the close of the prior month.
Business day 3
Prior month's transactions categorized; documents matched or flagged
Business day 5
Trust activity entered from the official bank statement; trust ledger brought current
Business day 7
Three-way reconciliation completed: bank, trust ledger, and client ledgers tied to the penny
Business day 8
Open items listed: anything that did not tie, with a named cause or a question for you
Business day 9
Founder review and sign-off: Josh Hsu checks and signs the reconciliation; the sign-off is timestamped and logged
Business day 10
Monthly report delivered, in plain English, with any decisions you need to make
The deliverable
What the monthly report contains
- One page, written to be read: the state of the trust account and the operating account
- The three-way reconciliation result: tied, or not tied with a named cause
- The signature: Josh Hsu's review and sign-off on the reconciliation, timestamped and logged
- Client-ledger balances as of month-end, matter by matter
- Open items requiring your decision, each with a recommended next step
- The evidence archive: statements, ledgers, and reconciliation reports, retained so the records answer a request as they are
When it doesn't tie
Escalation is part of the method
A reconciliation that doesn't tie is not a failure of the month; hiding it would be. When any of the three records disagrees, the month cannot close quietly.
The difference is investigated to a named cause: a timing difference, a mis-posted entry, a bank error, or something that needs your attention. You hear about it in the monthly report, or immediately if the cause involves client funds.
For accountants and advisors
Referring a client?
This page is the method your client would be run on, start to finish. If you are vetting Sum Certain before a referral, the Vendor Diligence Packet answers the questions your firm's obligations require you to ask, with no form in the way.
See the standard applied to your books
In a readiness call we walk your current monthly close and show, step by step, where this standard would change it.