Let’s face it, most legal professionals don’t wake up in the morning excited to run to the office and tackle their accounting.
Instead, you probably studied law so that you could help people and make a difference in the world, resolving problems and delivering results for your clients. Tracking transactions and crunching numbers? Not so much.
On top of that, law firms face a myriad of compliance demands. Trust accounting in particular is time-consuming, with high stakes for errors—even a single accounting mistake can expose you to regulatory issues that can lead to fines and other penalties that erode profitability and damage your brand image.
Worse yet, you could lose your right to practice.
It’s just not worth the risk. To help you take the hassle out of legal and trust accounting, let’s examine some common compliance challenges, discuss tips and tricks for how to overcome them, and see how you can save yourself time and stress.
Understanding compliance challenges for law firms
While you can outsource many accounting functions, you still have to keep a close eye on them to keep your practice compliant with state bar rules. Simply monitoring the efficacy of your accounting processes can be tedious and time-consuming, especially without the processes and procedures in place. And errors are common when you manage your trust accounting processes manually.
While there are many factors that could contribute to these errors, here are some of the reasons attorneys are most likely to encounter trust accounting headaches.
Relying on manual systems
Tracking client funds manually with spreadsheets is not only slow but also error prone. Despite your best efforts, you may waste hours trying to track down a five-cent discrepancy, re-creating records, or writing checks and deposit slips.
Manual systems also make it difficult to scale your operations as your firm grows, not to mention presenting challenges for team members who want the flexibility to work remotely. Look for software that will help you increase productivity and boost your law practice’s success.
Using disparate software
Using a combination of antiquated software and manual practices undermines financial visibility. When documents are scattered across disparate systems or file folders, decision-makers will find it challenging to obtain a holistic view of their trust and general accounts.
In turn, this lack of visibility can lead to fund mismanagement, diminish liquidity, and make navigating the auditing process unnecessarily difficult.
Therefore, the first step to achieving trust accounting compliance is to sunset disparate systems and replace them with an integrated solution that allows your practice to bring its general and trust accounting data into one platform, thereby simplifying fund management.
Failing to reconcile regularly
Three-way reconciliations are the foundation of any effective legal and trust accounting strategy. However, far too many legal practices fail to perform these reconciliations with the appropriate frequency. As a result, accounting errors can go unnoticed for days or even weeks.
You can avoid similar headaches by performing regular three-way reconciliations. If you want to further support compliance and improve accounting record transparency, consider using other trust accounting reports like trust receipts journals, trust disbursements journals, and transfer records.
When pairing these reports with three-way reconciliations, you can obtain a more holistic view of client accounts.
Mixing trust account funds with other business capital is a huge trust accounting misstep and may constitute a violation of the Uniform Principal and Interest Act, which governs the behavior of account trustees.
However, this mistake happens more often than you would expect. Well-meaning attorneys often face the temptation to use trust funds as business reserve capital, especially if they are experiencing financial difficulties. Even if they pay the borrowed funds back immediately, they are exposing themselves to serious compliance issues.
To avoid this, diligently keep your trust accounts and operating accounts separate. Make sure that your team members carefully verify which account they are depositing funds into, any time they are dealing with client or settlement checks. Also, ensure that any third-party payouts are promptly delivered to the appropriate entity.
Cyber security and data privacy
Data breaches can have many serious repercussions, including loss of client trust, financial losses, and violations of bar association rules. To safeguard your firm and your clients’ interests, firms must adopt stringent cybersecurity measures.
Some ways to do this include:
- Training your team on data security best practices
- Using 2-factor authentication on all user accounts within your firm for protection against unauthorized access
- Implementing security-minded workflow rules
- Paying attention to user permission management
Cloud-based solutions can also help you keep your accounting data secure with added protections.
The 3 pillars of trust accounting compliance
Trust accounting is an incredibly complex process. Consequently, attorneys cannot manage trust accounting processes the same way they approach general accounting functions. Doing so will leave the door open to potentially costly errors and expose the practice to compliance issues.
Trust accounting compliance does not have to be the proverbial thorn in your side, though. You can lay the foundation for simplified compliance by addressing three pillars, which include:
Always perform a three-way reconciliation to verify the accuracy of your accounts. You should perform these reconciliations at least once per week. Additionally, run a three-way reconciliation report any time a change is made to one of your accounts.
The more frequently you generate these reports, the better your chances of identifying errors before they negatively impact the integrity of your accounts.
Speaking of accounts, make sure that you have separate accounts for trust funds and business capital. Implement standardized processes for depositing funds to reduce the likelihood that checks will be deposited in the wrong account.
Additionally, ensure that your trust accounts are set up correctly so you can comply with state and federal regulations.
If you do not already have separate accounts, now is the time to implement them. Using distinct accounts for each type of funding will make it easier to meet auditing requirements and promote financial visibility. These insights help fulfill your moral obligation to your clients, avoid compliance concerns, and protect your reputation.
Unified accounting software
The road to simplified legal accounting compliance begins with a single step—and that step is implementing unified accounting software that integrates with your other technology tools.
Deploying a comprehensive legal trust accounting solution will provide you with real-time visibility into all of your accounts, streamline your workflows, and reduce the need for redundant manual work.
Top legal accounting software like CosmoLex are designed with features that support compliance and risk mitigation. What’s more, these tools improve the accuracy and efficiency of your accounting processes while decreasing the demand on your accounting team.
Simplify trust accounting compliance with CosmoLex
The cumulative revenue of U.S. legal service providers is projected to reach $348.5B next year. Modern law firms rely on diversified revenue streams to tap into this market growth. And while building a diversified practice and strengthening cash flow by offering a broad range of services is a net positive for most law firms, it also comes with legal and trust accounting compliance headaches.
Are you ready to simplify legal and trust accounting compliance? If so, we invite you to schedule a free demo of CosmoLex. We also offer a free trial so you can experience our platform’s full suite of account management tools.