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5 Trust Accounting Challenges That Are More Than Just Accounting

Though trust accounting—the bookkeeping of trust accounts in accordance with state requirements—may appear to be a simple component of law practice that does not require significant attention, its implications are vast and vital. In fact, just one trust accounting mistake can be career-ending, so it is critical for all areas of a law practice to be in order to ensure proper trust management.

Trust accounting is not merely about reconciling and regular reporting. Since client retainers are often held in a trust account, it also involves daily billing and business accounting activities. When improperly handled, and especially when funds are being earned from a trust, trying to bridge that gap between systems can expose a business to risk. Inaccuracy can result in not only compliance issues, but it can also directly affect the bottom line.

Five Trust Accounting Challenges That Encompass Your Entire Firm

Trust Challenge #1: Maintaining Matter Ledgers

To remain compliant, firms must ensure there are no overdrafts and no commingling of client funds for each account. The only way to achieve this is through strict management of matter ledgers. Every dollar in and out of an account in regards to a specific matter must be accounted for.

Trust Challenge #2: A Disjointed Picture of Matter Balances

A complete picture of matter balances is not only comprised of trust balances; it also takes into account A/R, WIP, and other factors such as funds that should be earned from open invoices that are no longer sitting in a trust. Likewise, in the event that an invoice has been paid but not yet withdrawn from the trust, these funds must also be included in the matter balance to avoid inaccuracies.

Trust Challenge #3: Retainer Depletion

Even if trust balances are visible, it is best to track minimum requirements or current WIP in order to properly plan for replenishment before the retainer depletes. Otherwise, it may be necessary to perform additional collection activities.

Trust Challenge #4: Separate Reconciliation Systems

If retainers are tracked in a billing system, and reconciling and reporting take place in a separate accounting system, it becomes difficult to address any mistakes that may arise across the two systems. This can lead to inaccurate trust balances, which may then be applied to invoices and directly impact the bottom line.

Trust Challenge #5: Using General Software To Track Trust

A trust account requires legal-specific accounting, which a generic system is often unable to support. While it may offer workarounds to create ledgers and reports, it does not provide safeguards against overdrafts, commingling, or entering a deposit or check without associating it with a matter. All of these issues potentially leave firms with a pool of mismatched funds and matters with inaccurate balances.

The Takeaway

Because of the complexity and compliance issues associated with trust accounting, it is best to utilize a legal-specific solution that is specifically designed to handle all of the unique requirements that a practice must meet, and avoids these risks to save firms both time and money. To learn more about the ways in which trust accounting challenges can affect your entire law practice, watch our recent webinar ‘Why Trust Accounting is More The Just Trust Accounting.’

Rick Kabra

Dr. Rick Kabra is CEO of CosmoLex Cloud, creator of cutting-edge technology solutions to help solo and small law firms law firms. Rick has a Ph.D. in Electrical Engineering from NJIT and has over 10 years of experience in the legal software industry catering to the specialized technology needs of small to mid-sized law firms. Rick has given numerous seminars and published articles on legal technologies such as law practice technology management, cloud computing, and legal billing, business & trust accounting compliance.