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Trust Accounting Risks

5 Trust Accounting Risks that Affect Your Bottom Line

Trust accounting is not just about reconciling and regular reporting; the fact that client retainers can also be held in a trust account necessitates that both billing and accounting activities take place daily. When not handled properly, however, bridging that gap can be risky, particularly when a firm is earning funds from a trust. Inaccuracy can result in compliance issues and may adversely affect your bottom line, so it’s important to have a firm grasp on what exactly trust accounting entails.

What is Trust Accounting?

Simply put, trust accounting is the bookkeeping of trust accounts in accordance with state requirements. In addition to common rules that require maintenance of accurate records and prohibit the commingling of client funds with those of the lawyer, law firm, or other clients,  trust accounting involves tracking all deposits and disbursements made through the account and performing monthly reconciliation of the account balances.

Separate Solutions are a Slippery Slope

Very often, law firms utilize separate solutions for their billing and accounting needs. However, because trust activities influence both areas, improper record keeping or mistakes made in just one of the systems can put your firm at risk. Here, we’re discussing five trust accounting pitfalls that affect your bottom line, and how a legal-specific trust accounting software can help your firm better manage its fiduciary duties.

  1. Separate Systems for Reconciling

If retainers are tracked in a billing system and reconciling and reporting takes place in an accounting system, it becomes difficult to address any possible mistakes that may arise across the two systems. This can result in inaccurate trust balances, which may then be applied to invoices.  

  1. Lenient Management of Matter Ledgers

In order to stay compliant, you must ensure there are no overdrafts and no commingling of funds for each account, and 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.

  1. A Disjointed Picture of Matter Balances

A truly complete picture of matter balances isn’t only comprised of trust balances; it also takes into account A/R, WIP, and any other factors such as funds from open invoices that should be earned and 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 should also be included in the matter balance to avoid inaccuracies.

  1. Depletion of Retainers

Even if your balances are visible, it’s best to track minimum requirements or current WIP so you can properly plan for replenishment before the retainer depletes. Otherwise, you may find yourself needing to perform additional collection activities.

  1. Generic Systems to Track Trust Transactions

A trust account is legal-specific accounting; a generic system is often unable to support this. While it may offer workarounds to create ledgers and reports, you can still overdraft, commingle, and even enter a deposit or check without associating it with a matter. This potentially leaves you with a pool of mismatched funds and matters with inaccurate balances.

Don’t let trust accounting become a headache (or worse yet, the source of your noncompliance). Learn more about how specialized legal trust accounting software can keep your firm current, compliant, and audit-ready.

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.