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Client Disputes Related to Mismanaged Finances Can Hurt More Than Your Reputation

Many of our recent blog posts have been focused on trying to avoid disputes with your clients. We have addressed time tracking disputes, disputes related to missed deadlines, poor communication, and disputes related to client fees. Now all of these different disputes are something you would absolutely like to avoid. There isn’t one that couldn’t tank your reputation amongst clients and across the industry, but this final type of dispute I’d like to address today not only has the potential to hurt your reputation amongst clients, but it is extremely likely that it could also harm your firm in the form of ethics violations and perhaps even disbarment.

For that reason client disputes associated with the mishandling of your firm’s finances are quite possibly the most dangerous disputes your firm could encounter. It goes far beyond a client providing a bad review of your services social media — it could mean the end of your firm all together.

Here are some tips on how your firm can avoid disputes with clients over mishandled finances, but instead of looking at these as simply tips or suggestions, I would encourage you to look at them more as requirements.

Tips To Reduce Client Disputes Associated With Mishandled Legal Finances

Account for and report on all client funds.

Attorneys often utilize trust accounts when dealing with a client’s matter. This means that the attorney is in possession of funds they have yet to earn. Since these funds are not the attorneys until they are earned, it is required that the attorney is able to account for and report on all of the client’s funds.

Make sure all trust records are kept clean and audit ready.

The easiest way to ensure that all trust records are kept clean and audit ready is through the use of a Three-Way Reconciliation Report.

When you administer a trust account, trust funds from several clients are put into a single bank account. You must make sure that individual ledgers for each client trust, as well as a business ledger that tracks bank fees and other costs, do not come out of client funds. The sum of the client ledgers plus your business ledger produces a third total, which should equal the totals of your overall account ledger and your monthly bank statement.

The three-way reconciliation report can help you find errors and reduce client disputes, but maybe more importantly, show auditors that you are administering the trust account correctly and avoid any penalties associated with a bad audit.

Differentiate between hard & soft costs on invoices.

A “hard cost” can be identified as any disbursement a firm pays as a “direct” expense to a vendor on behalf of their client. A “soft cost” is identified as an “in-house” or “indirect” expense associated with a client matter. These costs can include postage, long distance phone calls, facsimiles, and even photocopies. Differentiating between hard and soft costs not only effectively informs the client of what they are paying for, but also ensures that your firm is accurately tracking income- avoiding increased tax liability and the potential of being flagged for a legal audit.

Use Legal Specific Technology To Manage Your Firm’s Finances

Managing a firm’s finances can be extremely difficult. Mismanagement can not only result in client disputes, but with so many strict rules and regulations, it can also result in ethics violations, legal accounting audits, and even disbarment for your firm. Using legal accounting technology, like CosmoLex, allows firms to automate many of these tasks to remove the risk of human error and eliminate costly client disputes and penalties for your firm.
Have more questions about managing your practice’s accounts? Contact CosmoLex today.

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.