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The Winning Argument: “Legal-Specific” Trust Accounting (Part 3 of 3)

Over the past few weeks, we’ve been discussing the advantages of “legal-specific” technology in a new series, The Winning Argument. From billing to business accounting, modern practice management is transforming the way that law firms of the 21st century do business. In this final post of the series, we’ll be taking a close look at legal-specific trust accounting, and highlighting several areas in which generic accounting programs fall short of fulfilling the unique needs of law firms.

There are very specific responsibilities associated with the role of acting as the fiduciary for client funds, and simply put, a generic accounting package can’t help you meet them. When using a trust account, not only are there certain rules that you must follow, but you also need to generate special reports; a generic accounting program is unequipped to accommodate either. Beyond this, trust accounts are closely linked with compliance, and despite your best efforts, it’s important to use an accounting program with built-in safeguards for law firms, which again, generic options don’t offer.  

Firms that still use generic software to handle their trust accounting miss out on a number of benefits and put themselves at a higher risk of falling short of compliance. A fully integrated, legal-specific package can make all the difference, and set your firm up for success.

Before we offer several tips to improve your firm’s trust accounting practices in our Winning Argument for legal-specific trust software, let’s first review what the bookkeeping/accounting of trust accounts in accordance with compliance requirements entails.

A proper trust accounting workflow should include the following:

  • Maintaining separate ledgers
  • Receiving and disbursing funds
  • Printing checks
  • Reconciling accounts
  • Compliance reporting

Though not a particularly extensive list, a lot can go wrong along the way when using manual methods of recordkeeping or utilizing a general accounting software, such as:

  • Lack of trust-specific rules
  • Commingling of trust funds
  • Trust ledger overdrafts
  • Lack of controls and data protection
  • Un-cleared funds not being addressed
  • Billing and accounting kept separate — which leads to duplicate data entry and increases the likelihood of errors

 

Tips to Improve Your Trust Accounting & How Legal-Specific Software Helps

 

Tip #1: Arm Yourself With Trust Specific Knowledge & Rules

Ultimately, it is the firm’s responsibility to be aware of and satisfy the requirements of compliance. Even if an accountant or bookkeeper is physically completing the work, it is up to you to ensure the rules are being followed.

Legal-specific tools are key here, as they should include rules which keep funds tied to specific legal matters at all times, be setup to properly collect retainers and payment into trust, and guard against overdrafting the funds of a specific matter when making payments.

Tip #2: Avoid Accepting A Separate, General Accounting Software Because It’s “Popular”

General accounting programs such as QuickBooks and Xero are great programs for managing a general business. Because of this, many basic cloud-based practice management systems rely on syncing with these programs in order to manage your legal accounting. This poses significant compliance issues as we’ve covered above.  

Additionally, trust accounting bridges both billing and accounting:

    • Billing: retainer balances and applying payments to accounts
    • Accounting: managing transactions, printing checks, reconciling, and reporting

If improperly handled when going back and forth between your general accounting program and your legal billing program, issues relating to double entry, reconciliation, and retainer management can occur.  

Tip #3: Do Not Commingle Trust Funds

There are two types of commingling:

  1. Losing track of an individuals client balances in trust accounts (i.e. no separate ledger cards and not knowing who funds belong to)
  2. Mixing client funds with your own funds (while some provinces allow a float to cover bank fees, that also needs to be tracked separately)

While you can keep different trust funds from clients in one bank account, they must be separate on your books.

In some unique situations (e.g. large amounts of money that will sit for a while), you may wish to open a separate trust account for a single client. Although this practice is not mandatory, in some cases, it can simplify tracking and redordkeeping. In the end, it doesn’t matter how many accounts you’re using or how many clients you have, your system must force you to manage funds by matter; this cannot be an afterthought.

Tip #4: Prevent Trust Ledger Overdrafts

It is illegal to overdraw trust accounts at the matter level. In addition to an existing balance in the bank account, the ledger card must also have a balance before you draw a check against it. If funds are commingled, it is very difficult (if not impossible) to discern this.

There have been many cases in which a lawyer has been disbarred because funds—though used for genuine purposes—were not cleared from one matter before being disbursed to another account.

Tip #5: Address Un-cleared Funds

While most service business owners don’t lose sleep when their issued checks are not cleared, when it comes to a trust account, you maintain the fiduciary responsibility until those funds clear. And the longer it goes, the harder it becomes to “dispose of.”

Your monthly reconciliation and related reports are intended to help you keep an eye on this month-to-month.

Tip #6: Routine Bank Reconciliation

Bank reconciliation is always important, but it is especially critical for trust management. Trust reconciliation is different from your general account reconciliation because it requires you to compare your book and bank balances as well as the sum of your client balances. Not only will this help come audit time, but it also allows you to quickly discover any mistakes and fix them promptly each month.  

Bank feeds (i.e. bank imports to software) can also assist you in staying on top of items as they clear. However, this should be used for cross-referencing and not as a replacement for daily recordkeeping.

The Takeaway

So let’s review our argument: what’s the big deal about “legal-specific” trust accounting software? Well, in addition to its many other benefits, modern practice management technology includes these important capabilities:

  • Individual matter ledgers and balances
  • Built-in safeguards to remain compliant
  • Part of billing and accounting workflow
  • Trust-specific compliance reports

To learn more about the ways your trust accounting practices can be improved by utilizing a legal-specific solution like CosmoLex, watch our on-demand webinar: The Winning Argument: Legal-Specific Trust Accounting. And if you haven’t already, be sure to check out our other two posts in “The Winning Argument” series on Legal-Specific Billing and Business Accounting tools.

Erica Birstler

Erica Birstler is the Director of Strategic Communications at CosmoLex -- developers of a fully-integrated, cloud-based legal practice management, billing & trust accounting system specifically designed for solo and small law firms. Erica's degree is in Business Administration and she has over 6 years of experience in the legal software industry, catering to the specialized technology needs of small to mid-sized law firms. Erica has given numerous presentations across the country on legal technologies such as law practice technology management, cloud computing, and legal billing & trust accounting compliance.