Using software for your accounting is a smart way to create efficiencies in your law firm. But if you’re using general accounting software, like Xero or QuickBooks®, then you’re putting your firm – and your license to practice law – at risk. The accounting requirements of the legal industry are unique, which is important to take into account when choosing what tools your firm will use.
Many of the aspects involved in a law firm’s day to day accounting are similar to those of other businesses, including tracking incoming and expenses and generating accounting reports. However, tracking these expenses, setting up your chart of accounts and dealing with matter cost income and accounting can present a whole host of challenges when you’re using a program that wasn’t built specifically for those purposes. Managing client funds and trust accounts always presents a number of concerns as it is, especially when dealing with fee advances and retainer management.
Here’s just a few ways law firms are exposing themselves to the risk of audit failure by their state or province by using generic accounting tools rather than legal-specific software.
Lack of trust accounting compliance and safeguards
Matter-centric accounting is a crucial component of legal accounting. Lawyers need to be able to track trust account activity for every individual matter, making sure they always know where every cent has been spent or brought in. As part of this individual ledger requirement, every trust account transaction needs to be able to be tied to a matter. When entries can be placed without requiring a matter, law firms can find themselves with inaccurate matter ledgers or at risk for commingling of funds.
Many people use tools like QuickBooks because of their flexibility, but that very flexibility can quickly become a liability for law firms. Part of being compliant means never over drafting from individual matter accounts, not just the pooled trust account. Legal-specific programs prevent these types of overdrafts, whereas generic accounting programs don’t have these types of safeguards in place to prevent violations.
Relying on your memory and knowledge, or that of your staff, to properly maintain trust accounts and avoid compliance violations often leads to mistakes and audit failures.
In addition to trust accounting errors such as overdrafts and commingling, general accounting software is often separate from billing programs. Firms must enter data into each system, requiring double data entry and creating increased risk for inaccurate information. With legal-specific, integrated accounting and billing you only need to enter data into one program.
Fee distributions are another area of legal accounting that is prone to miscalculation when handled by standard accounting systems. The concept of fee distribution takes into account billing and accounting variables and can quickly become complex. You need to separate fees from payments, allocate distribution based on percentages and more. These calculations need to be accurate and can quickly become time-consuming, but legal-specific programs are built to meet these needs.
Loss of billable time
When your accounting and billing programs are separate, you can also miss out on recovering client costs. When you want reimbursement on these items, this needs to be applied at the time of billing, even if it’s tracked in the accounting system as well. Without the connection between the two, recovering these costs can wind up being missed, so it’s important to be able to track and link direct and indirect matter costs.
Client costs and deciphering what category they belong in and whether or not they’re reimbursable has a direct impact on your bottom line and financial statements. You need a program that can appropriately designate these items – and make sure that you collect reimbursement where possible.
Some firms use general accounting programs and try to make it work, using a number of workarounds. But these workarounds take time to implement, further detracting from your billable time. Along with putting them in place, you also need to utilize them each time you handle accounting, whereas these are built-in with legal-specific programs.
Reduce your law firm’s risk with legal-specific accounting
While generic accounting tools have their place, the needs of lawyers and the many facets of trust and legal accounting requires a more specific type of program. Legal-specific accounting tools can protect lawyers from compliance violations while helping avoid a loss of billable time.
Want to learn more? Check out our full webinar recording, 5 Ways General Accounting Software is Failing Your Firm.