Legal Accounting Challenges Only an Attorney Would Understand
At some point in your life, you sat down and made the decision to become an attorney. Maybe you were talking to your significant other, a friend, your parents, or even a stranger in a coffee shop. Regardless of who you were speaking to, it’s likely you discussed what type of law you were interested in practicing, how you pictured yourself in a courtroom and the way you would interact with clients in the future.
I’m confident that at no point in that conversation did you discuss managing client trust funds or your excitement about a legal-specific chart of accounts. Legal accounting certainly isn’t the most exciting part of being an attorney but it is, unfortunately, a very important piece of managing your own practice. In the legal world, issues with your legal accounting can prove to be extremely costly to your firm, resulting in ethics violations and even disbarment in the worst of circumstances. The best thing you can do as an attorney is to familiarize yourself with the challenges that are specific to legal accounting so that you can navigate them effectively and help your firm remain compliant and profitable.
Accounting Challenges Faced by Attorneys
You’re an Attorney, Your Accountant is an Accountant
Legal accounting is its own animal. Often attorneys think that accounting is out of their realm so they will seek out an accountant to come in and review their finances monthly. Unfortunately, this simply will not suffice when it comes to your firm’s legal accounting. There are a couple of problems here but first and foremost, most accountants lack the legal-specific expertise needed to successfully manage a law firm’s books.
Unless the accountant specializes in legal accounting (not general business accounting), you are running the risk of falling out of compliance with many of the legal-specific rules and regulations that are mandated by your state. Second, monthly reviews are not enough to successfully manage your firm’s legal accounting. If the accountant you are working with has expertise in legal accounting, he or she will know that your accounting always needs to be up to date. For this reason, they’ll realize that a monthly review of your ledger is simply not enough.
General Purpose Business Accounting Software Won’t Get the Job Done
When it comes to accounting so many new firms immediately turn to the big names like Quickbooks, Xero, or FreshBooks. They’re familiar with these names and they come with a reputation of getting the job done for small businesses in many industries. Unfortunately, just like an accountant that doesn’t have the specific needs of a law firm in mind, general purpose accounting software won’t meet the specific needs of a law firm either.
Law firms need to employ legal accounting software that features a legal-specific chart of accounts. Utilizing software that doesn’t have the following set of legal charts of accounts can create compliance issues for a law firm. Your legal specific chart of accounts should include at least:
- Client Trust Funds (Liability)
- Client General Retainer – Trust (Liability)
- Client General Retainer – Operating (Liability)
- Advanced Client Costs (Asset)
- Reimbursed Client Expenses (Direct) (Income)
- Inhouse Reimbursed Expenses (Indirect) (Income)
- Fee Income (Income)
- Discount (Income)
- Reimbursable Client Costs (Expense)
- Non-Reimbursable Client Costs (Expense)
- Unrecovered Client Expenses (Expense)
Clients Like to Pay with Credit Cards, Your Firm Should Accept Them
While we touched on how law firms are different from other businesses when it comes to their accounting, when it comes to how clients would like to pay, law firms aren’t different from any other business. Clients want to make payments with plastic!
Unfortunately, accepting credit cards from legal clients is a little more complicated than it would be for professionals in other industries. One of the biggest challenges facing attorneys when they consider accepting credit cards is finding a vendor that understands the unique requirements for processing legal payments.
Internally, credit card payments can also pose issues to your firm. When legal clients pay with a credit card it isn’t always clear which invoices are being paid if you have separate billing and accounting systems. With invoices being distributed via the firm’s billing system and payments being processed by the firm’s accounting system it can be difficult to understand which payments are to be distributed where. For this reason, law firms should search for an all inclusive billing and accounting solution that can also integrate with a legal-specific credit card processing program.
It is also worth noting that credit card batching can also create a challenge for law firms. Multiple clients’ payments come into a firm’s accounting system in a single deposit. This means that the firm MUST reconcile these payments on a daily basis. Otherwise, this could create a situation where one client’s funds are commingled with that of another’s. This is not okay and can result in compliance issues and ethics violations.
Multiple Trust Funds in a Single Account
One of the most heavily scrutinized areas of a firm’s accounting is their client trust fund accounting. While this is a necessary part of running a law firm, it can be rather difficult and dangerous.
While it’s usually required by the state for attorneys to have a trust account, most law firms utilize retainers to secure cash flow from clients. This means the firm is in possession and responsible for funds that aren’t theirs until they have been earned. Chances are, your firm is working with multiple clients that have multiple retainers or trust funds. It is imperative that funds from one client are not commingled and used to pay for services rendered for another client. These funds also cannot be used to pay for any of the firm’s general business expenses.
This can certainly be challenging, but firms who utilize legal-specific accounting software often have safeguards in place to ensure that:
- There is no commingling of funds
- The client ledger does not overdraft at the transaction level
- All transactions are posted to the appropriate liability account
- The 3-way reconciliation process is performed on a daily basis.
Combat Legal Accounting Challenges with Software Made for Legal Accounting
Let’s say you’re putting together a puzzle. You have everything in place except for one last piece. You can’t find that piece anywhere, would you go open another puzzle and try to fit a piece from that box into your puzzle? The answer is “no” because that puzzle piece wasn’t made for your puzzle.
Legal accounting is a puzzle. There is a lot to it, and it can drive you crazy at times, but if you want to do it right you need to use the right pieces. In this situation, the right puzzle piece is legal-specific accounting software. You can’t expect to get it right if you are using an accounting solution that was meant for another type of business.
If you’d like to learn more about the accounting challenges facing law practices and how to select the right solution for your firm by watching this webinar Compliance Challenges of Legal-Specific Accounting.