Transform Your Legal Practice with Cloud Accounting (Without Sacrificing Compliance)

In many ways, the legal field is no different from any other industry. Lawyers need to track their income, manage expenses, and plan for the future using accounting reports. 

However, this is only part of the story. When it comes to law firm accounting, lawyers have much greater responsibilities than other professionals, as they are required to maintain compliance with all rules, regulations, and requirements set in place by the Law Societies in Canada. 

While there are many popular general accounting solutions, these aren’t always designed with legal industry requirements in mind. Instead, lawyers often end up sacrificing compliance when they rely on popular industry-agnostic or on-premises accounting solutions.  

Luckily, there are better solutions out there for your law firm.  

There have been many advancements in the accounting software world, and now, law firms can transform the way their legal practices do business with a cloud accounting solution. Best of all, legal-specific software is designed to address the specific needs of law firms, making compliance woes a thing of the past.  

Common accounting challenges faced by Canadian law firms 

The majority of accounting solutions, such as QuickBooks, are designed for general purposes, so they lack the special tools law firms need to maintain compliance. To use them, law firms must create cumbersome workarounds that allow them to fulfill trust accounting practices required by Canadian Law Societies. 

Not only do these workarounds make basic accounting transactions longer, but they also open a law firm up to human error.  

With general accounting software, law firms may accidentally: 

• Commingle trust account funds 
• Record a transaction in the wrong ledger 
• Overdraft a client’s account 
• Create an inaccurate report 
• Transfer an incorrect amount from trust to the general ledger 

Any of these mistakes can put a law firm in danger of failing to comply with their Law Societies’ rules and regulations governing trust accounting.

Why is this a big deal? 

As you well know, failure to comply with the guidelines for handling client trust accounts can lead to fines, disbarment, or other penalties. And mishandling client trust funds can leave a law firm open to lawsuits from their clients, or even cost them their reputation.

How lawyers can benefit from cloud-based accounting solutions  

Law firms can avoid these common pitfalls when they upgrade to cloud-based accounting solutions equipped with legal-specific tools. The following are just a few of the benefits attorneys can expect to reap when they make the switch to accounting software for law firms.  

Track each trust fund to the appropriate client matter 

To maintain compliance, law firms must track every single trust fund transaction for client matters. At a moment’s notice, you should be able to produce a ledger that shows precisely how the funds have been either received or disbursed.  

Traditional accounting software makes this challenging, but with cloud-based technology for law firms, you can automatically track each trust fund and update the liability trust account and client matter at the same time as the trust bank account. 

Built-in safeguards to prevent over drafting client accounts 

Under no circumstances is a law firm allowed to overdraft a client account, but with traditional accounting software, there are no set mechanisms to prevent that from happening. Law firms that upgrade to cloud-based legal accounting solutions never have to worry about over drafting, though. The built-in safeguards protect the entire firm from this common mistake. 

Trust accounting categories to prevent commingling  

Since client trust accounts don’t belong to the firm, the accounting software should be able to reflect that. Law firms can use new cloud-based technology to make sure that trust fund transactions are never recorded as firm income or office expenses. Instead, the software automatically categorizes the transactions so that they only adjust the trust liability accounts.  

Tools to quickly transfer funds from trust accounts to the general account 

Trust funds only become earned income when a law firm issues a bill to be paid from the trust account. This may sound like an easy enough transaction to record, but when you do this with general accounting software, the process involves multiple steps—and if anything gets lost along the way, it could result in inaccurate records.  

However, when you use legal-specific cloud accounting software, the process is automated, eliminating the risk of human error. 

Three-way reconciliation reports for effortless compliance 

Law societies require that law firms complete reconciliations to verify that trust accounts are accurate. The most effective method is to perform a three-way reconciliation with the book balance, bank balance, and individual client ledger balances.  

Most legal-specific accounting tools have built-in three-way reconciliations, so audits are straightforward, not cumbersome. 

Automatic locking of books and bank statements 

Law Societies recommend that law firms lock their books and bank statements after a reconciliation has been performed. This prevents any accidental edits that could impact the accounts. With software like QuickBooks, this isn’t an option, but legal-specific solutions can lock the books automatically.  

Generation of standard trust reports  

Each Canadian Law Society maintains a list of trust reports with specific formatting requirements that must be submitted during an audit.  

These reports can range from client trust ledgers to trust disbursement journals. Regardless of which type of report you are trying to generate, accounting software for law firms can do it automatically, ensuring that each report complies with the appropriate formatting requirements. 

Demo a cloud-based accounting software designed with Canadian law firms in mind  

CosmoLex is the preferred practice management software partner of the Canadian Bar Association.  

Our cloud-based practice management solution offers built-in accounting software, which means you can save time on billing, trust accounting, and bookkeeping with tools like:  

• Built-in trust accounting. CosmoLex will do all of your trust bookkeeping—automatically, in the background, and in real-time 
• Audit-ready reconciliations with error-proof software 
• Comprehensive trust reports so staying on top of your accounting and avoiding compliance issues is easy and automatic 

Sign up for a demo or start your free trial today to see the benefits of having built-in compliance tools for your accounting practices.