Trust Accounting: The Challenges of Compliance
There aren’t too many attorneys out there who enjoy trust accounting. Come to think of it, outside of accountants you’d be hard pressed to find anyone who genuinely enjoys any type of accounting. Most attorneys certainly are not accountants, so they naturally aren’t trust accounting experts. Unfortunately, many accountants aren’t aware of the legal-specific regulations associated with the management of trust accounts by attorneys. You may be the best attorney a courtroom has ever seen, but if your trust accounting isn’t up to snuff it could spell disaster for your practice or firm.
It’s important for all attorneys to understand and identify the challenges associated with trust accounting compliance. Here is a list of some of the most common trust accounting compliance challenges attorneys face on a regular basis. Firms who fail to meet these challenges and remain in compliance with trust accounting regulations run the risk of bringing harsh penalties to their practice, even resulting in disbarment.
Trust Accounting Challenges for Attorneys
Funds from Multiple Clients in A Single Account
I won’t say always, but usually, a firm has more than one client. This means most firms are managing trust funds for more than one client in a single account. While these funds from multiple clients are all housed in a single account, it is extremely important that a client’s funds are only used for the legal matter they are associated with. Commingling one client’s funds with another will likely upset your clients, but it could also bring ethics violations to your firm. Make sure your firm doesn’t commingle client funds and has a system in place to keep clean records of client trust balances.
Posting Transactions to Inappropriate Accounts
The trust accounting practices of law firms are heavily scrutinized. This means your firm needs to make sure that all transactions are posted to the appropriate accounts. As an example, firms that operate on retainers cannot recognize any income until services are carried out or completed. This means that all retainers need to be posted to a firm’s trust account and not their income or expense accounts. In the event of an audit, these missteps can land your firm in hot water fast.
Not Performing 3-Way Reconciliations Regularly
Most people have performed a two-way bank reconciliation at some point in their life. It happens every time you balance your checkbook. You compare your most recent bank statement with your checkbook, accounting for the checks or deposits that have not cleared yet. If your balance matches with that of the bank, you’re fine and in the clear. If the balances don’t match it means that an error has been made by you or your bank.
When firms manage a trust, there are two sets of ledgers: the check register and the individual client ledgers. The check register shows a balance of the entire bank account, while the client ledgers are individual balances for each of your client’s trust funds within the account. The sum of the individual client ledgers must total the same as the bank balance and the book balance. When these three balances aren’t identical, it means that mistakes have been made, or you have failed to account for checks that have yet to clear.
In most states, firms are required to perform these reconciliations at 30 or 60 days. In reality, they should be performed on a daily basis. This ensures that your firm is always audit ready, and it will help you catch mistakes right after they happen opposed to a month or two months down the road.
Addressing these challenges on your own with a pen, paper, and a calculator can be extremely challenging and tedious. Your firm can drastically improve your efficiency related to managing trust accounting by automating some of these processes with the proper, legal-specific software. To learn more about the most common types of trust accounting challenges, and learn more about how your law practice can simplify the daily tasks associated with legal trust accounting, register for a special webinar on May 4th “The Battle for Trust Account Compliance.”