Legal Billing and Accounting: Ways Your Firm Can Fail

Lawyers have a very specialized set of skills and training. Their clients trust them with some of their most sensitive information. Accordingly, there is a higher degree of consideration placed on payment as a part of the lawyer-client relationships.  

When most people think about violating ethical standards, their first thoughts turn to the more well-known issues: embezzlement, misrepresentation, undisclosed conflict of interest. However, firms can run into ethical violations in many small, routine ways that have just as devastating of an impact on your firm’s success. 

Fees

Fees. What would you do without them? But unlike selling many products and services, lawyer fees are bound by ethical requirements to be reasonable. (See Model Rule 1.5(b).) 

How is a fee determined to be reasonable or unreasonable? Lawyer experience, the time required by a case, client demands, and market conditions all play a role. Additionally, what is considered reasonable at the start of a case might change due to the course of events. 

Lawyers run into problems with fees in numerous situations, but it’s especially common to see it happen at the termination of relationships. They sometimes fall into the trap of improperly billing for activities that advance their own interests rather than fulfill their obligation to the client.

Lawyers should also caution against speeding through the contractual parts of their fees. Clients must give informed consent to fees. The most ethical way to do this is to get that consent in writing by disclosing terms of the fee agreement and the associated risks.

Mismanaging trusts

Client trust funds are a crucial piece of law firm financial management. In fact, they’re often required by state bar associations. They’re also one of the biggest ethical pitfalls for them.

There are lots of potential issues with trust funds if you don’t manage retainers properly. Clients pay retainers into these accounts, but it’s money that lawyers haven’t actually earned yet. No payment can be taken out of the trust fund until services have been completed and approved by the client, usually through an invoicing process.

If you’re working with multiple clients and have multiple trust funds with retainers, there’s an additional challenge of keeping funds separated. Funds can’t be commingled and they can’t be used to pay for services rendered for another client or for the firm’s general business expenses. 

How does a law firm juggle these requirements? Start with the following safeguards to meet compliance guidelines:

  • Don’t overdraft client ledger at the transaction level
  • Post transactions to the correct account
  • Perform a 3-way reconciliation regularly

And, of course, proper accounting plays a big role, too.

Proper accounting

We’re not just talking about using generally accepted accounting principles here. Law firms have unique accounting needs that need to be addressed head-on. 

Let’s take, for example, billing costs. When it comes to billing costs to clients, not all costs are the same. While it depends on the type of cases, case costs often need to be treated as either “advanced client costs” or “reimbursable client costs.” This matters because these costs are recorded differently: the advanced client costs are included as an asset on your balance sheets while reimbursable client costs are added to profit-and-loss statements. 

If this isn’t consistently and correctly done, your firm can face problems with the IRS. 

Speaking of allocating costs, your accounting practices need to correctly differentiate between income and revenue. When invoices are paid, part of that revenue needs to be allocated to incurred costs first. Without doing so, it’s hard to determine revenue covering incurred costs from their actual income, which in turn creates inaccurate books, compliance issues, and analyzing the ROI of cases.

Credit card fees 

At face value, taking credit cards for payment doesn’t seem like it’d be a difficult question for lawyers. However, processing credit cards for legal payments has some unique requirements. 

When clients pay with credit cards, it’s not always obvious what invoices are being paid when you use different systems for account and billing. Another challenge that credit cards create is with batching. To avoid commingling funds, accounting departments need to reconcile credit card payments on a daily basis to keep them from being lumped into a single deposit. 

Bad data

To err is human, but it’s still not advisable when it comes to legal billing. To avoid errors, your billing and accounting systems need to operate from the same sets of data. 

What if you’re using two separate systems for this? You have to take extra caution to accurate input information. NOt doing so creates errors that ripple across your billing practices and can generate client complaints. (Or ethical violations.)  

You can streamline the process, though, by implementing a practice management software that incorporates both billing and accounting functions, allowing you to operate from a single data set.

When it comes to money, it pays to be careful. While your firm needs income to keep the lights on – figuratively speaking, at least – legal professionals have more intensive ethical requirements than those in other lines of work. However, by watching out for these issues, you can put your firm in a better position to avoid problems. 

Want to learn more about what financial pitfalls to avoid? Check out our webinar, Legal Billing and Accounting: 5 Ways Your Firm Can Fail.

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