Trust accounts allow lawyers to charge retainer fees, giving them peace of mind that clients can pay their bills—and as such, most lawyers will use trust accounts at some point in their careers.
Yet even though trust accounts are commonly used, adhering to all the proper bookkeeping protocols is a complex process, rife with compliance pitfalls. Moreover, errors in trust accounting can lead to ethics violations and other unnecessary headaches.
Trust accounting and compliance
Even though the law firm holds the figurative keys to a trust account, the money in the account belongs to the client. This is why there are such strict regulations for how the money in the account must be handled and how the books must be kept.
Trust accounting requirements vary by jurisdiction, and many states conduct random audits to help ensure regulations are being adhered to.
Law firms must generally follow regular reconciliation and reporting schedules for their trust accounts. They must also maintain accurate records and avoid commingling the funds in the trust account with the law firm’s funds or the funds of other clients. Additionally, they must track all deposits and disbursements made with the account.
It’s a lot to keep track of, but it’s important—both for your clients’ peace of mind when they hand over large sums to your firm for work that hasn’t been done yet and for keeping you compliant. If selected for a random audit, your firm needs to be able to produce accurate trust accounting records and reconciliation reports.
4 common errors in trust accounting
Lawyers have a fiduciary duty toward their clients, but common trust accounting errors can at times prevent lawyers from upholding those duties to the fullest extent possible.
Fortunately, once lawyers recognize possible sources of error, they can address the problems with the proper tools. Legal tech has continued to develop to the point where it’s able to provide key support for lawyers with a lot on their plates—and trust accounting is no exception.
1. Splitting information across two systems
Monthly reconciliation and three-way reconciliation—where you cross-reference individual client ledgers, the trust ledger, and your bank statement—are key components of compliant trust accounting.
However, problems can arise if you use separate systems for your billing and accounting. Why? If you use an accounting platform for reconciliation and reporting but your billing system to track retainer balances, a gap emerges. If there’s a mistake in one system, the other may not catch it.
With time, this can lead to inaccurate retainer balances—and overdrafting a client account or having an incorrect balance reflected on an invoice.
2. Not having accurate matter balances available
Having an accurate picture of matter balances is hard to do when your accounting and billing systems are separate platforms.
Part of the issue is that the balance in a trust account isn’t always an accurate reflection of the matter balance. To determine the matter balance, you also need to factor in accounts receivable and works in progress (WIP). This means that you need your billing and accounting systems to speak to one another, or you need to be doing the cross-referencing yourself regularly.
3. Letting retainers deplete
A depleted retainer that catches a law firm by surprise can lead to a real hassle. For example, if a law firm uses two separate systems for billing and accounting and then fails to track WIPs accurately, a retainer can deplete without the team being aware of it.
When the depleted retainer is discovered, the law firm will have some collections work to do.
Although depleted retainers can technically happen with a single-platform billing and accounting system, too, single-platform systems come with safeguards, such as evergreen retainers. When a retainer balance falls below a certain amount, the system can send out an automated reminder to the client to replenish the balance. In this manner, it’s possible to avoid an unpleasant surprise.
4. Not using safeguards on trust accounts
As mentioned above, it’s an ethics violation to commingle funds in a trust account with the law firm’s or other clients’ money. In addition, when a client account is overdrafted, commingling can happen unintentionally when the bank automatically draws the funds required to make up the difference from another client account.
Legal-specific single-platform billing and accounting programs come with safeguards that can help prevent these errors. For instance, if you try to overdraft a client account, your single-platform billing and accounting system won’t let you.
It also won’t let you deposit a check without associating a matter with it. This helps ensure your firm is accurately tracking client funds, as you’re required to do by your state bar.
Avoid errors with single-system billing and accounting
Although attempting to integrate separate billing and accounting systems can seem like a viable workaround, there’s a hidden cost in the effort and risk you take on with such an approach. Using separate systems can mean that mistakes in one system aren’t caught by the other until you have a fully tangled mess on your hands.
Likewise, separate systems can complicate your ability to accurately track matter balances—resulting in depleted retainers, overdrafts, and the commingling of client funds.
A single-system legal billing and accounting approach, however, can go a long way toward solving these problems. For instance, when all the information is being entered into a single system, errors can be promptly discovered and reconciled. Moreover, a single system means your team doesn’t lose time or have more opportunities for human error by entering the same data twice (once in each system).
With all the information in one place, your matter balances will accurately reflect any WIPs or accounts receivable. And yes, you can implement evergreen retainers, too.
Finally, a single billing and accounting system that’s legal-specific gives you access to key trust accounting safeguards that prevent the commingling of funds, overdrafts, and deposits not associated with a matter.
For most lawyers, trust accounting is something they have to do on a regular basis—so don’t let it be stressful! Take an approach that helps you stay compliant instead.
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