Most lawyers go to law school because they are interested in practicing law. It is rare that you find a who went to law school because they have a particular affinity for legal accounting.
Unfortunately, as a lawyer managing a practice, you must treat your law office accounting as fundamental. The problem is that accounting can be as equally challenging as it is important, and if you happen to be managing a smaller firm, it gets increasingly more difficult as you begin to consider the resources that are available to you.
The answers to these challenges are deeply rooted in technology. Law firms are increasingly adopting computerized legal accounting solutions to ensure their firms’ accounting is clean, in order, and above all, compliant with their local jurisdiction’s regulations. Continuing to use legal accounting solutions of the past or continuing to manage your firm’s different ledgers manually can be extremely costly. Continuing to use outdated solutions or even worse managing a firm’s legal accounting manually can lead to the following potential issues:
- Duplicate data entry
- Lack of referential integrity
- An inability to connect transactions and other records to the appropriate legal matter
- Difficulty in locating and fixing legal accounting errors
- It is nearly impossible to produce accurate bank reconciliation reports
- Napkins and loose receipts do not qualify as the required financial reports that are necessary in the event of a legal accounting audit.
Choosing The Right Accounting Software For Your Firm
The truth is many law firms have already made the move to computerize and automate some of their legal accounting functions through the use of different accounting software. Just utilizing an accounting software isn’t going to necessarily erase all of your firm’s accounting woes, though. It’s important to have the unique needs of a law firm in mind so that your firm chooses the appropriate accounting application.
All too often, lawyers turn to general business accounting software when it comes to handling their legal accounting. It is in your firm’s best interest to utilize legal-specific accounting software. In many cases, these legal-specific solutions are also equipped with legal billing and practice management systems. These legal-specific functions can increase the ease in which your firm can keep billing and payment transactions tightly linked with cases. Thereafter, your firm will still need to reconcile all of your book entries with your different bank accounts, a critical process to ensure your book entries match with what is happening in your accounts at the bank level.
How Often Should Your Firm Reconcile Bank Accounts?
Typically, bank reconciliations are performed on a monthly basis. While many firms believe carrying out the reconciliation process and generating financial reports on a monthly basis is enough, the truth is, it’s not. Let’s see why monthly bank reconciliations are rarely sufficient.
Why Monthly Bank Reconciliations Aren’t Good Enough
Consider Your Trust Accounts
The first place disaster can strike, is within your trust accounts. It is no secret that your firm’s trust accounting is one of the most heavily scrutinized areas of your business. It does not take much to turn your trust accounts upside down, and it does not take more than a check clearing to do this. For firms who wait until the end of the month to reconcile their accounts, an “unauthorized check” that clears on the first of the month could go unnoticed until the end of the month.
This doesn’t sound like a big deal, but it can be.
What about errors?
It is entirely possible that your bank — or you — could make a mistake. It does not have to be anything too crazy. A simple erroneous transaction entry into your books for one amount while the check was for written another could wreak havoc if left undetected for long. While mistakes are always going to happen, when they happen inside your trust accounts, you cannot afford to wait a whole month to find them.
What about fraud?
When it comes to accounting, we’d all like to believe that we can find solutions that protect us from any and all fraud but the truth is nothing is 100% secure. For this reason, it is essential for partners to be able to periodically review bank and credit card statements to ensure there are no instances of fraud
Are you overdrafting your accounts?
A check clearing or even something as simple as a bounced check chargeback could easily overdraft your account. Overdrafting a trust account can cause much more damage than just a $30 fee from your bank. Failing to maintain a positive balance in your trust accounts will result in ethics violations and compliance issues.
What type of law are you practicing?
Depending on your practice area, daily reconciliations may be required. This fact is true for lawyers working on matters related to real estate. While it’s not always necessary that these reconciliations be performed on a daily basis, it is crucial for firms to look into the specifics of clients who show activity on a regular basis.
Consider The Health of Your Business Accounts
The same mistakes and fraudulent transactions that can occur in your firm’s trust accounts can occur in your business accounts just as readily. While these accounts may not be as sensitive as the aforementioned trust accounts your firm may be managing, these mistakes can still have real consequences.
Does your firm use debit cards?
In this day and age, you would be hard-pressed to find a business that doesn’t utilize debit cards to make purchases. The problem is that, like credit cards, when using debit cards, often the transactions are not recorded in the books “first.” However, unlike credit cards, a debit card withdraws money from your business accounts in real-time. This withdrawal can lead to your books having an inaccurate view of your finances that affect cash flow and how your business operates on a day to day basis.
Credit Cards Are Convenient, But They Do Not Bill Conveniently
Just like debit cards, the use of credit cards is widespread. Many firms like to use credit cards to handle routine business expenses and even reimbursable client costs that occur outside of the office. Unfortunately, because of billing cycles, this activity represents one of the most significant sources of billing leakage for law firms.
If your firm is not reconciling your credit card activity on a regular basis, you may even bill your client before you realize that you need to be reimbursed for additional charges when your credit card statement comes in at the end of the month.
Failing to reconcile your firm’s different accounts on a regular basis can result in anything from a minor inconvenience to a disaster for your law practice. The problem is that logging into your various accounts and reconciling them on a daily basis can take a significant amount of time and effort you do not have available.
Utilize Bank Data Feeds To Reconcile Your Accounts
One way your firm can increase the frequency in which it reconciles accounts is to utilize bank data feeds. You should consider selecting legal accounting software that can also use your bank’s data feeds to automatically notify you when a check or deposit has cleared. You can then simply make it a daily process to review these cleared transactions and update your system appropriately. While utilizing bank data feeds will allow you to keep a much closer eye on your accounts, it will not erase all errors. So you still need to be diligent, but you can do this on a daily basis as opposed to a monthly one.
Challenges Faced When Working With Bank Data Feeds
While using bank data feeds will undoubtedly help your firm in reconciling your accounts on a regular basis, it is not foolproof, and there are still a few things that your firm needs to be mindful of.
It Can Be Difficult
This is not a simple process by any means. Several different layers and parties need to be involved. It is important to be aware of the different formats different banks will use for their data. Finding the right software that provides a reliable bank data feed is a significant piece of making this work.
Duplicate Data Entries
When the bank data feed is reconciled with existing book entries, you will begin to notice that some of the feed transactions do not find their correct match with the original transaction. The issue could be as minor as a different date. It is important to investigate transactions before accepting a feed transaction as a new transaction; else this can result in your firm making multiple entries for a single transaction.
Don’t Rely On Bank Feeds To Enter Your Transactions
Once your firm starts to use bank data feeds to reconcile accounts, you may think that it would be easier to rely on the feeds to enter your transactions. You would be right, it would be easier — but it could also be inaccurate. Bank data feeds should only be used as part of the daily reconciliation process. Should you choose to rely on these feeds for data entry, you run the risk of not accounting for transactions that have yet to clear, inaccurately recording the dates of transactions, or simply accepting any errors the bank may have made.
While you may not want to rely on bank data feeds to enter your bank transactions, it is possible to do so when dealing with your credit card accounts. With credit cards, there is no question of uncleared transactions. With this in mind, it is still important to keep a close eye on expenses associated with client costs. You also still need to watch for errors, duplicate charges, and missing credits. It’s always a good idea to have a source document for verification, and some expenses may require proof in the event of a tax audit or when tracking down any instances of fraud.
There’s no way to sugar coat it, accounting for law firms is far from simple. The undeniable truth is that no matter what solution you use, your firm needs to be diligent. However, the legal professionals that are most successful in navigating this landscape take full advantage of all the tools at their disposal in order to be as efficient and accurate as possible. This means finding the right mix of legal accounting software, practice management software, and banks that can be easily integrated with those software solutions.