Of all the administrative functions, trust accounting happens to be one of the biggest headaches with which small- and medium-sized law firms are plagued. The processing is, however, an indispensable ingredient in the ethical and legal service of maintenance of confidence on the attorney placed by the client. This article will walk you through some of the simplification procedures of your Trust Accounting in order to free up part of your invaluable time, meanwhile reducing mistakes along with continuing all the mandatory compliance.

What is trust accounting?

Trust accounting handles that type of system used for controlling and accounting for funds held by the firm as trusts on the clients’ behalf. This is not viewed as their money in that matter but was retained by spending on their behalf for reasons to be disclosed upon court fee settlement or whatever happening. Each of the jurisdictions will have special rules that are strict as to how the trust accounts are to be treated and will generally include the separation of the client’s money not being able to be commingled with any operating accounts, detailed records of deposits, withdrawals and balances, reconciliation on a regular basis, and disbursing of the funds for only their intended purpose. Any of the foregoing when not followed accordingly may be subjected to such severe sanctions as monetary fines, reputational harm, and even to the extent of disbarment.

Common Issues for Small to Medium-Sized Law Firm

The following are some specific challenges in the handling of the trust account operation for small and medium-sized firms:

Fewer Resources: Often, it is not economically feasible for a firm to hire a full- or even part-time bookkeeper or accountant. The job therefore falls on the lawyer, and sometimes the paralegal, in addition to the work already performed.
Complicated Rules: Rules for trust accounting are usually very obscure to interpret and apply and usually vary considerably from jurisdiction to jurisdiction.
Manual Processes: Spreadsheets and paper records increase the risk for errors and prolong reconciliation time.
Time Pressures: Lawyers can hardly afford to give any time to administrative tasks like trust accounting; hence, records are prepared in a tearing hurry or incompletely.

Fortunately, these can be overcome with the right tools and strategies.

How to Simplify Trust Accounting

1. Use Legal-Specific Accounting Software

One of the most viable means of easing trust accounting involves investing in law firm software for this particular purpose. Generally speaking, legal accounting software will support the following feature set:

Automation of reconciliation of trust accounts.

Inherent functionality to satisfy specific jurisdictional rules and regulations.

A highly detailed report on the client ledger

Alerts on probable errors that will lead to overdraft or commingling of funds.

These can save time, reduce errors, and thereby make it easier to maintain compliance by automating much of the manual tasks of trust accounting.

2. Know the Rules in Your Jurisdiction

Each and every state varies with respect to what the rules of a trust account are. Learn your state’s to avoid any compliance issues. These may involve minimum bookkeeping and record-keeping, treatment of interest from a trust account, or regular reporting with appropriate agencies. Sometimes the best thing is to seek the advice of an attorney or accounting professional that would be current with present rules and regulations, and one of the more functional ways to relearn updated laws is through continuing education.

3. Institute Good Internal Policies

The slightest miscommunication about trust accounting can lead to mistakes. Clearly defined internal policies regarding trust accounting need to be given regarding the following:

Who is responsible for the trust accounts?
Deposit and disbursement procedures
How reconciliations are to be prepared on a regular basis
Record-keeping requirements

Your policies should be such that all your employees who deal with any part of trust accounting understand them and follow them.

4. Prepare Reconciliations on a Regular Basis

Reconciliation is the process of comparing your records of the trust account to the bank statement with the goal of ensuring they agree. Reconciliations performed on a regular basis assure errors are identified and corrected quickly. Best practices:

Reconcile the trust accounts monthly, or more frequently, if possible.
Utilize software tools to assist in automating the reconciliation process.
Document the reconciliation for audit purposes.

5. Segregate Operating and Trust Accounts

Never mix the clients’ money with that of the individuals operating the business. Separation of bank accounts for the trust and operating funds is not only a requirement but one of the best practices promoting transparency and accountability. Consider, in addition:

Run different checks for trust account transactions.
Allow access to the trust accounts to only those persons who have been duly authorized to access them.

6. Train Your Team

Proper training is the linchpin of trust account compliance. Training for attorneys, paralegals, and administrative staff covers the basics of trust accounting, your firm’s internal policies, and how to use your trust accounting software. Ongoing education also updates regulation changes and refines best practices.

7. Leverage Technology to Simplify Auditing and Reporting

Auditing and reporting are major works in trust accounting. Assist these through technology by:

Run comprehensive reports on the client ledger.
Set up notifications for any event of non-compliance.
Prepare audit-ready financial statements.

Most legal accounting software will make proving compliance in case of audits quite easy in its reporting.

8. Work with Professionals

If the job of trust accounting seems insurmountable, outsource the work to an experienced professional in legal accounting. The experienced Legal Accountant or Bookkeeper will be able to:

Setup your Trust Accounting system.
Provide ongoing support and guidance on how to do it.
Periodically review to make sure it’s done right.

Outsourcing will add some expenses but will save hours and reduce the potential for expensive errors.

Benefits of Simplifying Trust Accounting

Such strategies will probably mean a few advantages for the small and medium-sized law firms:

Improve compliance: Following the rules of trust accounting sans penalties and preservation of your professional reputation.
Saves time: Automation frees the lawyers to assist in the handling of the clients.
Fewer errors: Technology coupled with a well-defined policy minimizes the errors in the management of the trust account.
More Confidence Amongst the Clients: Maintaining proper and transparent trust accounting builds confidence with the clients in your firm and depicts it as an ethical face.

Conclusion

Trust accounting does not have to be the boogeyman it is to many small and medium-sized firms. The right tools, along with clearly defined policies and pros who know their stuff, go a long way in making it all fairly seamless-so you can get back to what really matters: providing top-notch legal service to your clients.

Take the time to incorporate these procedures into your practice today, and you will be well on your way to mastering Trust Accounting with ease and confidence.