You endured years of college, burned the midnight oil studying for exams, spent countless hours in the library, and had to pass Bar exams. You thought when you got through all of these things you were on your way to a lucrative career as an attorney. You were probably right. I am sure you are an amazing attorney! But then something else happened. Now you are not only fighting for the win in the courtroom, but also in your law firm. Running your own firm requires another litany of skill sets. Skill sets such as legal accounting. I specify “legal accounting” because, as an attorney, you tend to have more at risk than your typical business owner, and this is why it is essential you have a knowledgeable and qualified legal accountant on your side.
You wouldn’t have your legal assistant present your case in the courtroom, would you? The same theory applies when talking about accounting for your law firm. There are most likely people who work with you whom you could put up to the task. How many other tasks do they handle for you though? Are you absolutely certain they have the time, attention to detail, and skill set to not only do the accounting, but also know the best methods to keep your law firm not only surviving, but thriving? Maybe you think it would be more lucrative to keep the cash in your pocket and do it yourself. But how much do you charge an hour? Even if you could fully handle this, is legal accounting the best use of your time?
If you’re like many other attorneys, your eyes get a slightly glazed over look when someone starts speaking to you about your law firm’s accounting. Hang in there for the rest of this article though, because in the end you will see why it is important to hire a skilled legal accountant, and how that can help your firm grow and stay compliant.
Legal accounting is more advanced than just understanding “money in / money out”. Successful and compliant law practices have legal accountants who understand the details of client trust fund accounting, direct and indirect matter costs, and three-way reconciliation of the client trust. While there are many areas we could delve into in regards to why you need an actual legal accountant, let’s get started with looking at just a few:
Retainers are necessary within law firms. This is a good way to make sure that you have funds from a client in advance, but they can quickly become an accounting issue. Improperly tracked retainers can actually lead to lost income for the firm. Do you have someone who is keeping retainers accurate and up-to-date? It happens frequently that law firms lose money because incurred costs are not properly recorded, and there’s an imbalance between what’s been put into the client’s trust and what’s been taken out. Therefore, if the case is closed and costs aren’t up-to-date on the account, you can end up losing money.
2. Knowing the difference between a retainer deposit and income
Not knowing the difference between the retainer deposit and actual income can be devastating to your firm. When retainer deposits come in, you need to make sure that you are allocating not only to the correct client, but also to the proper retainer account. Retainer accounts are considered liabilities since the funds do not yet technically belong to the firm. Only when the funds are transferred to the Operating account do they become revenue. Once again, this small distinction can not only create inaccurate books, but also state Bar compliance problems.
3. Data entry errors
Obviously, every business needs to ensure that their books are accurate. When it comes to legal accounting, this becomes tremendously important. It is paramount that a law firm’s billing and accounting systems match up. Aside from causing turmoil with your accounting, it can also cause ethics violations.
4. Case costs
In most legal practices there are costs associated with each case. Not only does this present a potential issue with recording properly, but correctly categorizing the costs can be tricky as well. For example, fees paid out of Operating are Advanced Client Costs, billable to the client, and should be considered an asset on your books. Fees paid out of IOLTA are handled differently. Failure to track these accurately and consistently can wreak havoc as far as state Bar and IRS compliance.
As you have probably gathered, we’re really honing in on potential compliance issues on top of simply having accounting nightmares to fix. Fixing these errors if they have been incorrectly recorded all along is a much more arduous and expensive process than doing it correctly from the beginning. We also are focusing on compliance and consistency in your legal accounting, because compliance and ethics issues can not only incur penalties, but can potentially lead to disbarment. There aren’t many other professions that have this additional concern. Do you really want a part-time administrative employee responsible for you maintaining (or losing) your license?
The good news, after all this information on how you can potentially put your law firm at risk, is that not only can a legal accountant help you avoid these pitfalls, but they can quickly take one of your biggest challenges as a law firm and turn it into a way to exponentially grow your firm! The same areas that have the potential to lose your firm money could also be ways to keep more money in your pocket!
If you’re worried that the legal accounting within your law firm may not be up to snuff, call Accounting Girl today for an X-Ray Scan. We’ll dig into what’s going on and why, and provide you with a detailed report summarizing the issues we’ve found and a recommendation for improvement.