Trust Accounting is a relatively simple accounting process. Unlike most accounting needs there isn’t any profit or loss to track. There is no depreciation or amortization to deal with. You don’t need to calculate interest accumulation. There is no tax accounting required, and you don’t have to calculate account management or banking fees.
How, then, do mistakes happen in trust accounting? A lot of it comes down to poor account management and recordkeeping. For instance, trust accounting does require you to track funds for each client, perform monthly reconciliation, and maintain an audit trail. These requirements are more than some law firms can or are willing to handle. But it’s incredibly important to meet these requirements since neglecting to do so can lead to trust fund violations and severe consequences for the lawyer or law firm.
The Most Common Mistakes In Trust Fund Accounting
Keep these common mistakes in mind as you develop your trust accounting policies and procedures to make sure you have the proper systems and controls in place to comply with the law. Common mistakes are:
1. A lack of trust-specific rules. Rules and procedures for handling trust funds are a must for accurate accounting, but, all too often, these internal controls and procedures are lacking or non-existent.
2. A lack of resources. Small law firms and solo practitioners in particular struggle to maintain accurate trust accounting. They lack the dedicated resources, training, and IT systems that make trust accounting much easier.
3. Manual systems. Recording transactions manually is a prime reason accounting mistakes are made and can often be traced back to simple human error.
4. Trust funds gets co-mingled. A big no-no is the comingling of trust funds. Again, manual systems or sloppy procedures can lead to co-mingling of funds. Once the funds have been co-mingled it becomes much more difficult to track them accurately and can give an appearance of impropriety.
5. Trust ledger overdrafts. Something as simple as overdrafting the trust fund is a common mistake, but it’s a mistake that wouldn’t happen if some of the other mistakes in this list were heeded, like having proper controls and procedures.
6. Lack of controls & data protection. Manual systems lack the controls necessary to ensure every requirement of trust accounting is met. There is also a high risk of data loss in unsecured or manual ledger systems.
7. Un-cleared funds not addressed. Attorneys should be regularly reviewing the activity of their trust accounts and following up on anything unusual, including un-cleared funds.
8. Bank reconciliation is sloppy. Bank reconciliation should be done monthly to maintain the most accurate records. Reconciliations should also be occasionally reviewed by a manager who is not usually involved in the process.
9. Billing & trust is kept separate. Another strict requirement of trust accounting is keeping billing and business operating funds separate from trust funds. Even though it may be easier to just have all of your funds in one account, doing so violates one of the most important principles of trust accounting.
10. Absence of safeguards. Internal controls are essential to accurate trust accounting. Every lawyer in the firm should be doing trust accounting the same way and understand the need for following the procedures.
Legal Trust Accounting Software Simplifies And Safeguards The Process
A lawyer’s fiduciary responsibilities, including trust accounting, must adhere to the strictest principles of accounting. Neglecting to do so puts the individual lawyer and the firm at risk. But this doesn’t have to be difficult. CosmoLex’s legal accounting software has built-in IOLTA accounting functions. All you have to do is follow the prompts. The software manages client funds, fee advances, disbursements, banking reconciliations, prevents overdrafts, and more. You’ll avoid these common mistakes, and you don’t need to be an accountant to use and understand the software.