When you went to law school, you were probably there because you wanted to practice law. It’s unlikely that at any point while you were sitting in a lecture, you thought to yourself, “You know what? After I pass the bar, I can’t wait to dig into some legal accounting.”
The problem is that as an attorney managing a practice, your law office accounting is supremely important. Unfortunately, it is equally as challenging as it is important, and if you’re managing a smaller firm, it only gets tougher when you consider the resources that are available to you.
There is hope, though, and that hope is 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. Remaining in the stone age of legal accounting or continuing to manage your firm’s different ledgers manually can be extremely costly. The potential issues and disadvantages include but are not limited to:
- Additional 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
Many law firms have already made the move to computerize and automate some of their legal accounting functions through the use of accounting software. Just utilizing software isn’t going to necessarily erase all of your firm’s accounting woes, though. It’s important to choose the appropriate accounting software.
All too often attorneys turn to general business accounting software when it comes to handling their legal accounting. It is in your firm’s best interest to use a legal-specific accounting software. In many cases, these legal-specific solutions are also equipped with legal billing and practice management systems. These functions can increase the ease in which your firm is able to keep billing and payment transactions tightly linked with cases. Thereafter, firms still need to reconcile all of book entries with different bank accounts, a critical process to ensure your book entries matches with what is happening in your accounts at the bank level.
How Often Should Your Firm Reconcile Bank Accounts?
The bank reconciliation is normally performed on a monthly basis. While many firms believe carrying out the reconciliation process an generating financial reports on a monthly basis is enough, the truth is—it isn’t. 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’s no secret that your firm’s trust accounting is one of the most heavily scrutinized areas of your business. It doesn’t take much to turn your trust accounts upside down, and it doesn’t take more than a check clearing to do this. For firms that 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.
It 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 doesn’t have to be anything too crazy. Simply incorrectly entering a transaction into your books for one amount while the check was for written another could cause a havoc if left undetected for long. While mistakes are always going to happen, when they happen inside your trust accounts, you can’t afford to wait a whole month to find them.
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 can be required. If your firm is working on matters such as real estate settlements, you could be required to perform reconciliations on a daily 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 easily. 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’d be hard-pressed to find a business that doesn’t utilize debit cards to make purchases. The problem is that, like credit cards, when debit cards are used, often the transactions aren’t always recorded in the books “first.” However, unlike credit cards, debit card charge withdraws money from your business accounts in real-time. This can lead to your books having an inaccurate view of your finances that affect how your business operates.
Credit Cards Are Convenient, But They Don’t Bill Conveniently
Just like debit cards, the use of credit cards is extremely common. 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 largest sources of billing leakage for law firms.
If your firm isn’t 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.
It’s clear that 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 firm. The problem is logging into your different accounts and reconciling them on a daily basis can take a significant amount of time and effort you don’t 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 utilize 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.
Not So Fast, There Are Some Challenges When Working With Bank Data Feeds
While using bank data feeds will certainly help your firm in reconciling your accounts on a regular basis, it isn’t foolproof, and there are still a few things your firm needs to understand.
It’s not easy. This isn’t a simple process by any means. There are several different layers and parties that need to be involved. It is also worth noting that different banks will use different formats for their data. Finding the right software that provides a reliable bank data feed is a major 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 don’t find its correct match with the original transaction. The issue could be as minor as a different date. Investigate before accepting 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 it’d be easier to rely on the feeds to enter your transactions. You’d be right, it would be easier—but it could also be a very costly mistake. 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, you may be able to do so when dealing with your credit card accounts. With credit cards, there is no question of uncleared transactions, but you would still need to keep a close eye on expenses associated with client costs.
Legal accounting is far from simple, and your firm needs to be diligent. If your firm wants to be successful, you need to take full advantage of all the tools at your disposal 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.