I am the managing partner with a 14 attorney firm in Chicago. We recently hired a new accounting manager/bookkeeper. While she has worked in a few other law firms these firms did not require her to manage a high volume trust account. Our firm has a high volume of transactions that flow through the firm's trust account. We have had problems in the past with prior bookkeepers and outside accountants that did not balance/manage our trust accounts properly. What suggestions do you have or resources do you suggest?
Failure to properly manage, balance, and reconcile the firm trust account can be a major problem for law firms - from professional responsibility, accounting, and tax aspects. From a bookkeeping standpoint - failure to maintain a trust account sub-ledger for each client that has money in the trust account and insuring that all of the sub-ledgers balance and reconcile back to the trust account bank statement in the biggest problem that I see. You must do more than simply maintaining a checkbook journal register - you must have a sub-ledger for each client. If the firm reflects the trust bank account on it's balance sheet there should be either a contra asset account or a liability account relecting the same amount reflected in the cash account. The total of all of the sub-ledgers should also equal the number in each of these two general ledger accounts. All should reconcile back to the trust account bank statement. If the firm does not reflect the trust account on the balance sheet - then the trust account bank statement should be reconciled to the sub-ledgers.
Many time and billing programs have trust accounting modules that fully automate the trust accounting management function, maintain the sub-ledgers, write trust account checks, and reconcile the bank statement against the client trust sub-ledgers.
There are a whole array of issues that you need to be aware of and stay on top of concerning retainers generally, firm trust accounts, and other matters. You, your bookkeeper, and your CPA need to get educated on all of the ramifications.
Here are a few additional suggestions:
- Get a copy of your local rules and read them. For Illinois lawyers - get a copy of the Illinois Rules of Professional Conduct of 2010 published by the Attorney Registration and Disciplinary Commission of the Supreme Court of Illinois. www.iardc.org.
- Insure that your bookkeeper and CPA read these rules and implement appropriate systems to ensure compliance.
- Get your hands on a copy of the book - ABA Guide to Lawyer Trust Accounts, by Jay Foonberg. Book can be obtained from the American Bar Association website. www.abanet.org
- Reconcile monthly.
- Use appropriate software to write checks, record deposits and transfers, renconcile bank statements, and maintain the client trust sub-ledger.
- Maintain a journal.
- Maintain a client trust sub-ledger.
- Insure that funds are transferred to the firm's operating account when fees are earned and appropriate accounting entries made at that time in the firm's books.
- Stay on top of the trust account.
- Insure that your bank and credit card company are following proper procedures. Insure that your bank takes services charges, charges for printing checks, etc. from your operating account rather than the trust account.
You are right in desiring to get a handle on this sooner than later. Sit down with your bookkeeper and CPA, get educated on the rules and procedures, and implement appropriate policies and systems now. It is always easier to prevent a mess than to clean up one.
John W. Olmstead, MBA, Ph.D, CMC