Once the requirements of the law firm are understood, it is very clear why a generalized accounting solution may not be the best choice for your firm.
Law firms have unique accounting requirements — like being bound to a code of ethics to account for any funds held in trust on behalf of clients. It’s important to keep these requirements in mind when selecting the proper legal accounting system to streamline your processes. As an example, law firms are required by a code of ethics to account for any funds held in trust on behalf of clients. Once the requirements of the law firm are understood, it is very clear why a generalized accounting solution may not be the best choice for your firm.
The Necessity of Efficient Legal Accounting in Law Firms
Since the compliance requirements of a law firm are different than most other businesses, your legal accounting solutions must have features that meet those unique requirements.
Trust Accounting Capabilities
As referenced above, trust account compliance is one of the unique features of accounting software for lawyers. Any system you choose must satisfy all the requirements of the Bar Association’s Safekeeping Rules.
The Safekeeping Rules specify that all money received in a trust bank account and all money disbursed out of the trust account must be accounted for by client/file. The reports required to properly account for trust funds are typically not found in the templates included with generalized accounting solutions. However, accounting software developed specifically for law firms has automated templates for all the required reports and controls to ensure trust account compliance.
In addition, specialized legal accounting software has controls to ensure money cannot be disbursed if the funds are not available for that client/file regardless of the total trust bank balance of the firm. These controls ensure that the law firm will comply with the Safekeeping Rules. Using a generalized accounting package can easily create trust imbalances and non-compliance issues which can result in disbarment.
The next accounting requirement for law firms relates to funds that the law firm expends on behalf of their client in support of legal services.
Typically, the costs that are incurred will be paid from the law firms’ operating bank account(s). However, individual client costs need to be recorded separately and included in scheduled billings. If these costs are not accounted for properly, it makes it harder to recover those expenses — reducing earnings. Unfortunately, there are many legal solutions that do not have integrated accounting and billing functionalities. This lack of integration often results in client costs being paid out of the accounting system but not recorded in the billing system to be recovered.
Client Cost Reporting
How client costs are reported on the accounting statements represents another unique accounting requirement of law firms.
One method of accounting for client costs is to record them as an expense in the year incurred. This method is used if the client costs are expected to be recovered within the same year. Recovered client costs will reduce the client costs incurred. But certain firms, like personal injury and contingent firms, typically will recover client costs more than a year after they are incurred. That means the client costs are not expensed but rather recorded as a receivable. With this method, the unbilled client costs should be able to be reconciled against the detailed client/file records of unbilled costs.
Very few generalized accounting systems give you the functionality to record costs to specific clients/matters, let alone allow you to determine how those costs are classified. Service industries are required under generally accepted accounting principles to report income at the time it is paid, not when it is billed. This is called cash accounting. Most other businesses will recognize income once the client/customer is billed; this is the accrual method of accounting. Cash-basis accounting is based on the movement of money; income is recognized when received and expenses are recognized when paid. Most generalized accounting systems will report based on the accrual method of accounting.
Aside from time savings and increased efficiency, law-firm specific solutions are more efficient for law firms because all data is entered once.
Integrated Time Keeping
One way to stay organized is to create reports that reflect timekeeper productivity and profitability on a client/file level. Most legal accounting solutions will include performance reporting that the law firm can use to make better management decisions.
For example, it is important for a managing partner(s) of a firm to know how time is being tracked. Reports that show billable hours and collected fees can be used to evaluate firm staff. These numbers determine whether the timekeeper is earning enough based on the cost to the firm for that timekeeper. These reports are often used in the calculations for timekeeper/partner compensation. Law firms frequently will compensate timekeepers based on fees collected by the originating, working and responsible attorney.
Evaluating fees collected by practice type is another important part of managing and evaluating a firm’s income. If a law firm is charging a flat fee for services rendered, it is important to know if the time spent performing the work is greater or less than the flat fees collected. Cases and matter types that are not profitable should be carefully considered in the future or fees should be adjusted to reflect the time required to work on the case. Generalized accounting packages do not have the reporting capacity to provide any of these metrics.
The Role of Technology in Streamlining Law Firm Accounting
Most generic accounting software is siloed, but all-in-one law firm-specific solutions combine practice management features with accounting functionality. Aside from time savings and increased efficiency, these solutions are more efficient for law firms because all data is entered once.
For example, when a trust receipt is entered, the client’s ledger, the trust bank journal, and the general ledger are updated. The fewer times a transaction is handled, the less potential for errors. These all-in-one systems provide profitability and productivity reporting that is not available in the generalized accounting programs.
Accounting for client costs is another feature that is enhanced with an integrated practice management and accounting system. As the check is entered and printed, the client billing ledger, the bank, and the general ledger are updated. At the time of billing, all the client costs are on the billing ledger and included for the law firm to recover the costs expended.
How CARET Legal Streamlines Legal Accounting Workflows
CARET Legal is a law firm practice management solution equipped with native accounting features. It was developed for lawyers, by lawyers and therefore contains all the unique features needed to keep law firms in compliance.
Client costs are published to billing records as recorded. All the trust accounting transactions are properly recorded and included in all the required reporting. Financial statements are presented based on the cash method of accounting. Plus, there are advanced security controls. Accounting information is restricted to those users who need to have access to those records and billing records can be restricted by security as well.
Law firms converting to CARET Legal from older legacy systems are pleasantly surprised with the straightforward and easy-to-understand accounting tasks. The law firm accounting features in CARET Legal are intuitive. CARET Legal has controls that ensure accounting is being done properly. An intellectual property firm using CARET Legal stated that their staff was able to access the information they needed fast – as well as information they didn’t know they needed. “CARET keeps the accounting and reporting tools in one place and includes bookkeeping tools. The system keeps track of certain things, and I could see things I should know,” says one of the users in the law firm. “CARET Legal teaches you how to manage a law practice and reports the financials you should be looking for.”
Start Improving Your Law Firm Accounting Processes Today
Law firms often struggle with understanding and using accounting systems. Utilizing CARET Legal is the first step to improving law firm accounting. Accurate accounting records allow lawyers to make informed business decisions in order to improve profitability and productivity. A strong accounting system will allow a lawyer to spend more time practicing law and less time on accounting issues.
Written by CARET Legal partner, Deborah J. Schaefer. Deborah is a Certified Public Accountant in Connecticut and New York, who specializes in the selection, implementation, training, and support of computer-based accounting systems for law firms. Practicing for over 35 years, she has worked with hundreds of firms across the US and internationally.