Though it may seem like a no-brainer, law firms’ actual protocols and processes to stay compliant are complicated. Especially in Trust Accounting (otherwise known as IOLTA Accounting or Escrow Accounting), individual states’ compliance and requirements are of the highest importance.
From keeping thorough records (both print and digital) to grasping the main differences between unearned and earned income, Trust Accounting brings several unique challenges. Let’s look at some of the trust accounting compliance challenges a firm is the most likely face.
Challenge 1: Shortage of Trust Specific Rules and Knowledge
Every state has made its audit programs and compliance guidelines that their attornies are responsible for grasping. Further than this, the firm’s bookkeeper(s) and accountants must understand the legal accounting and bookkeeping procedures.
We stress on this point that there are many expert accountants out there who are not familiar with the new and unique trust accounting compliance requirements, and the challenges it brings with it. You need to ask your bookkeeper or accountant regarding their expertise and experience with law firms.
Challenge 2: Restricted Resources and Means of Smaller Law Firms
Limited resources are another reason for law firms to face challenges in document storage compliance for their attorneys. When we say resources, we mean dedicated resources, IT systems, and training. These resources are reasonably hard to manage by many small firms. Nonetheless, the compliance requirements remain the same for every law firm. Regardless of the firm’s size, the chances of an audit will be the same for everyone.
Challenge 3: Systems Operating Manually
Law firms that keep track of their client funds through manual entries on paper spreadsheets increase the chances of errors. The bookkeeping process is slower. Despite the firm’s and attorney’s best efforts, a lot of valuable time will be wasted trying to find where the five-cent discrepancy occurs.
If the law firm makes use of an accounting solution, they need to make sure that the software is set up correctly. This software is not aimed at legal practice. That is why they require extra vigilance.
Challenge 4: Trust Funds Commingled
Commingling is of two main types:
- Losing tabs on the client trust account balances. In other words, no distinct ledger cards
- Mixing the firm’s funds with the client’s funds needs to be tracked individually
Although you can have various trust funds using one bank account, the trust funds must be recorded separately in the books.
Challenge 5: Lack of Safety Measures to Avoid Common Trust Blunders
Some common trust mistakes consist of lack of proof of identity for every matter, commingling of funds, repeated check numbers, overdrafts, and so on. Business owners of law firms cannot fulfill the part of a bookkeeper or CPA. Therefore, it is essential to implement processes and systems that can provide proper tools to the team.
Challenge 6: Disordered Bank Reconciliation
In trust management, bank reconciliation is even more critical. Trust reconciliation has a different way of reconciling as compared to operating accounts. It encompasses the “three-way reconciliation” where the total Individual Card Balance, Bank Balance and Book Balance, and Bank Balance is broken up. It helps you to discover any errors and correct them promptly speedily. This method dramatically helps at the time of the audit.
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