Legal bookkeeping for attorneys comes with certain set rules and regulations, listed in compliance guidelines for law firms. The SRA (Solicitors Regulation Authority) is responsible for providing these compliance guidelines, whether it be a sole legal practitioner or a relatively small law firm. Adhering, or more like staying compliant, to these guidelines keeps the SRA and government officials off a law firm’s back. In this blog post, we aim to bring light to what the best practices are in terms of trust accounting.
What is Trust Accounting?
To comply with Trust Accounting SRA Rules, lawyers first must be acquainted with the basics..
Lawyers are required to track and monitor a client’s funds while they are seeking legal advice. The fund is held in a Trust Account, in trust. The client is the beneficiary of this Trust Account. The fund cannot be used or accessed until or unless that client’s case requires it.
Every legal practitioner is required to maintain Trust Accounts for their clients. There can be two types of Trust Accounts:
- Pooled – these are accounts that are meant to hold more than one client’s funds.
- Separate – these accounts are used to hold large funds, created upon the client’s demand.
The 3 Rules of Trust Accounting
The three rules of accounting for a Trust Account are common across all jurisdictions. They are as follows:
- Trust funds must not be used for the law firm’s disbursements (expenses/costs). The purpose of the trust accounts is to keep the client’s funds separate, and commingling them with the law firm’s funds is only going to make life difficult with malpractice suits.
- Accurate and proper record-keeping of the funds coming in and going out is mandatory. An error in the data will come with consequences – a problem with the associated bank and a dissatisfied client!
This is exactly where an experienced legal bookkeeper comes in! With the help of automated legal practice management softwares, the hired legal bookkeeper can make sure the accounts stay error-free. - As mentioned earlier, it is of the highest importance that the held funds are only to be used in legal matters by the law firm. When the fund is withdrawn, law firms must ensure the fund is sufficient and the trust account does not have a negative balance.
Best Practices for Trust Accounting
- Maintaining clients’ Trust Accounts accurately
The systems and policies set to maintain trust accounts must be properly handled by the accountants or the legal bookkeepers that law firms hire. Accurate record-keeping should be an essential practice, set within the accounting rules and regulations set within the law firm.
A law firm can ask its financial institution for the provision of trust account statements by the end of reporting periods. It is recommended to clear reconciliations within a five week period. Furthermore, an accountant is required to keep a six-months report of the law firm’s accounting period to keep in compliance with SRA rules.
- Using Trust Accounts as little as possible
Lawyers can minimize the usage of a client’s Trust Account, for example, for a payment receivable transaction that falls under a state’s flat-fee exemption rules.
Using a client’s Trust Account results in:
- Fewer transfers of funds
- Reduced risk of error
- Less bar oversight
Conclusion
Trust Accounting SRA Rules are meant to keep a client’s funds safe from malpractice within law firms. Complying to these rules are mandatory for every law firm. While Trust Accounting might seem like regular legal bookkeeping, it is far more than that! Keeping track of clients’ Trusts according to Trust rules can be a challenge, but with the right procedures and practices, law firms can easily overcome this challenge.
