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Carefully Scrutinize Trust Accounting Claims – Legal Tech from the Trenches

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Lawyers using trust accounting functionality in practice management software need to be on the lookout for limited capabilities.

This article was written by Roberta Tepper, lawyer assistance programs director at the State Bar of Arizona, and Laura L. Keeler, practice management advisor at LCL Mass LOMAP, and originally appeared in The Finance Issue (September/October 2021) of the ABA’s Law Practice Magazine.


Managing a client trust account. Unless you are also an accountant, chances are those words make you feel a combination of fear/anxiety and loathing. In our experience, even lawyers who successfully manage their operating account are terrified of managing a client trust account. So, when lawyers look for practice management software, they may be looking for a platform that “does” trust accounting. But a claim that products include trust accounting may lull the unwary into choosing a product that doesn’t practically suit their needs.


Client Trust Accounts

It’s imperative to understand what is required for the management of a client trust account—a pooled account where funds belonging to multiple clients may be jointly maintained. Each state has its own rules about the requirements, and even what those accounts are termed can vary—Interest on Lawyer Trust Account (IOLTA), Interest on Lawyer Account (IOLA) or client trust account. Always check your state’s rules; if your state or local bar offers the services of a practice management advisor, check in with them.

This kind of account requires additional records and a specialized type of monthly accounting—usually referred to as the (dreaded) monthly three-way reconciliation. To successfully perform a three-way reconciliation, you must balance the totals reflected on the bank statement (adjusted for outstanding amounts in unnegotiated disbursements) and general ledger or checkbook register (adjusted for checks not yet cashed) with the total reflected in the individual client ledgers/accountings. In most states, maintaining a record of that reconciliation is required; in some states, trust accounts and the related recordkeeping and management is subject to random audit by the regulatory body.

Typically, legal practice management software (LPMS) that includes accounting functions includes the ability to handle the recordkeeping demands for a “standard” operating account, through a native application or through integration with another financial tool, like QuickBooks. It is the ability, or inability, to maintain and produce individual client ledgers—including deposits, disbursements and a running balance, or an equivalent, of the funds held for each client—that is the downfall of many claims that the LPMS “does trust accounting.”


Know What Functionality is Included, or Not

If you want true full-function trust accounting, options such as CosmoLex, Zola Suite and TrustBooks provide everything you need. There are many more that claim to do so but do not. So, let the buyer be aware. LPMS may offer tiered pricing; first confirm that the tier you are considering can integrate with accounting systems on any level. Some base-level tiers, like Clio Manage’s Starter tier, do not have that ability. They may be suitable for lawyers who do not take advanced fees and costs, and do not negotiate funds in which third parties have an interest. Other LPMS offer time and billing but not accounting, or may include financial accounting but not features specific to trust accounting. The bottom line is that you need to understand what you will get.


Not All Integrations Are the Same

Several platforms claim trust accounting functionality through integration with another tool, frequently QuickBooks. It is essential to know with which financial tools the platform integrates or does not. You’ll have to understand whether that tool can produce individual client ledgers (or accountings) that you need to do the required monthly reconciliation. Accounting products not explicitly created for lawyers (including QuickBooks, Xero and others) frequently do not come out equipped to produce those individual records but may do so with extra steps or workarounds.

Be sure you get specific information about integrations. For example, LPMS may work only with QuickBooks Online (which has benefits for remote accessibility, but simplified functionality), not legacy desktop software. Check whether the integration choices meet your firm’s needs. More advanced accounting functionality may require sticking with QuickBooks for desktop, which is unlikely to integrate with the LPMS that touts QuickBooks integrations.

Any synchronization may be “one-directional,” not “bidirectional”; it’s important to understand which you are getting. With one-directional sync, expense-related information added in LPMS can be pushed out to QuickBooks or Xero to avoid duplicate data entry. If you spot a mistake and fix it in the accounting program, it may not automatically reflect back in your billing system. While that causes some manual work and checks, integrated options do alleviate some manual data entry. When a client-accrued expense is entered in LPMS, most integrations will reflect the expense in the invoice in the accounting system; similarly, changing the invoice status in LPMS should push out the update to the accounting integration. Some programs offer more options. For example, with Xero integrations, you can specify an expense category and tax account codes in the LPMS and sync through the integration to accounting records.

While generic accounting integrations offer benefits, even high-end integrations lack the full functionality built into legal-specific trust accounting programs, such as the ability to instantly see the current balance of a client’s trust account while billing, built-in safeguards against overdrafts and production of three-way reconciliation reports.


Payment Processing Alone is Not Trust Accounting

Lawyers are increasingly using legal payment processing systems (like LawPay, LexCharge or Headnote) to offer convenient solutions to their clients. These services can produce customized invoices, accept payments and permit the lawyer to direct funds to the appropriate account. These payment processing tools frequently integrate with both LPMS and/ or stand-alone time and billing solutions. The utility of these products can cause a lawyer to believe that they are providing trust account management.

While legal-specific payment processors’ functionality can help facilitate compliance with trust account rules (including safeguards to prevent commingling of trust and operating accounts), payment processors aren’t full-on trust accounting. For example, they can produce some financial reporting but aren’t set up for automatic three-way reconciliation. It is the lawyer’s responsibility to use this and other legal billing and accounting tools properly.

While any reputable application will maintain records and audit trails relating to deposits and may assist with trust account management, they are almost certainly not the entirety of the records required under your jurisdiction’s trust accounting rules. Just as a LPMS may claim to “do” trust accounting or be “trust account compliant,” you, the lawyer, are responsible for verifying the records the platform creates and does not create. For example, your credit card processor won’t produce individual client ledgers with a record of all deposits and disbursements made for the benefit of the individual client.


The Bottom Line

Trust accounting is frequently any lawyer’s kryptonite—or if not the actuality, at least the fear of doing it wrong, random audits and possible disciplinary action. Using technology to assist you in managing the client trust account is not only an option but usually necessary, particularly if you can’t retain an accountant to assist. As in all other things relating to your practice and technology, you must know what you need and then be analytical about what each product you are considering offers. Knowing the rules, knowing your practice and then carefully considering the reality of the claims made by software vendors will help you, as will consulting with your state or local bar association’s practice management advisors.


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©2021. Published in The Finance Issue, Vol. 47, No. 5, September 2021, by the American BarAssociation. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

CATEGORIES: Billing | Ethics | Law Firm Finance | Law Firm Management | Technology
TAGS: iolta

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