Like most businesses, law firms require accountants just as much other ventures, if not more. It is apparent that most attorneys are not accountants, they certainly must have a legal accounting unit no matter the size of the law firm. Whereas, many small scale enterprises often get away with using a part-time bookkeeper, outsourced to accounting firms or even manage the records themselves.
Why is legal accounting so important?
So much is required when it comes to running a law firm, to settling a client’s case, including managing the many different expenses to cover and holding money in trust, a trained professional legal accountant (or account department) is precisely what every law firm, large or small, requires to ensure all businesses are correctly and ethically handled.
With so much involved in managing a law firm, legal accountants definitely have their hurdles. It’s crucial to consider exactly why all law firms require a solid legal accounting department.
Why Law Firms Need Legal Accountants?
- Compliance :
Being compliant on all levels should be the number one goal for all law firms and is really a key element of their success. If law firms are not compliant, they run the risk of incurring severe penalties and some lawyers could be disbarred, making legal accountants an absolute requirement.
If a law firm’s accounting system and the process isn’t properly maintained, the law firm could end up losing money to their client or other service providers due to inept accounting practices. Having the right legal accountant or legal accounting unit is essential for managing and maintaining the firm’s revenue.
- Continued Success:
If a firm has reliable and astute legal accounting staff managing their revenue and keeping the firm compliant, then the firm will build a dependable reputation for running a compliant and ethical practice.
Additionally, the law firm will begin to build some intelligence around the more successful parts of their practice and allow the firm to allocate the right resources to the appropriate areas to ensure the firm’s continued success.
What do the Legal Accountants Do:
While this is not a comprehensive list of what legal accountants typically do, it is apparent to see how important they truly are in the legal profession.
- Client Trust Fund Accounting:
A common practice of most law firms is to secure a retainer to commence work on a case. While the money will be in the firm’s possession, it does not belong to the firm, except they have earned it.
How does a law firm understand they have earned any of the retainers?
With the aid of an accountant coupled with a legal-specific software program that tracks expenses from the client’s trust account.
Trust accounts cannot be co-mingled and none of the funds in the trust account can be used to pay the firm’s expenses, which can all be avoided when rightly managed.
- Accounting of Case Costs:
This is often where law firms could easily get themselves into troubled waters. Since retainer fees are used to work on a case, the costs need to be correctly maintained and calculated and charged to the appropriate trust account. Errors or misappropriated funds could cause the firm to lose money or cause them to be non-compliant.
- Separating Revenue from Income:
When a law firm receives a paid invoice, part of the revenue must be allocated to any costs incurred. Revenue must be recorded separately from income.
In conclusion, if a law firm cannot tell what they have actually earned, what their expenses are and how they will get rewarded; they will battle compliance issues always, they will also struggle with inaccurate books, and will not be able to identify which cases are more invaluable to the firm.