LEGAL TRUST ACCOUNTING - WHAT YOU NEED TO KNOW
Keeping your finances in check using even the most basic of accounting strategies can be tough. However, trust account bookkeeping is a much more challenging industry minefield constantly proving difficult for many legal practice owners to navigate.
Let's delve into what's involved regarding setting up and successfully managing trust accounts and understand how things often turn detrimental for inexperienced law firms lacking the in-depth knowledge to co-ordinate the two.
Trust Accounting - Why it's crucial for law firms to get it right
Legal trust bookkeeping is a complicated area of accounting that is generally better outsourced or managed by
third party experts.
It's not uncommon for new law firms to misinterpret or underestimate the weight that the rules and regulations bear surrounding the responsibilities of holding trust monies for your clients.
While requirements vary betw
een states, the consequences for failing to follow the guidelines or assess and amend problems efficiently have been catastrophic for a number of legal practices - with many facing unrecoverable situations!
It's vital to research and understand your states legislation in relation to trust account management to avoid a tarnished reputation or worse.
Preparing & Managing a Trust Account
Notifying your state's law society of your intentions
As a practitioner that handles your clients’ funds, there are a few important processes you’ll need to be involved in with the set up and coordination of the accounts.
Part of being a legal practitioner with a Trust account means abiding by state trust account legislation which may include actioning a number of requirements depending on where you’re operating. This could include annual reporting to state entities or providing ongoing information to other government bodies or organisations.
One of the initial steps to opening a trust is to let your Law Society know about the new account. You usually have 14 days to provide this notification from the time the account is set up.
Appoint an account auditor
An account auditor must be assigned to the new trust account. You’re required to provide the name and business address along with endorsement details while ensuring your selected auditor is eligible by meeting legislative criteria.
Meticulous and accurate record keeping is important when it comes to trust accounting with records and other account activity needing to be submitted for auditing.
This helps closely monitor and track who is authorised to access the trust funds and limits potential fraudulent endeavours. It’s common practice to set up a trust account that requires two signatures to make withdrawals.
The importance of daily reconciliation
Trust accounts are one of the most examined, assessed and surveyed areas amongst law firms and their practices. This is due to the sensitive and confidential nature of trust account management making it imperative for legal practices to implement and carry out processes in accordance with the Trust Accounts Act 1973.
Daily interim reconciliation is ideal for successful trust account management and keeping your firm from getting into problematic territory in either the near or distant future. By reconciling on a daily basis you are ensuring accurate audits are easily performed and avoiding even the tiniest of discrepancies that could cost you your business and personal reputation.
The Trust Act recommends monthly reconciliation, however prioritising this area of your business helps to avoid hefty, tedious workloads at the end of each month, and makes tackling fraud and mistakes much simpler before it escalates.
Trust accounting errors and responsibility-related mishaps can be easily made through inexperience. However, being aware of these mistakes may help you to avoid them and provide an insight on how to strategise against them.
Here are some the most common mistakes that occur amongst Australian law firms regarding trust account management:
§ Inaccurate receipting of account values
§ Allocation mix-ups
§ Making incorrect withdrawals from accounts with insufficient funds
§ Failing to provide immediate notification of errors
§ Failing to keep proper trust account bookkeeping records
§ Withdrawal attempts without the appropriate authority
In addition to these common issues, oftentimes practitioners may be tempted into withdrawing funds for other purposes. Desperate situations can lead to bad judgement, audit breaches and a whole range of financial and legal problems potentially resulting in a high magnitude of negative consequences.
Why your firm should consult an experienced bookkeeper
Trust account management is an incredibly complex component of bookkeeping and without a thorough understanding or the capability for correct handling practices, your business could easily be headed for rocky shoals.
An expert bookkeeping or accounting team can provide advice and suggestions regarding trust account management, as well as take on the challenge of managing your trust accounts on your business’ behalf.
Self-managing your trust account can be a real pain, especially after calculating the time, effort and hassle associated with properly and accurately handling all the ins and outs attached.
Consulting a bookkeeper provides you with the peace of mind knowing your house is appropriately in order, eliminating the worry of whether you’re following legislative guidelines correctly.
Contact Ironbark Industries Bookkeeping today to discuss trust account management, ask us for advice and for more information on our extensive range of bookkeeping services.