Protecting Law Firms With Effective Trust Fund Accounting

A client trust account (TA) is an important part of any law firm's business. These accounts are used to cover the expense of a client's involvement with the firm. As such, these trust accounts (TAs), no matter their size, have specific limitations placed on them that the law firm must abide by. Failing to do so can result in serious legal sanctions and even the possibility of disbarment.

The most important fact when considering how to handle a trust funds accounting is the iron clad rule that the trust fund cannot be used to benefit the lawyer or the law firm. This includes direct payments, or the use of trust fund monies to assist in the operation of the law firm. In addition, any use of a TA must be noted as such, including the purpose for which it was used and the name of both the client and lawyer. Should a question be raised about the use of the trust fund, the lawyer or law firm must be able to provide accurate records that demonstrate that at no point have any of the funds been used for disallowed purposes.

This requires that the firm develop accounting methods that work to maintain the separation of TA funds from other accounts, and allow both the firm and any external auditors to track the use of the trust account at every point. At the very least, any client trust accounts must be deposited into separate banking accounts, rather than being placed in the business' general fund.

Additionally, the use of accounting programs such as Quick-books is necessary in order to effectively manage the trust fund, allowing the firm to easily track expenditures in order to ensure that the account is only being used for allowable purposes. This is especially important for firms that have a large number of individual client TAs, where manual accounting may be prone to errors. In addition, using computer based accounting systems makes it easier to provide the client with a full accounting of the uses the trust account was put to while under the control of the law firm.

Finally, it may be wise to consider having an outside auditor review the procedures put in place for handling client TAs. By doing so, weaknesses in the law firm's policies may be identified before they become a severe problem, allowing the development and implementation of an effective system for handling client trust accounts.

By following these steps, a law firm can ensure that it maintains the separation between client TAs and general funds that the law demands. By doing so, both the client and his or her lawyers are protected.


Article Source: George Pettit