There is No Accounting for Lawyers

Jan 31, 2019 12:00:00 PM | Michael Marget

Law firms need high-performance accounting systems just as much — if not more — than other businesses. While some smaller businesses can manage their accounting activities without building a formal accounting department, accounting and bookkeeping for lawyers is a much more rigorous process. Law firms who rely upon a single bookkeeper, or on law firm accountants not schooled in accounting principals for law firms, do so at their peril.

So much is involved in practicing law — with complex deadlines, ethics, trust, tax, banking and liability exposures — that being compliant on all levels of back-office operations can be a continuous challenge. Building and maintaining high performance in law firm accounting operations is every bit as important to law firms as obtaining professional liability insurance. In many respects, having a quality law firm accounting department is akin to having financial and compliance malpractice insurance.

Roles and Responsibilities of a High-Performance Law Firm Accounting Department

Bookkeeping for law firms is an essential component of accounting for lawyers. Weak bookkeeping and record keeping practices can undermind a firm. The principal duty of the law firm accounting department is to ensure the firm complies with its obligations — ethically, contractually, financially, and legally — and to keep their financial affairs in order. The daily tasks of accounting for lawyers including:

  • Client Billing: Delivery of timely and accurate invoices of a lawyer’s billable time, whether by mail or through electronic billing (e-billing), is essential to ensure prompt payments from clients. Without it, the law firm cannot meet its financial obligations to partners, staff, and third parties. 
  • Revenue Recognition: When a client pays an invoice, the amount must be allocated either to fees received or to cost recoveries. Fees represent firm revenue, and the cost portion reimbursement for amounts advanced on behalf of the client. The payment by the firm of cost advances (filing fees, expert witness fees, etc.) is not tax deductible when disbursed and nontaxable when the reimbursement is received. Revenue recognition also involves management of client retainer balances, and holding client funds in a trust account until earned in accordance with local bar rules.
  • Retainer & Trust Accounting: The codes of professional responsibility adopted by all state licensing bodies requires a three-way monthly reconciliation of client trust account balances. This is to ensure the bank statements, general ledger balance, and the individual, detailed client-matter ledgers are always "in balance" to avoid common trust accounting mistakes. This responsibility is not delegable, but lawyers may rely, in part, on reconciliations provided to them by the accounting department as part of their overall oversight responsibilities.
  • Payroll: It is essential that employees be paid accurately and in a timely fashion, and that related tax obligations are properly calculated and remitted. Processing payrolls requires an almost encyclopedic knowledge of state and federal labor and tax withholding laws. Resolving errors — whether computational or transmission errors, or catching mistakes by the tax authority — are time-consuming challenges. Failure to process payroll accurately and to timely resolve all notices received can lead to substantial penalties.
  • Paying Vendors: Like any other business, the law firm must make timely payments to, co-counsel and experts assisting with client work, and to others who provide services to the firm. When the timing of such payments depends upon cost reimbursements from clients, this process becomes more complex. 
  • Tax Filing: Tax preparation and filing can be extremely stressful. Failure to record financial transactions properly throughout the year will only compound the stress level. Among the duties of the law firm accounting department is to work with the firm’s outside tax professionals to streamline the process and make sure things get done.
  • Bank Statements & Account Reconciliation: Bank accounts must be reconciled monthly to ensure the account balance in the firm’s financial records is correct. This requires an analysis of deposits and withdrawals not recorded in either the firm’s books or their bank statements. Similarly, the accounting department reconciles fees due from clients and costs and liabilities due to others as reflected in the firm’s general ledger. The objective of regular reconciliations is to ensure the accuracy of the firm’s general ledger and financial reports.
  • Financial Statements: The issuance of timely, accurate, and informative financial statements is the cornerstone of accounting systems and helps to properly maintain law office financial records. Law firm accountants must ensure all balance sheets, income statements, and cash flow statements accurately reflect the current revenue and spending amounts. Financial statements inform the law firm about:
    • Whether they are making money,
    • The value of its assets,
    • The amount of its debt, and
    • The utilization of cash resources.
  • Management Reports: Management reporting enables the firm to examine the underlying financial drivers that influence firm profitability. A high-performance law firm accounting department will not merely report, but will also analyze the data and make assessments and recommendations to improve overall performance in accounting for lawyers. Some of these factors include:
    • Billable hours and billable time value produced;
    • Fee billing and realization after write-offs;
    • Fee revenue and realization after write-offs; and
    • Aging of unbilled time value and accounts receivable.

A High-Performance Accounting department Can Improve The Bottom Line

Law firm accountants have an important role to play in law firms. The accurate and timely accumulation, recording, and analysis of a firm’s financial transactions is a tall order. A law firm’s financial operations are awash in numbers — since numbers are the province of accountants, they are best entrusted to true professionals. 4L Law has compiled a guide to help firms, Unlocking Value of their accounting departments to increase law firm efficiency.

unlocking value with 4L accounting

Law Firm, Law Firm Management, Law Firm Accounting

Michael Marget

Mike Marget is an erstwhile large law firm manager with tours of duty as COO at Katten Muchin, Jenner & Block and CFO at Holland & Knight, among others. He’s currently president of 4L Law Firm Services which provides accounting, bookkeeping and related back office services to small/midsize law firms and co-CEO of NSource, LLC, a law firm consultancy. His blog, Law Firm CFO, is dedicated to every law firm manager who has ever asked the question, “Why me?”
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