As a lawyer, your skills might include establishing trust funds and the parameters for using them. But, while trust accounting is not very complicated, managing the actual funds themselves is likely out of your realm of expertise. In fact, even some bookkeepers aren’t familiar with the nuances of trust accounting.
That lack of familiarity, albeit common, can lead to mistakes with real consequences. Poor account management and record keeping can result in trust fund violations, which can lead to severe ramifications — even disbarment.
Explore a few common trust fund accounting mistakes, and learn how partnering with a bookkeeper that has trust accounting experience can help you avoid them.
5 Common Trust Fund Accounting Mistakes
1. Relying on Manual Systems
Unfortunately, manual systems are often prone to human error. When your trust accounting is conducted using manual systems, it’s easy to accidentally switch a number or include the wrong date. In addition to simple errors, manual systems can lead to bigger mistakes, too, like co-mingling of trust funds, ledger overdrafts, uncleared funds, and other issues. All of these blunders could give the appearance of impropriety.
Another drawback to using manual systems is the lack of granular access controls that you would otherwise have with digital systems. Anyone can open up a physical file and gain access to information they don’t need to see. With digital systems, you’re better able to control who is accessing data and for what purpose.
When you partner with a bookkeeper that has trust accounting experience, they’ll have industry-best systems in place to effectively and accurately manage accounts.
2. Lack of Safeguards and Trust-Specific Rules
As with any type of accounting, there are a number of specific rules that apply to trust accounting. A common mistake people make when it comes to trust accounting is failing to align with these rules, which are in place to protect both the clients and the lawyers.
Without specific knowledge about trust funds and how to do the bookkeeping for them, you could easily violate some of these rules. However, when you have a bookkeeping partner that understands the internal controls and procedures, they can ensure accurate trust accounting and you can rest easy knowing you’re in alignment with required standards.
3. Failure to Keep Trust Funds Separate
Co-mingling funds can have serious consequences for lawyers, regardless if it’s intentional or an honest mistake. It’s imperative that you avoid this at all costs, and keep billing and business operating funds separate from trust funds. An experienced bookkeeping partner will have the skills and systems in place to ensure these mistakes don’t happen. And, they have the record-keeping systems in place to show that funds have been kept separate in accordance with the law.
4. Irregular or Unchecked Reconciliation
Bank reconciliation, or the processes of aligning your bookkeeping records with the funds in your bank account, should happen on a monthly basis. When trust funds are left unchecked or even irregularly checked, existing errors could go undetected for months or years. Because you always want your trust fund accounts and records to be reliable, bank reconciliation needs to be a regular process. Also, your account reconciliation should be checked by another set of eyes to ensure accuracy. Fortunately, an expert remote bookkeeping partner knows how and when to reconcile accounts, so you don’t have to worry about unchecked errors.
5. Lack of Dedicated Resources
For many organizations, it’s hard to spare the resources needed for effective trust fund accounting. Due to the intricacies of trust accounting, it shouldn’t be handed off to just any bookkeeper. The best way to address this need is to hire a dedicated resource with trust accounting experience, like Keeping Your Balance. This takes the responsibility off your organization, making the process easier by outsourcing your trust accounting needs to professionals.
The best way to effectively manage trust funds is partnering with a bookkeeper that has the right experience. They’ll have the tools and processes in place to help you steer clear of the mistakes above and the consequences that come with them. And, you can avoid the pressures and responsibility of taking on trust accounting yourself.