Trust Accounting Technology for Law Firms

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Trust Accounting Technology for Law FirmsJoshua Lenon

Lawyer in ResidenceClio

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Instructors

Joshua Lenon

• Lawyer in Residence at Clio• Attorney Admitted in New York• @JoshuaLenon

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Agenda

• Rules for managing trust accounts– 20minutes

• General bookkeeping vs legal accounting– 10minutes

• Reconcile trust accounts– 10 minutes

• Clio’s trust accounting features– 10 minutes

• Questions– 10 minutes

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RULES FOR MANAGING TRUST ACCOUNTS

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Rule 1.15: Safekeeping Property

(a) A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of [five years] after termination of the representation.

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Key Concepts in Client Trust Accounting

• Separate Clients are Separate Accounts• You Can’t Spend What You Don’t Have• There’s No Such Thing as a Negative Balance• Timing Is Everything• You Can’t Play the Game Unless You Know the Score• The Final Score is Always Zero• Always Maintain an Audit Trail

Lawyer’sTrustAccountHandbook,TheNorthCarolinaStateBar,Revised 12/2014

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Separate Clients are Separate Accounts

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D. 27 N.C.A.C. 1D, Rule .1316, IOLTA Accounts

Pursuant to order of the North Carolina Supreme Court, every general trust account, as defined in the Rules of Professional Conduct, must be an interest or dividend-bearing account.

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You Can’t Spend What You Don’t Have

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There's No Such Thing as a “Negative Balance”

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Timing Is Everything

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You Can't Play the Game Unless You Know the Score

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The Final Score Is Always Zero

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Always Maintain an Audit Trail

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Rule 1.15: Safekeeping Property

(b) A lawyer may deposit the lawyer's own funds in a client trust account for the sole purpose of paying bank service charges on that account, but only in an amount necessary for that purpose.

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Credit Cards for Lawyers

Most jurisdictions let lawyers accept credit cards, with caveats:

• Credit cards may be used to deposit funds in trust & operating accounts• Fees and chargebacks should never be withdrawn from trust

accounts

Law firms need specialized credit card processors.

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Rule 1.15: Safekeeping Property

(c) A lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.

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Clio Firms Get Paid First

• ~115,000 bills generated in the first 3 months of 2015

• 36.5% of those bills were marked as paid on the SAME DAY– Trust Accounts Advanced Fee Deposits– Flat Fees Upfront– Credit Card Payments

Unpaid63%

SameDayPaid37%

Q12015Bills

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Fees

Lawyers are entitled to a reasonable fee for their work.

Reasonable fees are judged by 8 factors including:• Time & labor required, novelty & difficult of the issues, & skill

required• Preclusion of other employment• Customary fees in that locale• Amount in dispute• Experience, reputation, and ability of the lawyer

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2 Recommended Fee-Related Documents

1. Engagement / Retainer Contract stating terms of client billing– Get it in writing– Get it signed by the client– Mandatory inclusions– Required for contingency fees , nonrefundable, flat fees, & fee

sharing2. Invoices– Detailing work performed, personnel invoiced, and outputs

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Rule 1.15: Safekeeping Property

(e) When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.

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GENERAL BOOKKEEPING VS LEGAL ACCOUNTING

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Types of Accounting

Cash Basis• Revenues are recognized when cash

is received• Expenses are recognized when paid• Usually followed by individuals and

small companies• Not in compliance with accounting's

matching principle.

Accrual Basis

• Revenues are recognized when they are earned

• Expenses are matched to revenues or the accounting period when they are incurred (rather than paid)

• Better for tracking profitability• Required for use by accountants

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Double Entry Bookkeeping

Every entry to an account requires a corresponding and opposite entry

to a different account.

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Proper Accounting

Proper accounting tools should produce the following:1. Income Statement2. Balance Sheet3. Statement of Cash Flows

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Statement of Cash Flows

Cash amount change over an interval of time• This is one place where lawyers’ trust accounts will

be tracked• Pulls information from income statement and

balance sheet

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Work in Progress

Ongoing/unbilled Client activity

For accounting purposes, work in progress is considered as a current asset on the balance sheet.

Complex calculations needed to determine, based on estimated costs and estimated revenue

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Accounting vs. Legal Accounting

Accounting for most businesses is backwards when it comes to legal:• Law firms must track both operating accounts and trust

accounts• Trust accounts are a liability under normal accounting rules,

but are tracked as assets in most accounting software

Lawyers need specialized accounting software.

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How Trust Requests Differ from Invoices

Law firms issues 2 types of documents to clients about money

1. Invoices – work performed by the lawyer which is owed by the client

2. Trust requests – asking for funds to be deposited into a trust account

Law firms need accounting systems that can track both separately.

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RECONCILE TRUST ACCOUNTS

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2 Steps to Reconciliation

1. Confirm current bank balance– From the balance shown on the

bank statement for the monthly reporting period, subtract all outstanding checks.

– To this amount, add all deposits that have not cleared the bank.

2. Compare current bank balance to trust account amount– Confirm that the current bank

balance equals the total balance for the trust account as shown on the lawyer’s records

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Trust Account Records

• Have an IOLTA / Trust Account• Deposit Slips– Date– Source– Client or Matter

• Cash Receipts Book

• Disbursement Records– Cancelled Checks– Electronic Records

• Ledger– Client or Matter entries– Transfers, receipts, balances &

more

• Bank Statements

FloridaRULE5-1.2TRUSTACCOUNTING RECORDSANDPROCEDURES

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• Monthly reconciliation– balance per bank– deposits in transit– outstanding checks

• Comparison of reconciled balance and ledgers

Trust Accounting

• Annual listings• 5 year retention requirements

FloridaRULE5-1.2TRUSTACCOUNTING RECORDSANDPROCEDURES

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Storing Trust Records

“original or clearly legible copies”

FloridaRULE5-1.2TRUSTACCOUNTING RECORDSANDPROCEDURES

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Storing Trust Records

“consider generating and keeping hard copies of all the records required by the rule (including bank-created records).”

HandbookonClientTrustAccountingforCaliforniaAttorneys,2013

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Storing Trust Records

Rule 1.15 (d)(1) A lawyer shall maintain for seven years after the events that they record:

(viii) all checkbooks and check stubs, bank statements, prenumbered canceled checks and duplicate deposit slip

NYSUCS RulesofProfessionalConduct

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Clio Trust Accounting

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CLIO’S TRUST ACCOUNTING FEATURES

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"With trust accounting ledgers in Clio, and trust account management has since become a breeze for us.”

Jason Molder, Molder Legal Group, P.A.

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Clio Accounting Tools

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Clio Accounting Tools

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Trust Requests

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Trust Requests

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Clio Accounting Tools

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Clio Accounting Tools

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Client & Trust Ledgers

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Using Full Accounting Suites

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QUESTIONS?

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Thank You

Joshua Lenon

joshua@clio.com

@JoshuaLenon

Linkedin.com/in/joshualenon

1-888-858-2546