If you're an attorney, careless bookkeeping with trust accounts could ruin your career.
Although regulations vary by state, all law firms in the United States are required to maintain trust accounts for their clients. The reason is simple: When a client pays a retainer, or upfront fee, against an attorney's future services, the attorney may not access those funds until the services are rendered. In other words, those funds are not an advance that the attorney can use to pay his expenses, operating costs or salary.
Maintaining a dedicated trust account is not a minor bookkeeping technicality. As Sheila M. Blackford, a Practice Management Advisor for the Oregon State Bar Professional Liability Fund, noted in the American Bar Association's Law Practice magazine, "The number one reason lawyers get into regulatory hot water is due to mishandling their client trust account."
The consequences of inappropriate use of trust account funds include not only penalties from the IRS, but also possible disbarment.
Good Recordkeeping = Good Bookkeeping
Considering the stakes, it's remarkable that any attorney would attempt to do his or her own bookkeeping rather than rely on a trained professional. Between juggling multiple cases, preparing briefs and rushing to court appearances, lawyers have their hands full. Do they really have time to keep up with a trust account's stringent bookkeeping requirements?
To cite an example of how painstaking trust account bookkeeping can be, consider the New York Rules of Professional Conduct for the state's bar association. The rules stipulate that all New York attorneys must keep seven years' worth of all bank records related to any trust account, including detailed descriptions of every deposit, withdrawal and disbursement along with copies of every retainer and every bill sent to a client. A busy attorney might have trouble keeping up with all that for seven days, never mind seven years.
Trust a Pro
If you haven't already done so, it's time to turn to a bookkeeping professional who has experience with trust accounts. A professional bookkeeper can keep your books accurate and up to date. And that means you'll always be audit-ready.