Over the past decade or so, QuickBooks™ (QB) has grown in popularity as the “go to” accounting software recommended by accountants to their law firm clients. Many law firm practice management applications integrate with QB. When customized for law firm specific activities (see Caren Schwartz’s authoritative articles) QB Desktop, and to a lesser extent QB Online, provides a reasonable accounting solution. The problem is …
Due to the unique accounting requirements of law firms, there are several challenges when using QB, i.e. Trust, Advanced Client Costs, hierarchical allocation of client payments. Attorneys also have unique compensation reporting requirements, which I’ll cover in another article.
Without reviewing processes (see Caren’s book), IOLTA/Trust accounting requires diligence and vigilance. All transactions must be posted to the liability account and linked to the client “job” (QB parlance; “matter” for the law firm). It is a relatively common mistake, especially in firms where the office manager or an attorney doubles as the bookkeeper, to use expense accounts instead of the liability account, or fail to post to the client job. The hazard is more than just a bookkeeping entry error. Improper IOLTA accounting can result in the attorney being disbarred.
Three-way reconciliations – bank account, liability account, client ledgers – are essential to maintaining the integrity of IOLTA transactions. A customized report (trust proofing) in QB can make the comparison between the bank and liability accounts but the firm must manually compare the client ledger report with the client trust liability report to ensure there are no errant postings. The liability account and the bank account may reconcile correctly, while the client ledgers may reconcile with the bank account, but not with the liability account. This can happen if, for example, an expense was improperly posted. Discovering and correcting these types of mistakes is urgent and can be labor intensive. The importance of the reconciliation process to meet IOLTA compliance regulations cannot be overstated.
Client funds may only be used for the benefit of the client. Client funds can be comingled in the bank account, however one client’s money cannot be used to offset another client’s expenses. Client trust ledgers can never have a negative amount. There are no safeguards for this in QB. The firm must be vigilant and check the client ledger balance to ensure this doesn’t occur.
Beyond trust accounting, as a regular part of the practice of law, attorneys advance costs on behalf of clients. In some types of cases, these advances are invoiced to the client contemporaneously; in others the firm gets reimbursed months, or years, after they’re incurred as a part of settlement. While there is some debate in the accounting community as to whether all advanced costs are booked as an asset on the balance sheet, or whether those that are contemporaneously billed can be booked as “reimbursable client costs” on the income statement, vigilance is required to ensure that the expenses are posted correctly so they can be collected when due. Firms lose literally thousands of dollars a year on this type of “leakage”. Using QB a firm can run a report of expenses charged to a matter, but expenses that slip through the cracks are lost. QB is not built to ensure proper posting.
The allocation of payments on client invoices is extraordinarily important. An invoice can include fees, expenses, retainer replenishment, finance fees, etc. All liabilities and expenses must be satisfied prior to legal fees being booked. This hierarchy isn’t an issue when the invoice is paid in full. Partial payments create additional work in QB. The invoice has to be split to properly post the payments. Multiple aged invoices for the same matter create issues as the firm must determine what is paid first based upon both the age and the line item type on the invoice.
Handling these challenges to fine-tune QB processes, and reduce my clients’ frustrations, was my motivation to search for viable third-party applications and solutions; accounting modules built specifically for the bookkeeping requirements of law firms. If you are working in the law firm vertical, you may want to take a look at cloud-based CosmoLex, and legacy software vendors PC Law and Tabs3. (In full disclosure I was a paid consultant in the development of CosmoLex’s accounting module, and remain a strategic advisor and channel partner.)
Pamela Rozsa, founder of PWR Resources, has been assisting the solo, small and mid-size
law firms with a full range of issues on the business side of practice management for more than twenty-five years. Pam deals with issues of workflow improvement, technology, law firm accounting, and trust accounting compliance. She understands the attorney’s need to be more productive, work more effectively, and accelerate the timeline from service delivery to collection of fees and expenses. Pam is a Certified QuickBooks Pro Advisor and Certified Xero Consultant, a strategic advisor on law firm accounting, and a channel partner with several cloud-based law practice management applications. Pam welcomes email inquiries, Pam@PWRresources.com