Can I use a general accounting program like QuickBooks for Legal Trust Accounting?

Legal Trust Accounting

General accounting programs can be used to track trust accounts but be aware that they have three major deficits when it comes to legal trust accounting: they require significant customization, they lack necessary safeguards, and their reporting functions are inadequate.^[1]

Customization

Client trust funds have to be recorded on your law firm’s books as a deposit into a bank account and as an amount owed to clients. The bank account appears as an asset on the balance sheet and the amount owed to the client appears as a liability. The amount owed to clients should always match the amount shown in the bank account.

If the trust funds are held in a pooled account, an IOLTA, then the program must be set up to track each individual client’s funds that make up the total funds found in the [simple_tooltip content=’A Pooled Trust is a special type of trust that allows individuals to become financially eligible for public assistance benefits while preserving their resources in trust for supplemental needs.’]pooled trust account[/simple_tooltip]. This is a complicated process that must be completed in just the right way. Improper set up can lead to inaccurate tracking of client trust funds which can in turn result in serious bar sanctions against your law firm.^[1] This is not a task that can be delegated to a non-legal bookkeeper or to a legal staff member who has little understanding of bookkeeping or the ethical rules for handling client trust funds.

Safeguards

General accounting programs don’t have any safeguards to prevent your client trust ledgers, liability or bank accounts from having negative balances. These systems will not give you a warning if a transaction will cause a trust bank account to be overdrawn or warn you if a transaction will cause a client’s trust liability account to have a negative balance. If the bar [simple_tooltip content=’An audit is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern.’]audits[/simple_tooltip] your law firm’s trust accounts and finds negative trust balances, it could decide to sanction your firm for improper handling of client trust funds.^[1]

Reporting

General accounting programs do not have the ability to generate the specialized trust account reports that law firms need. Ethical rules require law firms to send reports to the client showing the trust balance and all trust transactions to the client.^[2] The easiest way to do this is to show this information on the client’s monthly invoice. Otherwise, you will have to print the client trust ledger and send it separately with each invoice.^[2]

General accounting programs lack the ability to show this information on client invoices.

Another example is the [simple_tooltip content=’The trust ledger, the client ledgers, and the trust bank statement. The trust ledger provides a summary of all the transactions flowing into and out of a trust account. The client ledgers are created by taking the trust ledger a step further, assigning each transaction to a specific client and grouping together all the trust account activity associated with each individual client. The trust bank statement is generated by the bank where the trust account is held and it provides third party verification of the transactions posted to the trust account.’]three-way reconciliation[/simple_tooltip]. In Canada and several states, the bar requires three-way reconciliations of client trust accounts.^[3] These report take the trust bank account [simple_tooltip content=’An asset is any resource owned by the business. Anything tangible or intangible that can be owned or controlled to produce value and that is held by a company to produce positive economic value is an asset.’]asset[/simple_tooltip] ledger and compare it to the bank statement and then compares those to the client trust [simple_tooltip content=’Liabilities are defined as a company legal financial debts or obligations that arise during the course of business operations.’]liability[/simple_tooltip] ledger to make sure all three match.^[4]

General accounting programs don’t have the ability to generate this report even through a customized report function. This means you have to reconcile the trust bank account ledger against the bank statement and then do a second reconciliation of the bank statement against the client trust liability accounts. Then you have to print the two reconciliation reports and manually verify that they match. Specialized legal accounting programs do a three-way reconciliation at the push of a button.

Finally, general accounting programs do not easily generate a report that shows each client’s receivables on the same report as the trust balances that a specialized legal accounting program can generate:

Non-legal bookkeepers try to generate this report in general accounting programs by recording the trust payment as a “sales receipt” with the funds being deposited into the IOLTA and a credit made to the Trust Liability Account.^[5] This does make the sales receipt appear on the Open Invoices Report along with all outstanding invoices, and it does ensure that the IOLTA balance and the Trust Liability Account balance match. But since the trust funds show up on the report as a sales receipts, it could mislead an attorney into believing that the funds were receipts for work done when they were, in fact client funds deposited to trust for any reason, not just as an advanced fee deposit for future work. There is a better way to enter client trust funds into a general accounting program, but then you have to print two reports, the Open Invoices Report and the Client Trust Report in order to find out how much each client owes and how much they have in trust.^[6]

Because of the significant deficits in legal trust reporting, it is better to use specialized legal accounting programs than it is to use a general accounting program.