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5 Common Bookkeeping Mistakes in Canadian Law Firms and How to Avoid Them

Updated: Oct 20, 2023

By: Keith Hill Jr.


Law firms face a unique set of challenges when it comes to bookkeeping. Not only must they maintain accurate financial records for themselves, but they must also manage their clients' trust accounts in compliance with Law Society regulations. Unfortunately, there are 5 common bookkeeping mistakes that Canadian Law Firms make that can lead to financial trouble and even disciplinary action.


In this article, we will discuss 5 common bookkeeping mistakes law firms make and how to avoid them.


1. Delayed Data Entry


Delayed data entry is a common oversight in law firms. Without timely data entry, you may find yourself with inaccurate reporting of trust funds and may cause negative trust balances, for example, which is a serious violation. Delays can also result in overlooked disbursements or time entries, potentially leaving money on the table. Delays may also cause late invoicing which might inconvenience clients, leading to possible disputes or dissatisfaction. Lastly, procrastinating on entering financial data can lead to backlogs, financial statements and reports that do not accurately reflect the firm's current financial status, or a list of other errors due to rushed data entry.


Tips to avoid this mistake:


  • To prevent issues, it's advisable to adopt real-time data entry. As often as you can, input data immediately after a transaction or client interaction. This approach stops data from piling up.

  • Additionally, when forced to decide, prioritize client transactions, particularly because of the importance of trust accounts and client invoices.

  • Lastly, establish a schedule for data entry. In a lot of firms, multiple users access accounting software using limited access points. Scheduling specific times for different data contributors helps avoid the congestion of multiple people trying to access the system simultaneously using the same credentials.


2. Failing to Reconcile Trust Accounts on Time


Trust accounts hold funds that belong to clients, not the law firm. As such, the Law Society requires law firms to maintain accurate records of all trust transactions at all times. One method for ensuring this is by the implementation of their mandate to reconcile trust accounts by the 25th of each following month. For example, September’s trust reconciliation should be completed by October 25th.


Unfortunately, many law firms fail to do so, which can result in errors, overdrawn accounts, or other incompliant issues.


Tips to avoid this mistake:


  • Law firms should schedule their trust reconciliations as early in the month as possible. This allows your bookkeeper ample time to complete the reconciliation before the deadline, keeping in mind that your bookkeeper will likely have multiple clients that all have the same deadline.

  • Once reconciled, utilize the rest of the month to promptly investigate and correct any discrepancies found. This is why the deadline for reconciliation is the 25th and not the end of the month – the remaining days of the month should be used for posting correcting entries.


3. Misclassifying Expenses


Misclassifying expenses can lead to inaccurate financial statements, which can in turn lead to incorrect tax filings and other financial problems such as budgeting and forecasting errors. This mistake is often made when law firms fail to keep (or provide) detailed records of expenses or when they rely too heavily on software that might miscategorize entries.


Tips to avoid this mistake:


  • Law firms should implement a system for categorizing expenses. A well-structured and logical category of expenses, referred to as the “Chart of Accounts,” should be established. (While this categorization system also includes assets, liabilities, equity, and revenue, this point focuses on the expenses category). Ideally, this structure should be developed with the consultation of an accountant.

  • Accounting software, when used correctly, can be a great help, specifically ones that allow for memorized transactions so that the software automatically places expenses into the proper category. However, it's essential to ensure the initial allocation is done correctly and to not rely solely on automated categorizations without periodic review.



4. Not Reviewing Financial Reports


In the hustle and bustle of legal practice, a lot of lawyers inadvertently overlook the importance of examining their financial reports – routinely. Without reviewing financial reports, it's challenging to track progress, identify areas for improvement, make informed financial decisions, and ensure remittance obligations are properly being met.


Tips to avoid this mistake:


  • Review your financial reports on a set schedule. Determine specific intervals, like monthly or quarterly, for report reviews. Sticking to a schedule helps ensure that it becomes a regular part of the firm's operations.

  • Look for trends and patterns in your review and identify any areas where you can make necessary changes.

  • It is also good to engage your bookkeeper, accountant, and key stakeholders in the review process. Different perspectives can offer invaluable varying insights and external financial experts or consultants can provide an unbiased view and insights that might be overlooked internally.


5. Using Trust Funds as Operating Funds



Another mistake, albeit not as common, is misusing trust funds as operating funds. This can happen when a law firm fails to keep accurate records of trust transactions, usually resulting from poor reconciliation practices or failing to keep trust funds segregated from operating funds. Trust funds should never be used as business operating funds. In other words, only once the funds convert from being client-specific to belonging to the firm can they be used for non-client-related expenses or withdrawals.


Tips to avoid this mistake:


  • Law firms should always keep trust funds separate from operating funds. This means opening a separate bank account for trust funds and ensuring that all trust transactions are properly recorded and reconciled, in accordance with the Law Society.

  • Once the client's services have been completed and the respective invoice has been rendered to the client, only then can trust funds be transferred to the firm’s operating account and therefore can satisfy operating expenses.

Conclusion


This list is by no means exhaustive. However, by avoiding these mistakes, your firm will be in a better position to maintain accurate financial records, maintain compliance, and protect clients' trust funds.


The main takeaways for avoiding these common errors include:


  • Create and follow a routine.

  • Avoid procrastination.

  • Understand and comply with Law Society regulations.


Do you have any additional points to add to this list? Leave your input in the comments! And, if you feel unsure about your firm's bookkeeping, it might be time to consult with a bookkeeping company that understands the legal industry and can ensure your processes are in compliance and optimized for your firm's success.


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Keith Hill Jr. is the Principal at Bookkeeping Matters Inc (BMI). For over a decade, Bookkeeping Matters has been fulfilling bookkeeping needs for lawyers throughout Ontario and other provinces. As a former Legal Accounting professor, Keith has also positioned BMI as a premier provider of online legal accounting training. Specializing in several practice management software, Keith and his team can be contacted at: info@bookkeepingmatters.ca / 1-800-893-2820 / www.BookkeepingMatters.ca


©2023 Bookkeeping Matters Inc. All rights reserved. Reproduction with credit is permitted.


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