Client Accounts 101 for Law Firms – Part 2
Written by The Clio Team
6 best practices for client accounts
As a solicitor, you are ultimately responsible for keeping client money safe from misuse—so it’s essential that your firm has and maintains good systems and checks. Here are some best practices to contemplate when handling client money:
1. Know that a client account is not a banking facility
While this point may seem obvious, it merits repeating, as it’s a core tenet of client accounting: You (and your staff) must never use your client account as a banking facility.
With a few specific exceptions outlined under SRA Accounting Rule 14.2 (for example, “an amount of the firm’s own money required to open or maintain the account”), only money linked to an underlying legal service should pass through a client account. As Rule 14.5 states in the SRA handbook, “You must not provide banking facilities through a client account. Payments into, and transfers or withdrawals from, a client account must be in respect of instructions relating to an underlying transaction (and the funds arising therefrom) or to a service forming part of your normal regulated activities.”
Preventing client accounts from being used as a banking facility is crucial to protecting clients’ money—and your reputation. Circumventing SRA rules in this area puts your firm at risk of assisting money laundering, improperly hiding assets, or being exposed to fraud.
2. Staff your firm thoughtfully
While you may pride yourself on properly handling client money, the responsibility for protecting your clients’ money goes beyond your individual actions. It’s important to carry out due diligence when recruiting potential employees to keep fraudsters away from your firm (and your client accounts).
Even honest staff can make mistakes, too. Prioritise training, supervision, and clear communication with staff that interact with client accounts.
You should also strategise to avoid unintentional blunders that can occur with accounting staff comings and goings—ensure your firm has a business succession plan and contingency plans.
3. Establish accounting systems
Account management and audit systems are key to preventing errors with client accounts and keeping SRA compliant. For example, you should have a method to record client account transactions, and an accounting system in place to prevent accidentally overdrawing from client accounts.
4. Reconcile accounts regularly
If client account mistakes occur, report them quickly by having systems and checks in place. When it comes to protecting client money, the SRA recommends that you “reconcile accounts that are signed off by the compliance officer for finance and administration at least every five weeks.”
5. Keep your technology current
Having strong IT systems with good backups is integral to protecting your clients’ money and data—this is especially important in an era where cyberattacks often target law firms.
6. Make use of the SRA
When all else fails, communicate any potential concerns with the SRA. If money is stolen from a client account—whether by staff at your firm or via a cyberattack—you must promptly report it to the SRA.
Difference between client and office accounts
Let’s keep it simple: The client account is for client funds only. The office account is the law firm’s money. Period.
For a typical monthly retainer situation, you will take the client’s retainer amount and put it into your client account. After each billing cycle, you calculate what is owed by the client to the firm and transfer that amount from the client account to the office account. If the retainer runs low, you ask the client to replenish the client account. If there are any client funds left when the case is wrapped up, they are refunded to the client.
And for cases where large payouts happen—your typical personal injury settlement, for example—you take the settlement funds, put them in a client account, then satisfy any liens (medical bills, etc.). You pay yourself the contingency fee, of course, plus any costs. Then you reimburse the client for whatever is left.
Client accounting and ethics
If you follow the aforementioned procedures, and familiarise yourself with the SRA’s rules, you should avoid issues with client accounts and misuse of client money.
When it comes to lawyers handling client money, most misuse occurs as a result of one of the following types of situations:
- There are insufficient restraints on who has access to the client account.
- For example, a lawyer, perhaps with a substance abuse or gambling issue, “borrows” client funds from a client account.
- There are inadequate controls within a firm’s accounting system.
- This could be if someone in a law firm (e.g., a member of the support staff) fails to learn the rules and commingles client and lawyer funds in either the client or office accounts.
- Staff are not properly trained on how to protect client money from fraudulent behaviour.
- For instance, a minor clerical error or two, usually a result of sloppy office procedures, results in blending of funds and the firm does not self-report, but does correct the error. The SRA finds out later due to an unrelated ethics complaint and punishes the firm for the failure to report.
If a mistake does happen, your best course of action is likely to self-report the mistake to the SRA and immediately correct it.
Tools to help with client accounting
Accounting is probably the worst part of running your own law firm, but there are tools that can help make the process more manageable.
Many lawyers turn to Intuit QuickBooks or Xero for managing their accounting and recordkeeping, rather than Excel spreadsheets. QuickBooks and Xero integrate with Clio’s case-management software, which helps save time on data entry.
Klyant—a comprehensive, cloud-based legal accounting application for European law firms—is built specifically to make it easier to manage client accounts for legal practices. With Klyant, trust or client money is managed separately from firm money—allowing for simple compliance with regulations. Klyant also provides a suite of management and financial reports, helping your firm better monitor growth and remain compliant.
Putting it all to work
Now that you’ve read far too much on client accounting, and after you have checked your local rules, what do you do next? Put this information to work for client accounting in your own firm:
- Create clear client accounting policies. Make sure your office policies for client accounts are clear so that an assistant does not accidentally combine funds or commit some other clerical error.
- Set up systems to guard against error. Stay on top the essentials, like vetting staff and keeping your technology current, to keep your name off the disciplinary list.
- Get assistance from technology. Ditch the Excel spreadsheet or paper ledger, and use some of the many available legal accounting tools—like Klyant—to better manage your client accounts.
It may seem like a lot to handle, but nobody ever said entrepreneurship and managing a practice were easy. With client accounts, like all things, once you put good habits into practice, they become second-nature over time.