Trust is the bedrock of any successful relationship, whether it’s between lawyers and clients or law firms and regulatory authorities. Trust isn’t just a desirable quality; it’s an absolute necessity. And within this sphere, trust accounting plays a pivotal role. This trust extends to critical financial transactions like retainer fee payments, personal injury settlements, or insurance payouts.

Trust accounting is the practice of separating client funds from the operational finances of the law firm. This clear segregation ensures that client funds are managed meticulously and completely transparently. It’s the cornerstone of financial responsibility and ethics. Clients gain peace of mind, knowing their finances are in capable, trustworthy hands.

Trust accounting isn’t just about good practice; it’s a foundational element of regulatory compliance within the legal industry. Law firms demonstrate their unwavering commitment to ethical conduct and maintain compliance with governing authorities by adhering to stringent accounting standards and implementing robust internal controls.

This commitment to trust accounting is a mark of professionalism and a safeguard against legal and financial risks. It exemplifies the legal industry’s dedication to upholding the highest integrity, accountability, and transparency standards.

Key Rules for Trust Accounting

• Client funds held in trust must not mix with the law firm’s operational funds.
• Law firms must maintain meticulous records of money coming in and going out of the trust account.
• Client funds in trust can only be used for the specific legal matters they are intended for.

What is Trust Accounting?

Here’s a closer look at the key steps involved in trust accounting:

1. Receiving Funds: It all begins when a client makes an advance payment for legal services or provides funds for settlements. Trust accounting is essentially dedicated bookkeeping, meticulously recording the receipt and disbursement of received client funds for the required payments on behalf of client. Each transaction is recorded in the Practice Management Software (PMS) and separate trust ledger accounts are maintained for each client.
2. Securing the Funds: The received funds find their home in a bank account designated as either a client trust account or a pooled one, depending on the sum involved.
3. Transferring to the Firm: As the lawyer progresses with the legal work for which the funds were prepaid, they transfer the money from the trust account to the law firm’s operational account. This transfer signifies that the lawyer has earned the prepaid money for their legal services.
4. Client Settlement: Any remaining funds are duly returned to the client after covering the fees and expenses incurred.
5. Dispute Resolution: In cases of disputes or issues related to the funds between the lawyer and the client, state bar guidelines may require the lawyer to retain the funds in the trust account until a resolution is reached.

Trust accounting regulations and compliance

It’s crucial to understand that trust accounting rules and regulations can vary state by state. Each state has unique bar rules, which lawyers must strictly adhere to. These rules are in place to guarantee transparency and the highest ethical financial standards within the legal profession.

Hhere’s an overview of trust money regulations and compliance in various Australian states:

New South Wales:

• Governed by the Legal Profession Act 2004 and the Legal Profession Regulation 2005.
• Lawyers can only withdraw trust money if they have provided clients with a bill related to the money.
• Clients have seven days to object to the withdrawal after receiving the bill.
• If a client wishes to challenge the bill, they must apply for a cost assessment with the Supreme Court of NSW within sixty days.

Queensland:

• Regulated by the Legal Profession Act 2007 and the Legal Profession Regulation 2007.
• Law practices can withdraw trust money if they have given the client a bill related to the money.
• Clients have seven days to object to the withdrawal after receiving the bill.
• If the client objects but does not apply for a review of the legal costs within sixty days, the law practice may still withdraw the trust money.

Western Australia:

• Controlled by the Legal Profession Act 2008 and the Legal Profession Regulations 2009.
• Trust money can be withdrawn if the law practice provides a bill related to the money.
• Clients have seven days to object to the withdrawal after receiving the bill.
• If a client objects but does not apply for a legal cost review within sixty days, the law practice may withdraw the trust money.

South Australia:

• Governed by the Legal Practitioners Act, 1981, and the Legal Practitioners Regulations 2009.
• Legal practitioners or firms cannot use trust money for legal costs without delivering a bill specifying the total amount and describing the legal work.
• The person liable for legal costs must request a detailed statement six months after receiving the bill.
• Legislation regarding trust money regulations in South Australia is still under consideration, partly due to a deadlock over compensation for victims of trust account fraud.

Tasmania:

• Overseen by the Legal Profession Act 2007 and the Legal Profession Regulations 2007.
• Trust money can be withdrawn if the person has received a bill, a written request for payment, or a notice of proposed withdrawal related to the money.
• Clients have seven days to object to the withdrawal after receiving the bill, request, or notice.
• If the client objects but does not apply for a review of legal costs under the Act within sixty days, the law practice may still withdraw the trust money.

Common challenges in trust accounting

Trust accounting is a meticulous process, and errors can have severe consequences, including potential fines and loss of licenses. Here are common trust accounting errors to avoid:

1. Billing Clients for Payment Processing Fees: Depending on your state’s regulations, charging clients for payment processing fees might not be allowed. If it is permitted, ensure you have written consent from the client for these charges.
2. Inadequate Internal Controls: Weak internal controls can lead to errors, mismanagement, and even fraud. Ensure your law firm has robust internal controls in place, including well-defined policies, procedures, and checks and balances to oversee trust accounting effectively.
3. Withdrawing Funds Too Early: Only disburse trust funds once they have fully cleared in the trust bank account, and you have proper, documented instructions from the client. Transparency agreements and documentation regarding trust fund disbursements are essential to compliance with state bar rules.
4. Commingling Business and Client Accounts: Keep your firm’s trust account entirely separate from your clients’ accounts. For internal tracking, you can label client and firm operating trust accounts, including the client’s name and ID number, to avoid confusion.
5. Mismanagement of Trust Funds: Using trust funds for unauthorised purposes or failing to follow client instructions can lead to ethical and legal violations. Trust funds must be used exclusively for the specific legal matters they were entrusted with.

Hiring a Trust Accountant for your Law Firm

For law firms that lack the expertise or resources to manage their trust accounting records effectively, hiring a trust accountant can be an excellent solution. A trust accountant can help law firms establish robust internal controls, maintain accurate trust accounting records, and ensure compliance with governing bodies.

Team SBA offers comprehensive trust accounting services tailored to the specific needs of law firms. These services are designed to help law firms maintain compliance with regulatory requirements and ensure the responsible handling of client trust accounts. Our services include:

1. Recording Trust Receipts: We meticulously review the process of recording trust receipts to verify that client funds are accurately and transparently documented in PMS.
2. Recording Trust Payments: Our experts assess the procedures for recording trust payments to ensure compliance and accuracy in the disbursement of funds.
3. Trust to Office Transfers: We review the mechanisms in place for transferring funds from trust accounts to office accounts, ensuring these transfers adhere to regulatory standards.
4. Requesting and Authorising Payments: Our services include a review of how payments are requested and authorised, confirming that these actions are carried out in accordance with established protocols.
5. Trust Reconciliation: Trust reconciliation are performed every month to ensure that all transactions are appropriately matched and balanced to prevent discrepancies.
6. Printing Trust Ledgers and Statements: We assess the processes for generating trust ledgers and statements to ensure that they accurately represent the financial activity within trust accounts.
7. End of Month Procedure: Our experts review the end-of-month procedures for trust accounting to confirm that all necessary tasks are completed accurately and in compliance with regulatory requirements.
8. End of Financial Year Procedure – Trust Accounting: We conduct an in-depth review of the end-of-financial-year procedures for trust accounting to ensure that all legal and financial obligations are met.
9. Maintaining Controlled Money Accounts: We review the maintenance procedures for law firms managing controlled money accounts to ensure adherence to relevant regulations.
10. Exporting Reports for Analysis from LEAP: If applicable, we assist in exporting reports for analysis from LEAP, facilitating data analysis and compliance assessment.

By offering this comprehensive range of services, we assist law firms in upholding the highest standards of trust accounting, regulatory compliance, and ethical financial management, ultimately safeguarding their reputation and ensuring client trust and confidence.