Trust accounting compliance is critical for every law firm, but it is not the only accounting vulnerability firms need to guard against. Law firm financial controls can help protect your firm from fraud, financial errors, and decisions made with inaccurate data.
Financial controls fall into two main categories: preventative and detective. Preventative controls are the first line of defense, catching problems before they happen. Detective controls catch problems that slip through so you can take corrective action. This law firm administrator’s guide covers five of the most essential controls for midsize firms.
1. Segregation of Duties
Segregation of duties means no single person controls your financial workflow, and serves as a preventive and detective control. It usually breaks down into three roles:
- One person generates bills.
- Another receives and records payments.
- A third reconciles accounts.
By splitting up the roles, you are more likely to catch accidental errors, and you make intentional fraud much more difficult. If your law firm is growing and professionalizing, segregating accounting duties should be a top priority.
What this prevents: Unrecorded payments, misapplied funds, trust accounting problems, hidden write-offs, and employee theft.
2. Approval Workflows for Disbursements and Write-Offs
In addition to segregating duties, firms need workflows that document approval for every dollar that leaves the firm: AP, advanced client costs, trust disbursements, write-offs, and any other disbursement. This is a preventative control, and it might look like:
- Partner or firm administrator approves firm expenses.
- Billing partner, practice group leader, or managing partner approves write-offs.
- Managing partner approves trust disbursements.
Depending on how your firm is structured, you might distribute approval differently than above. The important thing is that you have a written process, that the process is enforced, and that you keep records of each request and approval.
What this prevents: Unauthorized spending, quiet write-offs to appease clients, and trust disbursements made without proper oversight.
3. A Fixed Reconciliation Cadence
Bank accounts, trust accounts, and accounts receivable should be reconciled each month, and the duty should be distributed across two people. This is a detective control to help you catch errors early and take corrective action. Typically this looks like:
- Reconcile accounts, credit cards, aging AR, and trust account (three-way) monthly.
- Each reconciliation is owned by a single person.
- A second person reviews each reconciliation to catch errors.
Even when firms are conducting monthly three-way trust reconciliations, operating and aging AR reconciliations sometimes fall by the wayside. Then problems are not detected until year-end, by which time they may have snowballed into much greater issues. Law firm internal controls can prevent that.
What this prevents: Discrepancies, duplicate payments, trust shortages, and year-end surprises that cause problems with tax prep or partner distributions.
4. Role-Based Permissions in Your Financial Systems
Written processes and workflows are important, but they need to be backed up with access restrictions, or they are not true controls. Role-based permissions are a preventative control, and might look like:
- Billing staff can edit fee narratives, but not approve write-offs.
- Bookkeepers can post payments, but not change trust balances.
- Partners can view reports, but not alter financial settings.
Be aware of pressure to match permissions to seniority or convenience, rather than job duties. The permissions must reinforce your segregation of duties policy, or they will not be effective.
What this prevents: Accidental data changes, unauthorized adjustments, and going around the segregation of duties controls.
5. Audit Trails That Show Who Touched What
Audit trails are an essential detective law firm internal control. They should be present in every financial system your firm uses. An audit trail should log:
- Who made a change
- What they changed
- When they changed it
The logs created should not be editable by anyone at the firm, including the managing partner. Without a reliable audit trail, it can be impossible to determine accountability when errors occur. This is true even when the error was inadvertent: you need to know what happened to solve the problem effectively.
What this prevents: Inability to diagnose financial anomalies and inability to take corrective action when mistakes or misconduct are detected.
Software Enforces the Controls People Forget
Every firm, no matter how well-run, struggles to maintain discipline around law firm financial controls. People get busy, they take shortcuts, and the harm of “just this once” is not always apparent in a moment of stress. You will be much more effective with controls if you back up your policies and procedures with built-in controls that cannot be set aside.
Tabs3 Billing in Tabs3 Cloud, along with other Tabs3 products, supports robust role-based access to reinforce your segregation of duties policies, mandatory approval workflows, and immutable audit trails. It also automates much of the reconciliation process, so you can keep a monthly cadence without overloading staff.
If your firm is growing, or you’ve had a recent scare, now may be a good time to tighten the controls that protect your firm. Tabs3 can make it simpler. Schedule a demo today.
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