Armanino Blog

Don't Underinvest in Accounting

by David Roberts
May 05, 2017

The law is your business, but accounting is what helps you run a profitable firm. While doing it right can keep you in business, getting it wrong could mean that your firm loses its license to practice law.

Many state bar associations are increasingly focused on punishing noncompliance with accounting rules, mistakes in handling trust accounts and other often-overlooked aspects of legal industry accounting. This is why law firms, which are notorious for underinvesting in this critical area of their business, need to make sure that they are staffing their accounting and finance function properly.

For example, a firm with nearly 40 attorneys doing business in multiple cities relied on just one person for all of its accounting and financial reporting needs. Needless to say, for that one person, it was a stressful environment that was long on late-night hours. For the firm, the potential cost of understaffing this function was high: Embarrassing errors occurred that could endanger their license. They also faced business interruptions when staff was suddenly unavailable and had little to no insight into business performance, because there was simply no time for analysis and reporting. 

This situation is not an outlier for law firms. In fact, it’s not unusual to see only one or two people in the back office responsible for everything from human resources to purchasing to partner compensation—not to mention billing, accounts payable, asset management, tax compliance, reporting and more.         

Accounting mistakes happen all too often
Overworked, understaffed accounting teams can miss something. Often it’s a small mistake, easily corrected, but sometimes it’s not. And these big problems happen more frequently than you think. Consider these two scenarios:        

The case of the missing distribution: A law firm inadvertently missed recording a partner distribution in the spring. No one noticed the mistake right away, because the accounting staff did not have time to close the books and reconcile bank accounts monthly, or even quarterly. They significantly overstated their available cash, and at the end of the year, the partners prepared for a healthy year-end distribution—until it was discovered that the spring distribution had been overlooked. As partners readjusted their expectations for the much smaller year-end distribution, they had to wonder: What else was being missed or mishandled?

A guilty plea for not reconciling trust accounts: Many firms, whether they know it or not, do not properly handle trust accounts. These accounts are shown as assets and liabilities on the balance sheet and must be reconciled every month. If your accounting staff doesn’t understand the state bar regulations and doesn’t do a monthly reconciliation, it is a trust account violation. States such as California and New York already have, or are setting up, compliance arms that are empowered to go after these types of violations, and the punishment can include losing the firm’s license to practice law in that state.       

What you can do
To strengthen your accounting function, start by documenting your current accounting processes. A good first step is creating a business requirements document―essentially, a snapshot of your current accounting processes in which you describe each process and the steps involved. Doing this will help you understand how accounting is currently performed in your firm, and more important, will bring to light inefficiencies and gaps.

For instance, a 15-attorney law firm was tracking billable hours in an Excel spreadsheet. Each attorney would record their time, and an administrator would enter the data from each spreadsheet into QuickBooks, then enter the same data again into a separate spreadsheet to consolidate hours. Not only was the process inefficient because of the triple data entry, it also lacked a way to easily track and report on important business metrics, such as unbilled work-in-progress.  By doing a business requirements document, the firm uncovered the inefficiencies in this error-prone billing process.     

How to address your gaps
To correct and improve your accounting processes, you must have the right staff. Today, you have two choices for achieving this. You can hire qualified accounting personnel as employees, or you can outsource all or part of the accounting function to a third party. While many law firms use outsourcing as a cost-effective alternative for functions such as IT and payroll, not as many realize that there are also outsourcing options for accounting services that are specifically for the legal industry.

The benefits of outsourcing your accounting to legal experts include: industry-specific knowledge and services, improved internal controls based on industry best practices, access to real-time business performance data, and a contractual service level agreement that ensures you get services, reports, analysis and insight when you need it.     

The choice is yours: Hire the right number and type of accounting staff, or outsource to experts. Just don’t ignore your accounting function, because the health of your business really does depend on it.

May 05, 2017

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