The importance of good solid accounting systems

I have spent much of my time at The Law Factory working in problem solving and accounts reconstruction. The main cause for having a non-compliant set of accounts is not having strong enough systems in place to cope with the Solicitors Accounts Rules (SAR). As I explained in my blog, it is essential to have […]

I have spent much of my time at The Law Factory working in problem solving and accounts reconstruction. The main cause for having a non-compliant set of accounts is not having strong enough systems in place to cope with the Solicitors Accounts Rules (SAR).

As I explained in my blog, it is essential to have book-keepers who are fully aware of the intricacies of the Solicitors Accounts Rules who can pick up and rectify errors quickly and efficiently to prevent breaches of the rules.  These would otherwise be picked up at the Accountant’s audit and be qualified as breaches to the Solicitors Regulation Authority (SRA) on the accountant’s management letter.

It is also crucial to have a good office manager, particularly in medium to large firms. They could be a partner or fee earner but are often part of the administration team. They need to be in charge of collating and checking the financial information to be provided to the accounts department and will also act as a conduit between the accounts department and the fee earning staff on financial matters.

I set out below the systems I consider vital for the smooth running of any good Solicitors practice.


Routine is a key to having good office systems. Everything needs to be done in a particular order for it to work. If you have a solid, fixed routine it keeps everything under control. It is when you are unsure about where you are with your work that things go missing and mistakes are made.

Below are the main areas that the accounts department will deal with (in order):

• Client money received
• Client money paid/requested
• Office Disbursements paid/requested
• Bills Issued
• Transfers between accounts (client to office/vice versa)
• Office money received
• Office money paid/requested (overheads)
• Legal Aid – (CDS, CMRF, Crown Court, Certificated Civil Cases) if applicable
• Bank Reconciliation #038; Financial Reporting
• Dealing with accountants and other auditors

I have illustrated some systems below. I have used cheques as an example as it has been the most common way of moving money in law firms in recent years. However similar systems can be applied to money moved by credit card, TT, internet payments, standing orders and so on.

Client money received

This is one of the most important transactions. This money must be treated carefully and clearly identified as client money or office money. If “mixed funds” are received i.e. costs #038; disbursements, it must be paid into client account. If it is purely office money i.e. costs #038; VAT it must go into office account after a bill has been drawn up. The system implemented must trace the entire life of the cheque from when it was received, to when it was posted onto the accounts package. A strong system would be:

1. Cheque is received at the office. This is extremely important. Clients cannot pay cheques straight into your account they MUST go through the office #038; be written into a monies received book.
2. Cheque is given to the fee earner, and the fee earner identifies whether the cheque is client or office money. At this time a slip is filled out showing date, client number, name, payer, amount, narrative #038; whether it’s client or office money.
3. A copy of the slip goes on the file and another goes with the cheque to the office manager for paying in.
4. Office manager collates all of the slips and cheques and completes the paying in book. Afterwards, the paying in book reference is added to the slips and the cheques are paid in.
5. The slips are given to the accounts department for posting to the accounts package #038; client ledgers. The slips are then filed in order for that month for ease of reference.

Client money required

Money required from client funds received also attracts the attention of the SRA. Firms often accidentally pay cheques out before they have received client funds, simply due to not being organised enough and having good records. It is imperative that money is readily available in the client account for that particular client before funds are withdrawn to fund disbursements. Client debit balances are a major qualifying breach of SAR. A strong system would be:

1. If the fee earner believes money is available to fund disbursements from mixed funds received from the client previously, then a cheque request needs to be presented to withdraw the funds from client account. This can be done by way of a slip to the office manager/accounts department, a copy of which goes on the file.
2. The accounts department checks the client ledger and grants authorisation for a cheque to be written, providing funds are readily available. If funds are not available, the fee earner is consulted to see if an error has been made, and to double check that the client did pay the funds in the first instance.
3. Upon authorisation, the office manager writes the cheque, hands it to the fee earner to give to the partner for signing. The cheque number is written on the slip and given to the accounts department for processing onto the accounts package.

Office Disbursements required

Often, disbursements are paid from office account. These may be paid from the solicitor’s own funds for search fees or court fees in advance of money being received from the client. Frequently money will be received from a client for payment of a bill raised which includes disbursements as yet unpaid such as counsel #038; land registry fees. It is imperative that these disbursements are paid out by the solicitor within the correct time period: 14 days for Legal Aid disbursements and 48 hours for private clients, otherwise there will be a breach of the SAR. However the requests for disbursements are similar to those of client money required. The difference is that we don’t have to wait for funds to be received before the disbursements are paid if they are from office account. A strong system would be:

1. The fee earner working on their file is asked to pay a disbursement.
2. An office cheque request slip is filled out and handed to the office manager.
3. Office manager writes the cheque and puts the cheque number on the slip. Slip goes to accounts; cheque goes back to the fee earner for the partner to sign.
4. Accounts post the entry.

Bills Issued

Bills are a core part of the business, and the part of the accounting procedure that the fee earners will be most familiar with. There will be bills with disbursements allocated to them and also ones without. SAR states that unpaid and paid disbursements must be shown separately and be clear on the bill. A strong system would be:

1. When preparing/dictating the bill, the fee earner has a disbursement schedule and a copy of the ledger present, clearly showing which disbursements have been paid.
2. The person in charge of preparing the bills (secretary or office manager) prepares the bills based on the fee earner’s specification.
3. This bill is entered into a bill book kept in the office.
4. The bill is given to the accounts department to post.
5. The accounts department notifies the office manager/fee earner of any unpaid disbursements that will be due for payment upon receiving funds from the client.

Transfers between accounts

In many cases, money on account of costs will be asked for before the work begins. This is common practice. However the time will come when the solicitor will need to bill for his/her time. Once the bill has been done, the firm has 14 days to transfer the money on account to pay for that bill from client account to office account. To avoid issues of transferring funds twice, transferring incorrect amounts, or miscommunication the following strong system would be:

1. A transfer request slip from the fee earner is written, a copy is put on the file and another is given to the office manager/accounts department.
2. The accounts department checks to see if there is money on account and if the bill stated on the transfer request also appears. The accounts department also checks to see if any disbursements on the bill are outstanding as unpaid.
3. The accounts department authorises the transfer request and notifies the fee earner #038; office manager if certain disbursements need to be paid out when the transfer goes ahead.
4. Office manager/Accounts department sets up the transfer at the bank.
5. Slip gets given a transfer reference and it’s posted by the accounts department and is filed.

Office money received

This is treated in a similar way to client money received although there is one key difference. Money paid into office account can only be for bills that have already been issued with the money from the client being specifically for that purpose. It can be used to pay bills that are simply profit costs and VAT and also bills which contain disbursements, providing those disbursements have been paid. A breach of the accounts rules will occur if the amount paid into office account exceeds the amount owing creating a credit on the account which will be deemed as client money in office account on the management letter. This often happens when bills have not been provided to the accounts department or disbursements have not been paid out. It also happens if a fee earner deems a cheque to be office money when in fact it is client money on account. This is why it is imperative to have good office systems here. A strong system would be:

1. Money is received into the office from the client (as per the client money received section)
2. Fee earner ascertains whether it is client “mixed funds” #038; “money on account” or office money to pay costs and disbursements. A slip is done (in this case an office receipt) and given to the office manager stating which bill/disbursement is being paid.
3. The accounts department checks to see if there is a bill/disbursement outstanding on the ledger that relates to this money received. Accounts grant authorisation for the money to be paid straight into office account unless there is no bill or disbursement, in which case an error has been made and further investigation is required.
4. The office manager pays the money in and gives the slip a paying in book reference. Accounts post from this slip and it is filed in order for that month.

Office payments/overheads

Overheads have less of an SAR implication because they are simply running costs for the firm. However, having a good solid system in place will stand the firm in good stead when it comes to a revenue inspection and an accounts audit. A strong system would be:

1. Invoices received are given to the office manager/accounts department after initial viewing from the partner.
2. These invoices are placed on a purchase ledger or filed in a “bills to pay” folder depending on the size of the firm. Most small to medium size firms will not need to use a purchase ledger
3. When the bills are due, the office manager requests a cheque by way of a slip to the partner. Once the cheque has been written and the bill paid, the cheque number is added to the slip which in turn is given to the accounts department to post.
4. The original invoice is then filed in an alphabetical invoice folder.

Legal Aid – (CDS, CMRF, Crown Court, Certificated Civil Cases)

There are many variations of legal-aid work and therefore many different types of accounts procedures. Quite often the systems will have to be tailor made to the practice. The key is to keep copies of everything! A basic system that works would be:

Certificated (civil litigation, crown court litigation etc.)

1. Claims are sent to the LSC by the fee earner and two photocopies are kept, one for the file and one for the unpaid claims folder
2. Upon payment via LSC BACS the claims are matched to the schedule and given to the accounts department
3. Accounts department does the necessary postings and files the claims with the schedules in order.

This enables an ongoing unpaid claims figure to be obtained to give a clear picture of how quickly the LSC are paying as this can fluctuate throughout the year quite dramatically.

Contracted Work (CDS6, CMRF)

1. Monthly contract is submitted with all of the claims on the LSC website.
2. Office manager makes sure that all of the files are open on the case management/accounts system.
3. Accounts department retrieves all of the claims from the LSC website and the office manager provides the open file numbers on the CDS6 or CMRF list.
4. Accounts department puts them together and does the necessary entries, filing them together in order afterwards.

Reporting #038; Talking to Auditors

This is all about organisation and timekeeping. The key is to be up to date at all times so that information can be accessed quickly. This is the accounts department’s job. If an auditor or partner needs financial information quickly it must be forthcoming. Organising reports and information in an easily accessible way is of the utmost importance.

In Conclusion

The hard part is implementing the strong systems set out above and asking the whole staff to follow them. Little can be achieved without the assistance of a good office manager and a capable accounts team. Many companies fall into the trap of believing that they cannot afford these things. In my experience a successful, compliant law firm cannot afford not to have them!

Compliance is King. Make sure you cover all of the bases.
The Law Factory specialises in legal bookkeeping and can provide a very strong and comprehensive accounts department, tailor made to your practice. We are experts in helping to implement systems to create a compliant and efficient firm.
More about us can be found on our websites:
Alex Simons
Outsourced Accounts Manager

The Law Factory

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