Victus Search, Multi-jurisdictional Recruitment Partner for Financial Services 1200 627

Date

28 September 2023

Category

Trust accounting represents a fundamental responsibility for lawyers and law firms when handling client funds. However, the precise procedures and requirements often seem complex. This article will provide an in-depth overview of key principles and practices to demystify trust accounting for legal professionals.

What is Trust Accounting and Why Does it Matter?

Trust accounting refers to the proper bookkeeping processes and controls lawyers and firms must follow when receiving, holding, and disbursing client funds. These funds require robust protection and accurate tracking. Trust accounts provide assurance to clients that any funds entrusted to a lawyer will only be used for intended purposes in a legitimate manner.

Common examples of client assets requiring careful trust accounting include:

  • Retainers and advance payments for future legal services
  • Settlement proceeds from disputes or deals
  • Real estate deposits
  • Inheritances
  • Insurance settlements
  • Court awards or settlements
  • Escrow funds
  • Any other funds received and held on a client’s behalf

Law firms have a fiduciary duty to segregate client funds and carefully account for them separately from the firm’s own operating accounts. Firms must follow rigorous provincial regulations governing trust accounting and client asset protection, such as those mandated by the Law Society of British Columbia. Proper trust accounting demonstrates a commitment to ethics and upholds the integrity of the profession.

Key Procedures and Requirements

Here are some of the vital procedures and requirements for maintaining excellent trust accounting practices:

  • Client funds must be deposited into a designated trust account or accounts at a financial institution approved by the Law Society. This must occur as soon as possible upon receipt, ideally within 1 business day or sooner.
  • Detailed records attributing received funds to specific client matters and purposes must be maintained. Law practice management software and well-organized spreadsheets represent common tools for tracking funds.
  • Trust accounts are subject to 3-way reconciliation on a monthly basis, examining any discrepancies between the bank statement, detailed client ledger, and overall trust account ledger. This rigorous process ensures agreement across all records.
  • Lawyers and firms must file an Annual Trust Report with their Law Society providing details on all client funds received and disbursed, as well as summaries of accounting practices followed.
  • Interest earned on funds held in trust accounts is payable to the Law Foundation, a nonprofit that directs these earnings to public programs for legal aid, education, and research. However, clients can specifically request interest in writing, in which case it is paid into a Separate Interest Bearing Trust Account (SIBTA) to be eventually returned to the client.
  • Trust accounts are subject to periodic compliance audits by the Law Society. In some cases, firms may be required to engage an accountant to provide an external Report validating the firm’s trust accounting practices and controls.
  • Strict rules govern the handling of cash, including limits on amounts that may be accepted and requirements around documenting and depositing cash funds. Special regulations also exist around electronic transfers.

While technical in nature, following provincial trust accounting rules and procedures precisely protects clients and demonstrates a lawyer’s commitment to ethics. Leveraging accounting expertise and the right software tools can streamline processes and minimize confusion. With dedication and care, legal professionals can master trust accounting practices.

Victus Search: Connecting You With Top Trust Accounting Specialists

At Victus Search, our experienced recruitment experts help firms build finance and accounting teams with specialized expertise in key areas like trust accounting. We tap into our networks across boutique and international firms to find professionals who can not only handle technical accounting but also understand the nuanced regulatory and ethical landscape. Contact us today to explore how we can help you build a world-class finance team optimized for long-term growth and risk management.

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