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Required-Law-Society-Financial-Documents-Checklist

Required Law Society Financial Documents Checklist

Law Societies have very strict requirements when it comes to bookkeeping and financial records. Lawyers are obliged to maintain compliance with these regulations and doing so means the thorough understanding and production of a multitude of reports. Making sure your firm is adhering to the mandated regulations requires implementation of a process to maintain key records, produce timely reports and properly retain all data.

The Importance of Reports

Each Law Society outlines their expectations of what firms are responsible for when it comes to financial recordkeeping. The Law Society of Ontario provides in in-depth Bookkeeping Guide for Lawyers which helps lawyers better understand what the Law Society requires. Review your own Law Society’s guidelines. While the Law Societies may provide these types of resources, reading the rules themselves is the best way to become familiar with the exact requirements.

The requirements set by Law Societies are done so in order to protect the public, which means they have a heavy focus on trust records. Basic trust principles and proper handling of client funds require firms to be able to account for all funds at any given time. To make sure this is possible, accurate recording of all transactions is essential.

Law Societies conduct regular audits to determine if firms are staying compliant with these mandated financial recordkeeping requirements. The audits are meant to correct minor recordkeeping deficiencies and look for signs of potential mishandling of funds. During an audit, firms are expected to provide a significant portion of their records, usually over a 12 month period.

Failing to keep the required records on a regular basis will result in considerable difficulty in meeting the auditor’s requests. Beyond the scope of a Law Society audit, not having the above reports and documents can be costly to correct later. Lack of proper bookkeeping is harmful to client relationships and can cause problems when dealing with other organizations such as the Canada Revenue Agency.

Not only do these reports provide valuable insight to the Law Societies as to how a firm is functioning in accordance with its by-laws and rules in the event of an audit, but they are also beneficial to the firm itself. Being able to see what is occurring on a financial level provides firms with tangible information to make business decisions with. Having these reports complete also makes it easier to meet obligations in filing reports for income tax and harmonized sales tax (HST) to the Canada Revenue Agency.

Required Reports: The Checklist

The reports required by Law Society rules and bylaws to stay compliant involve both trust accounts and general accounts. All of these requirements are account specific reports. If you have multiple trust accounts then these reports will need to be generated for each account.

As per Law Society requirements, all of these reports should be completed on an ongoing basis by the 25th of the following month.

Trust Reports

  • Bank Reconciliation Report. A comparison of the bank and book balances which should be completed monthly after reconciling all other accounts. Pay special attention to any discrepancies and uncleared transactions.
  • Client Trust Listing. Shows the client file, matter owner and the current cleared and uncleared trust ledger balance. Keep an eye out for any outstanding funds and transactions.
  • Client Trust Ledger. Individual statements for each client file showing all transactions. Very helpful for pointing out if any overdrafts have occurred.
  • Trust Bank Client Reconciliation. Three-way reconciliation of the bank, client ledger, and book balances to make sure all three are equal.
  • Trust Disbursements. The ‘withdrawal half’ of the trust journal report, showing all funds withdrawn, the amount, who they were paid to, what method of payment and the client matter it relates to.
  • Trust Journal. Shows all activity for a trust account, including all transaction details such as the payee/payor, method, amount, date, client/matter, memo and running balance. Useful for seeing complete bank activity including all deposits and withdrawals.
  • Trust Receipts. The ‘deposits half” half of the trust journal report, showing funds received, the amount, by which method and what client matter the deposit pertains to.
  • Trust Transfer Record. Tracks any instance where funds were transferred from one client file to another client file in the same bank account.

 

General Reports

  • Client’s General Journal.  Shows specific client activity within each account.
  • Disbursements Journal. The ‘withdrawal half’ of the general journal report, showing funds withdrawn, who they were paid to, the amount, the method and the tax breakdown.
  • Fees Book. Shows a breakdown of each invoice with fees, disbursements, taxes, and write-offs.
  • General Journal. For an individual account shows all activity including payee/payor, amount, method, client/matter, memo and running balance. A helpful way to get a complete record of all bank activity and to check running balance for any account level overdrafts.
  • Receipts Journal. The ‘deposits half” of the trust journal report, showing who funds were received from, by which method and the amount received.

For a more in-depth guide to these documents check out Law Society Required Documents Demystified.

Proper Recordkeeping

Go through each item on the checklist and be sure your firm is maintaining each piece as part of the accounting procedures. Many of the ongoing ledgers and journals are necessary for the completion of the reports. For example, if the book balance is not being updated continuously it will fail to be accurate, making it impossible to perform trust bank client reconciliations.

These records should be stored in a way and for the amount of time that is compliant with your specific Law Society’s requirements. Each Law Society sets their own standards for what is considered acceptable, so be sure to review rules and bylaws to verify what’s needed.

Maintaining the above records will play a significant role in the overall business success of a firm. Having these reports and information isn’t optional and firms that don’t maintain appropriate records will see consequences from the Law Society, clients, and governmental agencies. Reviewing your current accounting procedures and implementing creation and ongoing updating of these required reports will ensure compliance and the following of best business practices.

Rick Kabra

Dr. Rick Kabra is CEO of CosmoLex Cloud, creator of cutting-edge technology solutions to help solo and small law firms law firms. Rick has a Ph.D. in Electrical Engineering from NJIT and has over 10 years of experience in the legal software industry catering to the specialized technology needs of small to mid-sized law firms. Rick has given numerous seminars and published articles on legal technologies such as law practice technology management, cloud computing, and legal billing, business & trust accounting compliance.