Accounting for Law Firms: Best Practices Lawyers Should Know

Editor’s Note: This post is written by the chair of law firm services at accounting firm Berdon LLP.

By John Fitzgerald, Partner and Chair of Law Firm Services at Berdon LLP

Law firms are no longer simply partnerships of practitioners. Successful law firms, like their corporate counterparts, need to develop, implement and monitor stronger financial and operational practices. The tighter the ship, the less the likelihood that a firm will fall into financial distress or allow any malfeasance to go undetected.

Secure Your Finances

There are numerous measures that will enable a firm to build a more secure financial environment, among them:

• Capital Planning. Don’t overstretch your finances. Develop a capital plan and capital structure formula that is agreeable to the partners and delivers the financial resources the firm requires.

• Debt Planning. Determine the appropriate level of debt for the firm (debt tolerance) and review various sources for financing operations.

• Billing and Cash Flow Policies. Determine what may be hindering a smooth flow of funds from clients and develop procedures to enhance profitability rates. This may include revisiting billing practices and fee arrangements, as well as analyzing individual attorney collection and billing realization reports

• Tax Planning. If operating in multiple states, is the firm compliant with the various local laws and regulations? Failing an audit can be an expensive and time-consuming affair. Firms with overseas offices should be fully aware of any cross-border issues they may face.

• Personal Wealth Services.Partners devote considerable time to the firm and a great way to relieve the pressure on their private lives is by having the firm provide personal financial services. These services can include individual tax planning and preparation, bill paying, and estate and trust planning.

Tighten Your Control Environment

A firm’s control environment is one of the strongest defenses against intentional and unintentional malfeasance. The following list is a sample of measures to improve the firm’s security, including:

• Risk Assessment. To see that the firm’s control environment is effective and efficient, conduct a comprehensive risk assessment and process review to identify any the control gaps and remediate existing deficiencies.

• Fraud Prevention.Evaluate the effectiveness of controls over fraud prevention and detection.

• Cybercrime Protection.In the age of the cybercriminal, evaluate the effectiveness of controls over private information security, change management, and data backup and restoration. Many firms have been lax in developing a cybersecurity policy that should also include procedures to follow in the event of a breach — an increasingly likely event.

• Escrow Policies. Through errors of omission or commission, escrow account problems can leave a firm exposed to a host of penalties. It is important to evaluate the financial and internal controls and standards to determine if the firm is as secure as possible.

• T&E Rules.Travel and entertainment expense abuses can be a financial drain on a law firm. Consider policies that deter these abuses and require more accountability from partners in reporting their T&E expenses.

• Retirement Account Compliance.Your 401(k) and other retirement plans come with a host of complex requirements under the Internal Revenue Code and ERISA. Performing audits and tests that determine that the firm is meeting its fiduciary obligations will help avoid liability exposure.

While all of these steps are important and will make an impact, a firm’s compensation system should also be clearly defined to eliminate uncertainty of profit allocation and ensure individual partner compensation is commensurate with firm goals. This should be one component of a successful long range plan that includes a focus on governance, succession planning, lateral growth and staff development. Finally, it’s imperative that a firm’s culture encourages open communication between firm leadership and the partners. A holistic approach that aligns the necessary financial controls with strong and effective leadership is the surest path for law firms to achieve their professional and financial goals.