From 1 April 2004, changes to the Legal Profession (Solicitors’ Accounts Rules) (the “SAR”) came into force. The main change in the SAR is the provision for a law practice to:-
(i) ensure 2 lawyers act as signatories to approve payments above $5,000 from the client account of a law practice; or
(ii) engage an accounting firm or accounting corporation or a firm or corporation to provide book-keeping services to a law practice;
(iii) employ a book-keeper to write up required books of accounts of a law practice.
Prior written approval of Council of the Law Society (Council) is required to engage or employ a book-keeper to write up the required books of accounts under the Rules. Council has specified qualifications for a book-keeper other than for an accounting firm or an accounting corporation.
Good client account management goes beyond fraud prevention and detection.
Technical breaches of the SAR occur even in well managed practices. They occur because of inaccurate or late entries, oversight and human error. Because financial data is input manually, human error will inevitably take place. However putting in place sound bookkeeping and business processes will go a long way towards avoidance and early detection of such technical breaches.
Our recommendations for good Client Account management are designed to help you minimise the risks associated with handling funds on behalf of a client. You will discover that the implementation of such practices will bestow additional benefits of better client care, improved backroom efficiencies and even improvements in your cash flow.
A. Documentation
The four inviolate principles that govern a diligent approach to client’s money in all its forms are:
Written records must be kept
The records must disclose the true position
Records must be auditable
Records must be up to date.
Paragraph 11(1) of the SAR prescribes that every lawyer shall keep cash books, ledgers and journals and such other books and accounts as may be necessary to show proper accounting records including transactions relating to
(i) client’s money received, held or paid by him; and
(ii) other money dealt with by him through a client account; and to show separately in respect of each Client all money of the category specified in items (i) and (ii) above.
Whether you use a manual or automated accounting system, the information that is documented must show (at the very least) -
a. The balance in the client account (for each client) at all times; and
b. Details of transactions affecting each Client’s balance.
The following prescribes the account records and ledgers which law firms should maintain in order to provide the above information:
(i) Cashbook
The Cashbook details in chronological order the receipt and payment of all client’s money, with the following transactional details-
a. Date received or issued
b. Name of Payer / Payee
c. Cheque number and Payment Details
d. Name of Client and Matter Reference
e. The Amount
f. Available Cash Balance.
Each entry in the Cashbook should be supported by a copy of the deposit slip, cheque book stubb, payment and receipt voucher or other document evidencing the deposit or payment. These “source documents” must be retained as part of your accounting records.
(ii) Client’s Ledger
This is a record that contains similar information as in the cashbook described above, except the balance is for the individual client only. The aggregate sum of all individual client balances must be identical to the balance in the Cashbook.
There are a variety of formats which you could use for the Cashbook and Client Ledgers. These could take the form of a computer spreadsheet or be generated from your computerized accounting system. Appendix 1 and 2 show a sample of a Cashbook and Client Ledger.
B. Monthly Procedures
The monthly Client Account Bank Reconciliation should go a step further than the routine bank account reconciliation by including a reconciliation of the individual client ledgers. To explain, a comprehensive client account reconciliation should comprise the following actions -
(i) Cashbook / Bank Account Reconciliation
At the end of each month, the account balance in your bank statement must be reconciled to (ie must tally with) the account balance shown in your cashbook register. There is no prescribed format for this report but Appendix 4 shows a sample Cashbook / Bank Account Reconciliation. Differences between the balances in your bank statement and cashbook should be investigated immediately and the discrepancies corrected either in your own records or by the bank.
This bank statement reconciliations (of both client and office accounts) should be undertaken every month as a matter of good internal control for the firm.
(ii) Reconcile your individual Client Ledgers
After you have completed the cashbook / bank account reconciliation, you should check that the individual client balances tallies with the reconciled cashbook / bank balance. The easiest way to do this is to make a list of the clients and the balance for each, then add the individual client balances. If every item has been posted correctly and your math is faultless, the aggregate of all individual client b balances should be identical to the balance in the cashbook.
If they are not, it means that you have – (1) omitted a client from the list, (2) the activity during the month was not correctly posted to the client ledger, or (3) your calculation is wrong. Redo each step to identify the source of the discrepancy and make the necessary correction.
While this step (reconciliation of the individual client ledgers) is not prescribed in the SAR, we recommend it strongly as a means to identify inadvertent breaches of the SAR arising from data entry errors.
(iii) Review Debit Balances
Debit balances in the Client Bank Account signal that Clients funds are overdrawn. In the absence of fraud, this can arise as a result of human error and oversight such as an incorrect postings, as well as late postings of transactions to the client’s ledger. Once the lawyer has identified the cause of the error he/she should rectify it immediately.
(iv) Client Account Statements
As part of good client care, we also recommend that lawyers send client account statements to their clients at appropriate intervals.
The statement should show the balance in client’s account at the beginning of the reporting period, any transactions in the Client’s Account such as deposits or withdrawals, and the final balance in the account as at the statement date. If an invoice is going to be paid from the client’s account, a statement noting this should also appear on the billing statement. Appendix 5 shows a sample Client Account’s Statement.
Even if funds are held in client’s account on a long-term basis without any activity, a periodic report to the Client should also be made. This reminds the Client that funds are being held by the firm and gives you an opportunity to stay in contact with the client.
(v) Review of amounts that can be transferred from Client to Office Account
Good client account management also means timely transfers of amounts from client’s to office account. As failure to undertake timely transfers will have a detrimental effect on the firm’s cash flow, law firms should institute a process of review conducted at appropriate intervals to ensure that funds that can be transferred are correctly transferred. Appendix 6 contains a sample report which will aid this review process. This report should be circulated to the relevant partners for further consideration and transfer instructions.
C Legal Accounting Systems
Paragraph 11(5) of SAR accepts the use of computerized bookkeeping systems provided that the financial information recorded in such computerized system is capable of being reproduced in the form of a printed document within a reasonable time.
Most modern legal accounting software in the market today will have the capacity to generate comprehensive and accurate reports in easy-to-read formats. We have seen such systems make tremendous improvement to backroom efficiency, as well as relieving the backroom staff from menial and repetitive tasks, hence reducing the opportunity for errors. Such systems can and should be regularly backed up with an appropriate storage device.
The experience of our clients shows that the implementation of a good legal accounting system will go a long way in helping law firms avoid and detect technical breaches, and are regarded by many law firms as an important risk management tool.
In terms of good client account management, a good legal accounting software can perform these functions faster and more accurately than a whole team of backroom staff can possibly deliver through manual effort:-
(i) alerts the user of any technical breach of SAR at the time of the posting;
(ii) keeps tight audit trails of financial transactions, including any adjustments or corrections made to the data (unlike manual records that can be erased or amended without trace);
(iii) performs the 3-way cashbook / client ledger / client bank account reconciliations recommended in this article and generates the requisite bank reconciliation reports, as well as the cashbook and client ledgers for easy reference;
(iv) possesses powerful query, filter, sorting and reporting functionalities that will help you to access pertinent financial information, zoom in on any potential risk situations and generate comprehensive financial reports for proper practice management;
(v) generates the Client Account statements that we recommend that you send to your clients regularly.
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How We Can Help
The Bizibody bookeeping team has over 25 years of bookkeeping and business experience. We undertake accounts set-up and bookkeeping for law firm clients in Singapore to ensure compliance with the strict regulatory safeguards for lawyers handling client funds under the Solicitors Accounts Rules.
In order to accomodate the needs and bugets of our clients, we offer a range of different bookkeeping options. These include insourced onsite bookkeeping arrangements where dedicated staff will write up your books at your office so that you need not send your source documents to our office.
