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About 15 years ago, Jeremy Downham of The Law Factory and I were asked to visit a struggling law firm where the accounts had been very much mis-managed and from a financial perspective the firm was haemorrhaging money. The senior partner was incredibly stressed, and this feeling then spread across the firm. Having the accounts in disarray led to SRA Accounts Rule breaches across the board and placed a significant risk to client money. As a result of their recent accountant’s report, the SRA had also paid the firm a visit, rubbing salt in the already gaping wounds. As a result of this visit, we were asked to attend to determine what the issues were and put them right.
During the SRA audit, the SRA inspector asked “Where is your legal cashier?”, to which the Senior Partner replied, “I can’t afford one.” The SRA inspector raised an eyebrow and very matter-of-factly stated “you can’t afford not to have one!”
Jeremy and I found this exchange incredibly poignant, especially as we were building a company based on the added value of the legal cashier/bookkeeping team.
The question therefore is, how much do you value your accounts department? Do you make use of the skills a trained legal cashier provides? Does your legal bookkeeping team include everything that the business needs in their monthly procedures?
Quite often the answer we come across when asking this question is; “I don’t know.” That is something that I hope this article will help with.
So what can we expect from a good legal cashiering team?
The basics! Postings and reconciliations, month-end reports, VAT, annual reporting, compliance reports.
It’s easy to say “the basics” but the basics are the bedrock for everything else, all the reporting, management accounts, annual reporting, audits all come from the basics. A good legal accounts department therefore must have solid systems and procedures to help get “off-the-blocks” and deal with the basics efficiently. The systems and processes must work for the cashiers but fundamentally must also work for the practice and be SRA Accounts Rules compliant. Source information is crucial and its usage and storage is the height of importance.
A step further: Once the accounts team can do the basics, can they be relied upon to set up bank transactions to be authorised by the signatories? This is a great way of staying compliant with the SRA accounts rules. We have solid procedures for requesting transactions, the requests are then scrutinised heavily by the accounts department and double checked for compliance. Then set up and re-checked by the signatory before the payment debits the account. This gives one source for all bank initiations, and every transaction has been filtered through the legal accounts department beforehand.
If nothing else, just having these two aspects put together with sold procedures is a huge plus for any law firm and ensures that if there is a question about any transaction, it goes to the legal bookkeepers who can explain it and help decide on what comes next.
So having the foundations of great procedures, safer transactions, accurate entry and reconciliations leads to everything else. The first being an accounts department that continuously monitors everything. A good legal cashier will always check and re-check the accounts and accounts requests to ensure accuracy and compliance. Even with the best procedures, a good legal accounts department is never satisfied and will not be complacent. Complacency leads to things being missed and that’s where mistakes are made and breaches occur. Continuous monitoring is crucial. Below are some example areas:
- Quality of source information.
Is the quality in decline? Is there a person or department not following the procedures? Does the issue of source information quality need to be raised/addressed? - Procedure/Process Efficiency.
Are the systems still fit for purpose? Could they be upgraded/amended to make them more efficient but equally compliant with SRA Accounts Rules? Have things changed within the firm which would instigate a change in operations? - Client balances.
These should be checked very regularly. Minimum of a once per month full run-through. They should be looking for; any breaching balances (office credit/client debit), any residual balances where monies have been held on client account a long time and have not moved, any anticipated/unpaid disbursement balances, any aged debt. Anything showing as in breach should be rectified immediately and then an investigation undertaken to determine why the breach occurred. All fee earners should engage with monies they hold for clients and state why it is there or return it as soon as possible after the case ends. Disbursements must be reviewed to ensure that we are not holding client monies in office account or that they have been paid and the monies are not sitting erroneously in client account awaiting transfer.
Beyond: Once the firm has good procedures in place where the general day to day accounts work with minimal risk to client monies and SRA Accounts Rules compliance, the accounts department can then take things a step further. As I mentioned earlier, the basics are the bedrock on which further procedures are based, followed by the importance of key performance indicators and better business management. There are two key areas that the cashiers will focus on. Client matter accounting and management reporting.
The client matter accounting is where the legal accounts department will review all aspects of the client ledgers and report to the fee-earners, working directly with them to undertake further actions, such as:
- Residual balances on client account: Can these be returned or is further work required?
- Disbursement balances: Are these covered by what is in client account or are disbursements due for payment?
- Aged debt: Who owes money and why? Are we following credit control procedures?
- Matter closure: Which files can be closed so we have an accurate live list?
This kind of client matter management should be a part of every law firm’s accounting management protocols to ensure that the fee-earner has a firm grip on their files and “no stone is left unturned”.
The management accounts are slightly more nuanced and are generally tailored to each firm depending on what the management wants to see or will find useful. Good legal cashiers will be able to provide this information in a succinct manner with minimal paperwork. In my experience, stacks of reports every month usually result in them not being read, so summaries/dashboards etc are usually the way to go. There are key areas however that will need to be reviewed:
- Profitability: This needs to be looked at month-on month to determine ongoing success.
- Budgets: Does the firm have one and is it sticking to it?
- Cashflow: How much money does the firm actually have and what is the cashflow prediction for the following month?
- Aged debt: Who owes and why? What is being done about this. Are there any patterns?
- Lock up: How long is realisable value being held in work in progress and debtors. Can this be worked on, to lower the lock-up days?
All the above is linked to financial efficiency and responsibility. The legal cashiering team should look to push this where possible so that management has greater visibility on the finances of the business as a whole.
It is crucial the recognise that the legal cashiers at a law firm cannot be just anyone. Specialist bookkeepers are essential and hold tremendous value for solicitors’ practices from an SRA Accounts Rules compliance perspective through to a financial management and profitability perspective.
If in doubt, remember that you cannot afford not to have one!
Alex Simons MAAT
New Business & Outsourced Accounts Manager
The Law Factory LLP
