This Is Your Sign to Get a Good Bookkeeper

Many legal ethics issues are interesting to lawyers and non-lawyers alike. There’s the “buried bodies case”, where two lawyers’ commitment to maintaining client confidentiality (in horrifying circumstances) destroyed their practices, sparked harassment and death threats, and caused them to be criminally charged. There’s the lawyer who gossiped with his spouse about his clients’ affairs, only for the spouse to report the lawyer to the Law Society for breaching confidentiality when their marriage broke down. My students are always engaged when we have in-class debates about the good character requirement, or the (lack of) regulation of lawyer-client sex.

This column, on the other hand, is about an issue that is uninteresting to lawyers and non-lawyers alike: financial recordkeeping.

Bear with me.

Our professional obligation to maintain complete and up-to-date financial records is decidedly unsexy. But if you have a trust account, it is incredibly important.

This is for two reasons: one is in the public interest, and the second is in a lawyer’s self-interest.

Reason #1 you should care about your books and records: Honouring public trust

Practising law is a privilege. A licence to practise gives lawyers significant power—including the ability to be implicitly trusted to hold substantial sums of others’ money and to disburse it when asked, to whom we are directed.

There likely are not many strangers you would trust to hang on to your life savings for a little while. But this is precisely what real estate lawyers (among others) effectively ask their clients to do, and what their clients agree to do—because the clients trust that the lawyer will honour their professional responsibility to safeguard the funds and return or disburse them as and when required.

“Illegal disbursements” from trust accounts, that is, the use of funds in trust for personal expenses (and sometimes lavish luxuries) have been in the news a fair bit lately. (This is the closest to salacious a discussion about maintaining proper financial records is going to get.)

But this sort of deliberate dishonesty—theft of client funds by those who were entrusted to keep them safe—is thankfully relatively rare.

It is much more common to see irregularities in a trust account because of an honest mistake, or because a third party sought to use a lawyer’s trust account to perpetrate a fraud (without the lawyer’s knowledge).

To clients, however, the reason for irregularities in a trust account probably doesn’t matter—what matters is that their money is present and accounted for.

Maintaining your books and records as per Law Society requirements is the way to ensure this.

In Ontario, this involves[1] keeping detailed records of all trust account transactions (including the amount, date, payment method, payor/payee, purpose of funds, and the client to whom the transaction relates); keeping a ledger of trust funds for each client; and doing a monthly reconciliation confirming that the balance in trust as per your client ledgers (assembled together as a detailed listing of the amount in trust for each client) is equal to the balance in trust according to your bank statement.

The monthly trust comparison is crucial, because mistakes happen. Indeed, the following have all happened to me personally:

• Inadvertently reimbursing business expenses charged to a personal credit card from the trust account instead of the general account (pro tip: make sure your trust cheques and general cheques look different and are clearly labelled—and consider keeping trust cheques in a different part of your office than the general cheques to minimize the chances of a mix-up).
• The bank withdraws service fees from the trust account, despite specific instructions that all fees should be taken from general (this has happened to a number of my clients as well).
• Recording that a bill has been paid from trust, but forgetting to actually move the funds from trust to general.
• Typos in data entry, so the wrong amount is withdrawn from trust or recorded as having been withdrawn from trust.

If you are keeping up with your monthly reconciliations, these errors are easily caught and can be rectified promptly, so you can be confident that all your clients’ money is accounted for. (As per LSO By-Laws, this should be done by the 25^th of the following month.)

But the more time that passes between an error occurring and being discovered, the harder it is to identify what went wrong and how to fix it. And, in the meantime, you risk being in breach of your duty to maintain sufficient funds to honour all trust obligations.

Readers might reasonably note that sometimes clients keep money in trust for ages, and as a practical matter a small shortfall for a short period of time is unlikely to hurt anybody, so long as it’s rectified before the client funds are needed. This may be true—but it is also beside the point.

Honouring our obligations to maintain proper financial records is part of the self-regulation bargain; to paraphrase Spider-Man, with great power comes some responsibility. We ask clients to trust us to hold on to significant sums of money; they should also be able to trust that we will account for it.

Reason #2 you should care about your books and records: Self-defence

I noted earlier that mistakes and being “duped” by unscrupulous third parties appear to be much more common causes for trust account irregularities than a lawyer’s deliberate dishonesty.

It’s not uncommon, however, for the Law Society to presume dishonesty when a licensee cannot provide a credible explanation of what happened, supported by compelling evidence.

This is where your compliant books and records come in.

In all likelihood, the Law Society will review your records at some point (whether pursuant to its powers to conduct a random (or targeted) spot audit, or to address a client or third-party complaint).

Let’s assume that you haven’t maintained perfect records—after all, the requirements are quite robust, and from time to time a busy lawyer is going to miss something. In all likelihood, the Law Society is going to identify a deficiency or irregularity.

What happens next will depend on the nature and severity of the issue, as well as the lawyer’s ability to explain and rectify it.

It’s difficult to make a serious, irreversible error with your trust account if you are keeping up with your books and records. Your reconciliation and review catch any issues, and you can take steps to fix them promptly.

But serious problems can and do arise for lawyers who do not keep up with their financial recordkeeping. Without these regular touch points, lawyers miss early signs of potential fraudulent activity, recurring charges on their trust account that add up to a significant deficit in client funds, or administrative errors that can look like misconduct (e.g. if money is transferred from trust to pay a bill that was inadvertently not sent to the client).

The problems are compounded if non-compliance with recordkeeping requirements has been going on for months or years—and it’s a massive headache to try to piece things together after much time has passed.

I was inspired to write this column because I am currently assisting a handful of clients who are dealing with financial records issues with the Law Society. The issues arose in different ways and are likely to result in a wide range of consequences, from non-disciplinary regulatory guidance to serious disciplinary penalties, potentially including the loss of a licence to practice law.

But these matters all have one thing in common: the lawyers had fallen far behind on their financial recordkeeping, and found themselves scrambling when the Law Society came calling.

It’s time to hire a good bookkeeper

To be clear, I am not saying that you should personally maintain all your financial records.

To the contrary—unless you are an accountant as well as a lawyer, and you have an abundance of time on your hands, you should not do your own bookkeeping.

Generally speaking, the hourly rate of a good bookkeeper is going to be less than that of a lawyer in private practice. And they will do the work more quickly to boot. As a value proposition alone, hiring a bookkeeper is the obvious choice. It’s also worth noting that a good bookkeeper actually has training in these matters whereas (unless things have changed significantly since I was in law school) lawyers do not.

Ultimately, as the lawyer you bear professional responsibility for all aspects of your practice, so this is not something you can fully contract out.

You should review the Law Society’s requirements and guidance and understand your obligations so you can competently review the records your bookkeeper prepares, ask questions if something is unclear, and follow up if something is incorrect or missing. This is entirely manageable, even if (like me) your undergraduate degree was in theatre and you haven’t attended a math class since Grade 11.

You may have noticed I keep using the term “good bookkeeper”. What I mean is you should hire a professional who has experience working with law firms and satisfying all Law Society requirements. Get recommendations from colleagues and ask for references. There are many excellent bookkeeping/accounting firms who are well versed in Law Society recordkeeping rules and who can do the work on contract and remotely.

Even once you have hired a good bookkeeper, your work is not done—you have to stay on top of your obligations, including by reviewing the monthly records (every month) and correcting any issues they uncover. If you encounter a problem with your bookkeeper—such as repeated lengthy delays in completing your trust reconciliations—fix it promptly or find someone else. If your bookkeeper becomes unavailable, find a replacement—believe it or not, I have seen multiple lawyers innocently miss indicators of fraud because they fell behind on their recordkeeping while their trusted bookkeeper took a medical leave.

Running a law practice is not easy, and many lawyers let their administrative obligations slip when their file work is keeping them busy. This is a pattern I see over and over in Law Society investigations and discipline cases. And it is largely avoidable.

Don’t let this happen to you. Hire a bookkeeper and get your records in order before the Law Society comes calling.

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[1] This is not an exhaustive list of financial recordkeeping requirements—see (for Ontario) LSO By-Law 9, Part V for more.