Accounting and reporting

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21 Feb 2022

It’s all about the money and the metrics….

For the last two weeks we have been speaking about the foundations of a business (and specifically a legal practice). We have emphasised the importance of having a strong foundation in order to operate a business, at any level, effectively and in turn, being successful.

But what is a foundation really? According to the Oxford dictionary, a “foundation” is an “underlying basis or principle”. For example, “this idea is the foundation of all modern economics”. And that is what we have been trying (our best) to drive home. Setting out the underlying principles that will make your practice successful.

Whilst this series of topics may not be the most cutting edge (we agree), they are (actually) the basis for and the underlying principle of effectively running your legal practice (and business). And as your trusted legal tech providers, we believe that it is important to perfect the basics first, before proceeding on to some of the more complicated and technical “added features”.

Things we at AJS can not only help you with, but are both excited and eager to show you what we can do. So, trust us, we have your best interests (clearly) at heart.

A quick recap/intro…

We started off our “foundational series” with discussing Practice Management and some of the basic tools that you require in order to effectively manage your legal practice. So important were these foundational principles that we did a Part One and a Part Two, just to drive home the point. And we are not done yet.

Sure, we have Practice Management covered but what about the rest of the foundational principles? Because surely there is more to effectively managing your legal practice (and business) than just basic practice management tips? You bet there is!

This week, we are focusing on two aspects which are equally as important (or should be) to your legal practice. One topic is fundamental to practicing as an attorney under the Legal Practice Act 28 of 2014 – namely trust accounting.

The other topic is tantamount to knowing exactly how your legal practice is performing, at all times. By staying on top of your law firm’s most important metrics, you can be certain of what’s working, and identify what changes need to be made. What can we be talking about? Management reporting. Obviously.

As we said last week, (something which we believe bears repeating) – how you think of managing your legal practice needs to change. Legal practitioners need to start running their legal practice the same way they would any business, because again, that is what your legal practice is – a business.

The same business principles will therefore apply to your legal practice, which is achieving the desired outcome within an agreed timescale and according to the projected or agreed budget. And those principles will ring true, whether it is for a legal practice or a business. Time, cost and quality are the building blocks of every project, business and legal practice alike. Remember that.

Central to the concepts of time, cost and quality come down to truly understanding both the financial side as well as the metrics that reflect the performance of the business/project/legal practice. This is where trust accounting and management reporting step in.

As we go through these topics, we would like you to, once again, keep the following quote in mind – “Law is not a profession at all, but rather a business service station and repair shop” – Adlai E Stevenson.

Trust accounting

A cornerstone of legal practitioners is the client-centric approach taken on all matters involving the public, their clients and the law.

And a lot of this stems from being able to trust (excuse the pun) your legal practitioner to handle both your money and your affairs in a manner befitting someone in their position. Trust accounting therefore fits squarely within this realm of both trust and serving the public, their clients, and the law responsibly. And of course, legally.

What is a trust account?

A trust account refers to a bank account opened by a legal practitioner (who is in possession of a Fidelity Fund Certificate) to receive or hold funds or property belonging to another person or a deposit on account of fees or disbursements in respect of legal services to be rendered. The attorney acts as a custodian of these funds and invests the money in accordance with their clients’ wishes. The funds are only accessed by the attorney once legal service have been provided or expenses have been incurred on behalf of their client.

What are the practicalities here?

The Legal Practice Act requires every legal practitioner to effectively operate a trust account, which must be kept at a bank with which the Legal Practitioner’s Fidelity Fund has made an arrangement (Section 63(1)(g).

Note: A legal practitioner may not deposit money, nor invest money in accounts held at a bank which is not a party to an arrangement as provided for above, unless prior written consent of the Fidelity Fund has been obtained.

With reference to Section 84 and 86 of the Legal Practice Act as well as to the Rules at Rule 54.14 –

  • The legal practitioner must deposit any money (held by such practice on behalf of the person) as soon as possible after receiving same, into the trust account.
  • The legal practitioner must deposit any money (held by such practice on behalf of a person) as soon as possible after receiving same into their trust account. In addition, they may (of their own accord) invest in a separate trust savings account or other interest-bearing account any money which is not immediately required for any particular purpose. Or, if instructed to do so by the payee, open a separate trust savings account or other interest-bearing account for the purpose of investing any money deposited in the trust account of that practice, on behalf of such person (the proviso being that the legal practice exercises exclusive control as trustee, agent or stakeholder or in any other fiduciary capacity).
  • If any interest is accrued on the trust bank accounts, the legal practitioner is obligated to pay over any and all interest generated or accruing on the separate trust savings or other interest-bearing account opened by the legal practitioner to the Fidelity Fund. Additionally, 5% of the interest generated on an investment account opened on the specific instructions of a client is payable to the Fidelity Fund. The balance of this interest must be paid to the client.
  • But it must be kept in mind that a legal practice must ensure that the total amount of money in its trust banking account, trust investment account and trust cash at any date shall not be less than the total amount of the credit balances of the trust creditors shown in its accounting records.
  • If a legal practitioner is not in possession of a Fidelity Fund Certificate, they (or any person employed by that legal practitioner) may not receive or hold funds or property belonging to any person, nor may they take a deposit on account of fees or disbursements in respect of legal services to be rendered.
  • So, it is safe to say that having both a Fidelity Fund Certificate and operating a trust account are fundamental to both operating and effectively managing a legal practice.

Note: the capital amount deposited by a client into the trust account of an attorney remains the property of the client. The attorney merely is a custodian of the funds and invests the money in terms of the clients’ wishes. The attorney will only be entitled to access the funds held in trust once he has provided legal services to the client or has incurred expenses on behalf of the client.

Getting a Fidelity Fund Certificate

In our article Going out on your own – Part One, we discussed the basic principles of completing a legal practice management course in order to receive a fidelity find certificate. They go hand-in-hand (as if that was not already obvious).

In short –

Legal practitioners practicing for the first time must complete a  legal practice management approved course (referred to as practice management training or PMT) as offered by Legal Education and Development (L.E.A.D), within the period of one year after the date on which he or she was required for the first time to be in possession of a fidelity fund certificate. Payment of a fee as determined by the Legal Practice Council will also need to be made. In the case of a first-time applicant (requiring a fidelity find certificate), they will need to submit proof to the Legal Practice Council that they have indeed completed the legal practice management course (proof of completion must accompany the application for the fidelity find certificate).

If an applicant was in possession of a fidelity fund certificate the previous year, the certificate of an auditor – who undertook an audit of the trust account bank accounts for the year ending immediately prior to the application – must have been submitted (or proof of such submission) must accompany the application.

Note: a Fidelity Fund Certificate is valid until 31 December of the year in respect of which it was issued.

Accounting on a trust account

According to Section 87 of the Legal Practice Act, a legal practitioner must immediately report and account (in writing), to the Legal Practice Council the total amount held in a trust account bank account and money held as trust cash.

In addition, when it comes to reporting to the Legal Practice Council regarding non-compliance, Rule 54.14.10 finds application –

“A firm shall immediately report in writing to the Council should the total amount of money in its trust bank accounts and money held as trust cash be less than the total amount of credit balances of the trust creditors shown in its accounting records, together with a written explanation of the reason for the debit and proof of rectification”.

Equally, and unless prevented by law from doing so, every legal practitioner is required to report to the Legal Practice Council any dishonest or irregular conduct on the part of a legal practitioner in relation to the handling of or accounting for trust money on the part of a trust account.

It therefore stands to reason that a proper (and reliable) accounting programme for your legal practice is an absolutely necessary and crucial tool. At AJS, our legal tech is designed specifically to assist you with both your trust and business accounting concerns. We have three amazing software solutions that can be tailor-made to suit your practice –

  1. AJS Express – a web-based, flexible, full featured system that allows for document management, time recording, contracts management, FICA management and an asset register, to name but a few things;
  2. AJS Pro – a web-based, flexible full-featured accounting and practice management system geared towards mid-size firms, that also includes an impressive integrated process automation, user task and notification tool;
  3. AJS Enterprise – a comprehensive legal and professional accounting software package serving mid-size, large and major international firms with an impressive integrated process automation, user task and notification tool.

It should be noted that in addition to the extremely capable software offered by AJS (as per the above), part of our standard offering includes a “7 column ledger system”. Our offering is made up of trust debit, trust credit, trust balance, business debit, business credit and business balance columns, all resulting in an “overall balance” overview. This, inevitably, gives users the ability to view trust and business balances simultaneously and on any given matter (how handy is that?)

Our very nifty ledger system allows for added system integrity and accuracy and is favoured by auditors of the Legal Practice Council due to the added integrity it offers.

Management reporting

Management reporting is kind of like a source of “business intelligence” that helps business leaders make more accurate, data-driven decisions. And law firms are no different. In order to run a successful law firm (and therefore a business) you need to know how your legal practice is performing (really). By tracking your law firm’s most important metrics, you can stay on top of what’s working, and identify what changes need to be made.

Wait, what are metrics?

Metrics (especially in a business sense) are quantifiable measures that are used to track business processes in order to judge the performance of your business (ditto for your legal practice). There are so many variations of these metrics because there are so many different kinds of businesses, each with different processes (again – ditto with legal practices).

Management reporting involves collecting data (or metrics) from various departments of the company in order to track key performance indicators (KPIs). These metrics show the worth of your legal practice/business over a specific time period by disclosing operational information. Reporting, whilst tedious and monotonous (except if you use AJS products) empowers decision-makers to find the right path to increase operating efficiency and make pertinent decisions to remain competitive (especially in today’s highly saturated and technologically advanced markets).

But with so much already on your plate (as a hectically busy legal practitioner), running reports that don’t serve or are not relevant to your long-term goals, seems like a huge waste of time and energy.

Therefore, limiting the amount of time you spend on reporting is crucial. Narrowing down what is important for your particular legal practice will help immensely with this. Here are three examples of some reports you may find worthwhile running –

AJS clients’ favourite reports

Our clients find that the following reports (which we offer as standard in our software) have made their reporting an absolute breeze –

  1. Revenue report – with this report, one can focus on the amount of revenue that is being brought in. Specific attention to reports such as total revenue billed over the month compared to what was actually collected, your net overhead, average fee per matter and most revenue-producing marketing sources are crucial when trying to make informed decisions;
  2. The new management report – consolidates all the most relevant (popular) information such as debtor ageing (who owes you), creditor ageing (who you owe) as well as who your top 10 clients are;
  3. Ageing report – offers up to the minute, time and fee summaries per user (for management);
  4. Work in progress (WIP) report– shows all work that is currently still in progress and which amounts are unbilled (per user). The calculated value of unbilled work in the WIP report is vital to your practice as it gives you a clear understanding of the (actual) overall value of your files/matters/cases/projects within your practice. Without this, it will be impossible to understand your businesses (legal practice’s) true value, and
  5. Client report – lists the top 20 or 50 clients of your legal practice (and this becomes an extremely valuable tool when it comes to client relations).

The goal here is to keep everyone on track and taking the necessary swift corrective action (such as incorporating the correct legal tech into your practice), where needed. You need to stay on top of all the “goings on” in your legal practice so that you can stay ahead of your competition.

AJS has a wide range of products that not only assist with accounting (both business and trust accounting) but can also assist with drawing reports with the touch of a button (thereby reducing wasted time in drawing up a report that is meant to help you boost productivity – ironic really).

Being an efficient, affordable and reliable legal practice has never been easier. And has never been more necessary.

As Thomas A. Edison said – “There’s a way to do it better, find it”.

Just because it is a foundational principle, doesn’t mean it cannot be improved upon. So, do that – seek to continually improve your legal practice – incorporate legal tech to become more efficient, accurate and affordable, comply with legislation and make an effort to boost your revenue, your productivity and client retention in order to build a successful operation.

If you have questions on either trust accounting or management reporting, get in touch with AJS today to see how we can support you.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
Alicia Koch

Alicia Koch is an admitted attorney with over 10 years PQE. She has worked in law firms, has had her own legal consulting company and has been an in-house legal... Read more about Alicia Koch

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