The Audit Trail – Why It Pays to be Sherlock Holmes and not Inspector Clouseau.
When it comes to keeping track of the Client Trust Account, many attorneys could think of a million different tasks they would rather do instead. This is entirely understandable, you’re busy, and maintaining an audit trail can be overwhelming — especially if you don’t have a strategic method to keep on top of it all.
So what is an audit trail, and why is it so important to keep accurate records?
What Is an Audit Trail?
Put simply; an audit trail is a set of records that catalog accounting procedures and provide accurate documentation which can be used to provide proof of compliance and operational integrity.
An audit trail should be precisely that; a trail of the transaction that you can follow from start to finish, and should include the following:
- how much the retainer was for
- which client the retainer belongs to
- the date you received the retainer
- what the retainer is for
What Is the Best Way to Create an Audit Trail?
When managing their own audit trails, attorneys financial records typically fall into one or two categories — an erratic disorganized audit trail that can create problems, or a well organized and strategic audit trail that can be quickly followed. We will refer to these two different approaches as the Inspector Clouseau method and the Sherlock Holmes method.
The Inspector Cousteau Method in Action
A brilliant attorney meets with his new potential client, Mr. Big Bucks, on April 1st. At the end of the meeting, Mr. Big Bucks is thoroughly impressed and decides to retain the attorney, paying him a $5,000 retainer in cash.
Elated to have secured his new client, and distracted by his son’s trombone recital he has to attend, he decides to place the $5,000 retainer in his desk drawer for safekeeping. Two weeks passed, and the attorney finds the $5,000 retainer in the drawer where he left it. Unfortunately, the attorney has no recollection of where the money has come from, so he promptly deposits the cash into his IOLTA (Interest on Lawyer Trust Accounts) account, without any notation on the deposit slip as to who the client is, what it is for, or the date the funds were received.
When the end of the month comes along, the attorney’s accountant has no idea where to credit these funds and asks the attorney if he knows. The attorney then proceeds to spend 2 hours of his day rummaging through various client’s notes and decides with 85% confidence that the funds belong to Mr. Big Bucks.
This is an example of an ineffective and weak audit trail.
The Sherlock Holmes Method in Action
A diligent attorney meets with his new potential client, Mr. Big Bucks, on April 1st. At the end of the meeting, Mr. Big Bucks is exceptionally impressed and decides to retain the attorney for his services, handing him a $5,000 retainer in cash.
The diligent attorney gives Mr. Big Bucks a receipt for the funds on firm letterhead, stating the date, the amount received and the matter concerned. Since this was the diligent attorney's final meeting of the day and he was late for his son’s trumpet recital, he left the office after bidding farewell to Mr. Big Bucks.
The next day, the diligent attorney promptly deposits the money into his IOLTA (Interest on Lawyer Trust Accounts) account. The bank deposit, along with the receipt, is scanned and uploaded onto the law firm's practice management software.
At the end of the month, the law firm’s accountant has a clear and concise record of the transaction and is easily able to post the retainer to the client ledger and reconcile to the bank account.
This is an example of a strong and effective audit trail.
The Bottom Line
If your law firm is using the Sherlock Holmes method of recording your transactions, you can ensure that each transaction is well documented, from the receipt and all necessary details, to the client ledger and finally the reconciliation to the bank.
When it comes to law firms accounting and record keeping, it makes sense to work smarter — not harder. By ensuring a reliable audit trail from the beginning, there is no need for guess work. You can be confident that you and your accountant are posting the transaction record correctly and efficiently.