Internal Controls are processes you put in place to help you run your practice more efficiently by reducing the risk of errors and fraud.
This guide is designed primarily for sole practitioners and lawyers in small law firms who may not have the resources to implement a formal control structure. However, many of these suggestions can be used in any size law firm. Even with limited resources, you can reduce the risks by:
- knowing how your law firm’s accounting system works
- being familiar with the Law Society’s record keeping requirements in By-Law 9
- knowing how to set up and maintain proper books and records
- being aware of the Law Society’s money handling requirements in By-Law 9
- being actively involved in the financial activities of your firm
- supervising the accounting and finance functions of your firm
You can easily implement many of the following recommendations in your firm. Please note that while many of these recommendations are offered as suggestions, some are Law Society requirements and must be implemented. You should be familiar with the Law Society’s By-Laws and the Rules of Professional Conduct to ensure your firm’s record keeping and money handling procedures are in compliance with them. You can view the Law Society’s By-Laws and the Rules of Professional Conduct at www.lsuc.on.ca.
To ensure clients’ money is promptly and accurately recorded in your firm’s financial records in accordance with By-Law 9.
- you are unable to meet your client trust obligations
- trust transactions are allocated to the incorrect client trust ledger account
- transaction errors go undetected.
- Are your trust receipts and disbursements always up to date?
- Do you ensure that the trust comparison, which compares the reconciliation of the trust bank account and the client trust listing, is prepared within 25 days of each month end?
- Do you review the trust comparison, trust bank account statements, reconciliations and the client trust listing each month?
- When you review the monthly trust comparisons do you ensure that:
- The reconciliations have been prepared by the 25th of the following month?
- Reconciling items are listed individually and each one is clearly explained and can be traced to the bank statement?
- The deposit book confirms any outstanding deposits listed on the trust bank reconciliation were deposited the next banking day?
- Reconciling items, except outstanding cheques, are cleared promptly and do not recur the next month?
- Uncashed cheques that are outstanding for more than two months are followed up?
- Stop payments are requested on stale dated cheques over six months old, the cheques are reversed, the client trust liability reinstated in the clients’ trust ledger, and the cheque reissued if appropriate?
- The balance held in trust for each client on the client trust listing is correct?
- There are no overdrawn client trust ledger accounts?
- Funds in trust for completed matters have been billed to the proper clients, and the funds either transferred to your general account or returned to the client as appropriate?
- You have followed up on all client trust ledger account balances that have had no activity in the past twelve months?
- All funds in the trust account are allocated to a client and that there are no miscellaneous or suspense accounts or accounts in your name or the firm’s name?
- Do you periodically check the clients’ trust ledger looking for unusual or incorrect items?
- Do you ensure that you have adequate documentation, for example, the client’s written instructions, to support the transfer of trust funds from one client's trust ledger account to another client’s trust ledger account?
- Are all transfers of funds between client trust ledger accounts recorded in a trust transfer journal as required by section 18(4) of By-Law 9?
- Does your trust bank statement clearly indicate that it is a trust account?
- Have you given a written direction to your financial institution to pay all interest on your mixed trust account directly to The Law Foundation of Ontario as required by section 57.1 of the Law Society Act?
- Have you advised your financial institution in writing to deduct any service charges for your mixed trust account from your general account?
- Have you sent a completed Form 2: Report on Opening a Mixed Trust Account to The Law Foundation of Ontario within 30 days of opening each mixed trust account?
- Have you sent a completed Form 3: Report on Closing a Mixed Trust Account to The Law Foundation of Ontario within 30 days of closing each mixed trust account?
- If you make automatic banking machine (ABM) deposits, do you always print out the ABM deposit receipts, attach them to your deposit book, and record the details of the deposit (i.e. source of funds, client reference and amount) in your deposit book?
- Are credit card and debit card receipts from clients paying retainers for future fees and disbursements always deposited directly to your trust account and the details recorded in your trust deposit book?
- Are credit card and debit card receipts from clients paying your invoices always deposited directly to your general account and the details recorded in your general deposit book?
Segregation of Duties and Handling of Money
To ensure cash and cheque receipts are properly controlled and safeguarded.
- funds received are lost
- funds received are not recorded
- funds received are stolen
- Do you ensure that the individual who opens and reviews your firm’s mail, stamps each cheque with a restrictive endorsements such as “deposit only” to reduce the likelihood of fraud?
- If opening mail and depositing funds is assigned to staff in your firm, do you ensure that one person opens the mail and a separate person deposits funds?
- If a staff member deposits the cash and cheques, does another person enter the receipts in the accounting records?
- Do you ensure cash and cheque receipts are deposited by the end of the next banking day and if they are not deposited immediately that they are locked in a safe location?
- Do you review the stamped deposit slips to ensure each cheque is listed by source, client reference and amount?
- Do you issue pre-numbered receipts to clients with a copy to accounting staff for all cash and cheques received to:
- provide clients with proof of payment?
- ensure funds are posted to the correct client's account?
- reduce the risk of theft?
- Does a person, other than the person who issues receipts for cash or cheques, verify the numerical sequence of receipts to ensure that all funds receipted are also recorded in the accounting records and deposited in the bank?
- If you are a partner in a law firm, do you have management controls in place to monitor the handling of money to:
- scrutinize your firm’s trust and general bank account statements and returned cheques for any unusual transactions?
- assess the reasonableness of the trust bank account balance(s)?
- review the monthly trust account reconciliation and list of outstanding items and follow up on items over two months old and any stale-dated cheques over six months old?
- review the client trust listing for overdrawn and inactive accounts and any accounts not in the name of a client?
- If your firm uses petty cash, have you established a reasonable dollar amount for your firm as petty cash?
- Do you require pre-numbered written requests supported by original receipts for petty cash?
- Does the sum of petty cash on hand, plus the amounts in the written requests/receipts, always total your firm’s established petty cash amount?
- Do you ensure the petty cash account is reconciled monthly to the requests and receipts for petty cash by a person independent of the person who handles the petty cash?
- Does your firm have a policy setting out what types of expenditures are acceptable for petty cash disbursements?
To ensure that all withdrawals of money from the trust and general bank accounts are for goods and services properly billed and authorized and that trust money is properly disbursed in accordance with By-Law 9.
- money could be erroneously or fraudulently withdrawn from bank accounts
- funds could be withdrawn from the incorrect client trust ledger account
- trust accounts could be overdrawn
- payments could be made twice
A) Cheque Preparation Policies
- Are original copies of invoices stamped "paid" to prevent invoices being paid more than once?
- Are only original invoices, and not photocopies, required as backup for cheques?
- Are your trust account cheques clearly marked “trust” and your general account cheques marked “general”?
- Are your trust cheques and general cheques different colours to avoid confusion?
B) Cheque Signing Policies
- Do you review the validity and reasonableness of cheques before signing them?
- Do you check that there are adequate trust funds available for the related client before signing cheques?
- Do you review the supporting documentation prior to signing cheques to ensure the service was provided and billed, or the disbursement is proper?
- Do cheques issued on behalf of clients include a client reference to ensure the disbursement is allocated to the proper client in your disbursement journal and client ledger?
- Do cheques made payable to financial institutions include details of the transaction, for example, a mortgage number?
- Do cheque stubs have sufficient detail to provide a trail to supporting documentation?
- Are trust cheques always signed by at least one licensee of the Law Society who is permitted to hold trust funds?
- Do you have a practice to never sign blank cheques?
- If you are in a partnership, do cheques above a certain dollar limit require more than one partner’s signature?
- If you are a sole practitioner, have you made arrangements with another licensee of the Law Society who is entitled to hold trust funds, to sign cheques on your trust account if you are unable to do so?
C) Internet Banking and Automated Banking Machines (ABM)
- If you use Internet banking to transfer trust funds, do you ensure your firm is following the procedure set out in section 12 of By-Law 9?
- Do you prepare a proper audit trail for electronic transfers, for example:
- does each electronic transfer start with a properly numbered, completed, and signed Form 9A - Electronic Transfer Requisition?
- does each electronic Teranet withdrawal from a special trust account for registration fees and Land Transfer tax, start with a properly numbered, completed, and signed Form 9B - Authorization for Withdrawal by Teranet?
- do you print the bank confirmation for each electronic transfer and Teranet withdrawal, compare it to the requisition details for accuracy, then sign and date the confirmation?
- Do you keep all electronic transfer requisitions (Form 9A), Teranet withdrawal requisitions (Form 9B), and bank confirmations in numerical sequence with your accounting records?
Note: By-Law 9 and Forms 9A and 9B can be viewed on the Law Society website at: www.lsuc.on.ca
- If your financial institution offers automatic banking machine (ABM) access, have you carefully read the ABM agreement and made sure you understand, and are willing to accept, the risks and liabilities involved before signing the agreement?
- Have you confirmed that the ABM agreement for your trust account does not allow any funds to be withdrawn unilaterally by your financial institution?
- Do you ensure that trust funds are never transferred or disbursed from an ABM?
- Is the ABM access card for your trust account encoded for deposits only?
- Do you keep your passwords to access and authorize ABM and Internet transactions confidential?
D) Cash Refunds
- Do you prepare a proper audit trail when making cash refunds (such as when required by section 6(e) of By-Law 9), for example:
- Always obtaining a detailed receipt from the payee?
- If using a withdrawal slip, requesting a duplicate copy of the withdrawal slip for your records?
- If issuing a cheque payable to yourself or your firm, noting the client file number and that it is a cash withdrawal?
- Do you obtain written instructions from the client on the method of refunding
To ensure that billings to clients for services rendered, are prepared promptly and accurately, and are properly recorded in your books and records
- legal services not billed
- invoice delivered to client but legal services not provided
- errors in invoices to clients
- revenue recorded in incorrect period
- invoice to client posted to incorrect client ledger account
- Do you discuss the fees for legal services and the expected disbursements with your client at the start of a matter?
- Do you confirm all fee arrangements in writing for all services in easy to understand language?
- Do you bill work-in-progress within a specified time frame and according to your agreement with the client?
- Do you review the appropriateness and accuracy of invoices to clients?
- Do you bill disbursements on a regular basis to maintain cashflow and prevent allocation of personal disbursements to client ledger accounts?
- Do you check the original documents for accuracy before authorizing a request to transfer a disbursement from one client ledger account to another client ledger account?
- Do you ensure invoices for legal fees are mailed or delivered to clients before transferring the fee amount from your trust bank account to your general bank account?
- Are invoices to clients promptly recorded in your books and records as to date, client and amount?
- Do you review the accounts receivable monthly to identify any credit balances which may indicate that invoices to clients have not been prepared, mailed to the client and entered in the client’s ledger account?
Protection of Client Assets
To protect physical assets, important documents and financial records from loss.
- misappropriation of clients’ assets.
- inability to fulfill your financial obligations
- Do you maintain an up to date inventory of valuable items and negotiable documents held on behalf of clients in a Valuable Property Record as required by section 18(9) of By-Law 9?
- Do you periodically check the physical existence of the valuable items, to ensure items have not been lost, stolen, taken for personal use or used as collateral?
- Do you keep all unissued cheques locked up and ensure they are all accounted for?
- Are all issued cheques numerically accounted for in your trust and general disbursement journals and do you follow up on any missing cheques?
- Do you print hard copies of your trust and general bank journals on a regular basis, at least monthly, and store them in a secure, fire proof location so that you can reconstruct your records in the event your computer crashes or your data is corrupted?
- Do you print a hard copy of the client trust ledger account and review it for accuracy whenever you bill the client?
To ensure you and your staff conduct yourselves in a professional manner and identify and address conflict of interest situations.
- inappropriate activities or conduct by lawyers or staff
- errors and Omissions and/or Compensation Fund claims
- fraudulent transactions are not identified or prevented
- decline in revenue
- Do you have an adequate conflicts checking system, and does everyone in your firm know how to use it?
- Do you conduct thorough reference checks before hiring lawyers and staff?
- Do you ensure all staff are aware of, and respect, the requirements for client confidentiality?
- Does your firm require lawyers to disclose when they are acting as an executor or estate trustee, or are exercising a power of attorney on matters that are not reflected in the firm’s books and records?
- Do you ensure that any files of lawyers who act as executors of estates or in which the lawyer exercises a power of attorney is subject to the same scrutiny as "firm" files and that proper accounting records are being kept?
- Does your firm conduct periodic reviews of lawyer and staff work to identify:
- a lawyer or staff member who is consistently too busy to take holidays?
- a lawyer or staff member who appears to be living beyond his or her means, including any sudden significant increase in advances of entertainment expenditures, or large increases in unbilled disbursements?
- a lawyer whose production has fallen off for no apparent reason, or a lawyer who appears withdrawn or nervous?
- a lawyer or staff member who often makes last minute requests for funds?
Small Business Computer Controls
To ensure financial data is protected and to ensure you will be able to continue to practice in the event of a disruption.
- misappropriation of funds
- unauthorized access to your financial records
- loss of data
- loss of clients and income during the recovery of operations after a disaster
- Do you deal with a reputable software dealer to ensure that updates, service and support are available?
- Do you have appropriate licenses for all the software on your firm’s computers?
- Do you back up your computer data daily so that when your hard drive crashes you will lose only one day’s data?
- Do you have surge protectors for all your computers and modems?
- Do you know how to operate your computer and accounting systems?
- Do at least two people know how to operate your firm’s systems?
- Has your firm implemented segregation of duties in using the various functions in your computer system?
- Are your computer systems password protected?
- Do you safeguard your system’s passwords to ensure client confidentiality?
- Do you change passwords periodically?
- Do you have adequate firewalls to prevent unauthorized access to your computer through the Internet?
- Does everyone in your office scan for viruses prior to installing or using software or copying any file to the hard drives on your office computers?
- Do you restrict access to your clients’ and your firm’s accounting information to authorized personnel?
- Do you have adequate insurance, including business interruption insurance and insurance on records in storage?
- Do you have a business recovery plan and procedures in place to ensure that:
- your hardware and software are safeguarded from loss or damage?
- electronic files are regularly backed-up and kept off-site?
- important financial documents and files are copied and stored off-site?
- Do you periodically test your business recovery plan to ensure it is effective?
And a final word of advice…
A system of internal controls will work only if it is understood, accepted and implemented by everyone in your firm. We suggest you use this guide as a basis for discussion with your partners, employed lawyers, staff, and accountants to set up appropriate internal controls that will work for your practice.