Week 4: Lock the Vault – Financial Security Practices Every Law Firm Needs

The Hidden Risks in Law Firm Finances

In law firms, trust is the foundation—clients trust attorneys with their most sensitive matters, and partners trust staff with the firm's daily operations. But financial trust without systems is a recipe for disaster. Law firms handle large sums of client money, manage trust accounts, and make frequent disbursements—all while juggling billing, payroll, and overhead. When those financial processes are left undefined, inconsistent, or unmonitored, it opens the door to errors, fraud, reputational damage, and even legal discipline.

Unlike corporations with full compliance departments, many law firms rely on a handful of administrators to keep everything running. That’s why security policies and internal financial controls are essential. They’re not about red tape. They’re about protection, consistency, and peace of mind—for you, your clients, and your leadership.

This week’s module will help you:

• Understand financial vulnerabilities in law firm environments

• Learn how to structure approval systems and transaction boundaries

• Create policies to verify information before money moves

• Take specific, actionable steps toward financial security

Section 1: Why Internal Controls Are Essential in Law Firms

Definition

Internal controls are the practices, approvals, policies, and processes that safeguard money, maintain accuracy, and ensure that no one person has too much unchecked access to financial decisions or resources.

What Happens Without Them?

• Embezzlement: A bookkeeper with full access to operating accounts transfers small amounts to a personal account over years.

• Unauthorized Spending: An associate signs up for five new legal research tools without approval, costing the firm $1,200/month.

• Trust Account Violations: A settlement payout is made to a third party without proper documentation or client consent.

• Vendor Fraud: A scammer impersonates an existing vendor and changes the ACH info via email—payments go to a fake account.

  
  

Benefits of Strong Controls:

• Prevent financial loss

• Detect mistakes early

• Simplify audits

• Protect the firm from liability

• Build client trust through transparency

  
  

Quote to Remember:

“Trust, but verify. Systems don’t replace trust—they enforce it with clarity.”

Section 2: Cash Controls That Protect the Firm

Cash controls aren’t just for handling paper money—they refer to how funds flow in and out of the firm, including client retainers, settlements, credit card payments, and operating expenses.

1️. Bank Access & User Permissions

• Who can see account balances? Only those who need visibility for their job function.

• Who can initiate transactions? Should be limited to two or three authorized individuals.

• Who has authority to approve payments or transfers? Best practice is to require dual sign-off for any transfer above a threshold (e.g., $2,500).

• Action Tip: Run a user permissions report from your online banking system. Audit it quarterly.

  
  

2️. Segregation of Duties

No one individual should control the entire lifecycle of a financial transaction. Example structure:

• Invoicing: Paralegal or billing coordinator generates invoices.

• Payment Collection: Bookkeeper logs payments and issues receipts.

• Reconciliation: Office manager or external accountant reconciles the account.

  
  

This model provides checks and balances and makes it easier to detect irregularities.

3️. Timely Reconciliation of Bank Accounts

Bank reconciliations should occur:

• Monthly, at minimum
  

• By someone independent of cash handling
  

• Using tools like QuickBooks, Xero, or a dedicated law firm accounting system
  

• With a standard process checklist that includes:
  

  • Matching each transaction

  • Identifying uncleared items

  • Verifying client trust balances (if applicable)

  • Investigating any discrepancies over 30 days old

    
    

Policy Note: Maintain reconciliation logs for at least 7 years to support compliance reviews.

Section 3: Expense Controls – Setting Limits That Make Sense

Without clear spending rules, law firm purchases can be reactive, inconsistent, and costly.

Common Issues:

• Staff using personal cards and submitting unverified reimbursements

• Partners making large purchases with no paper trail

• No clarity on what’s “billable” to the firm vs. personal expense

  
  

What to Implement:

• Spending Thresholds

Set tiered limits by role. For example:

• Legal Assistant – $0–$100 (office supplies)

• Paralegal – Up to $250 (client expenses, court fees)

• Associate Attorney – Up to $500 (research, filings)

• Partner – Up to $2,000 with monthly reporting

• Operations Manager – Up to $1,000, approval for more

  
  

• Pre-Approval Process

Any spend over a threshold should trigger a quick form/email:

• What’s being purchased?

• What client or internal project is it for?

• Is it a one-time or recurring charge?

• Who is the vendor?

• Who approved it?

  
  

Use a shared Google Form or internal ticketing tool to track these approvals centrally.

• Monthly Credit Card Audits

At month’s end, review:

• Charges by category

• Duplicate or recurring charges

• Unauthorized purchases

• Charges made to incorrect vendor accounts

  
  

Assign a dedicated person to review expense statements and flag inconsistencies.

Section 4: Vendor and Client Disbursement Security

Mistakes in payouts—especially from trust accounts—can lead to serious regulatory consequences.

Vendor Risk:

Scammers now target law firms by posing as vendors. They may:

• Request changes to payment info via email

• Use similar domain names (e.g., @quickbookvs.com vs. @quickbooks.com)

• Submit fake invoices that match prior ones

  
  

Prevention Tactics:

• Always verify account changes by phone with a known contact

• Require dual sign-off for any change to vendor banking info

• Keep a list of approved vendors with contact info, bank account endings, and EINs

  
  

Client Risk (Trust Disbursements or Settlements):

• Never send client funds to third parties without written authorization

• Confirm client identity using two forms of verification (driver’s license + original retainer agreement)

• Require a signed distribution agreement before cutting checks from trust accounts

  
  

Sample Policy: All client disbursements over $5,000 require:

1. Verified identity and banking information

2. Written client authorization (email or signed doc)

3. Dual internal approval

Section 5: Your 5-Step Financial Security Blueprint

You don’t need to solve everything overnight. Start with this manageable plan:

Step 1: Document a Firm-Wide Cash Handling Policy

Include:

• How funds are received (mail, in person, electronically)

• Who logs them

• How deposits are recorded

• When funds are deposited

• Who reviews the transaction and reconciliation

  
  

Step 2: Define and Communicate Spending Authority

Build a permissions chart by title. Print it and post it in your operations binder or internal wiki.

Step 3: Clean Up Bank and Software Access

Audit access to:

• Bank accounts

• Accounting software (e.g., QuickBooks, Xero)

• Payroll platforms

• Bill pay tools

  
  

Limit roles to “read-only” where possible. Remove any old or duplicate user accounts.

Step 4: Map Financial Processes Visually

Create a swim lane diagram that shows:

• Who invoices

• Who handles payments

• Who approves

• Who reconciles

  
  

This makes responsibilities (and gaps) clear for everyone.

Step 5: Launch Verification Protocols

Create three checklists:

1. Vendor Onboarding

2. Bank Info Change Authorization

3. Client Disbursement

   
   

Include them in every SOP and make completion mandatory before funds move.

Reflective Questions

These can be used for journaling, group discussion, or review:

• Where in your current process could fraud or miscommunication happen?

• Are your firm’s financial policies written down or just passed along verbally?

• How would you explain your spending approval process to a new team member?

• Are client and vendor details verified through multiple channels before funds are released?

• What’s one thing you can implement this week to reduce financial risk?

Optional Activity: Law Firm Security Self-Audit

Take 60 minutes this week to complete one of the following:

1. Audit Vendor List: Review the last 20 vendors you’ve paid. Are payment details and contact info still accurate?

2. Review Bank Access: Who has logins to operating and trust accounts? Are they still active employees? Are roles limited appropriately?

3. Walkthrough a Recent Disbursement: From start to finish, who approved it, who processed it, and who verified it? Did it match your policy?