What are common accounting mistakes made by law firms?

At Towerstone Accountants we provide specialist accountancy services for solicitors and law firms operating under SRA regulation. This article has been written to explain What are common accounting mistakes made by law firms in clear practical terms so you understand how the rules apply in day to day practice. Our aim is to help you stay compliant protect client money and make informed financial decisions.

After working with solicitors and law firms across England and Wales for many years, I can say with confidence that most accounting mistakes are not caused by carelessness or bad intent. They are usually the result of time pressure, misunderstanding, or assuming that accounting and compliance will somehow look after themselves.

Law firms operate in a uniquely regulated environment. You are balancing client money, professional rules, tax obligations, payroll, and business performance all at the same time. When accounting slips, the consequences are rarely limited to messy numbers. They often lead to tax issues, regulatory scrutiny, cash flow stress, and sleepless nights.

In this article, I want to walk through the most common accounting mistakes I see law firms make in practice. I will explain why they happen, why they matter, and how they can be avoided. Everything here is based on real world experience rather than theory, and written with the aim of helping firms strengthen their foundations rather than criticising past decisions.

Treating accounting as a once a year exercise

One of the biggest and most damaging mistakes law firms make is viewing accounting as something that only matters at year end.

When accounting is treated as an annual task, problems tend to build quietly in the background. By the time the accountant gets involved, the firm is often dealing with:

• Months of unreconciled transactions

• Missing records

• Unclear drawings or transfers

• Client account discrepancies

• Unexpected tax liabilities

Accounting should be an ongoing process. Regular bookkeeping, reconciliations, and reviews allow issues to be spotted early when they are easier and cheaper to fix.

From my perspective, firms that keep their numbers current rarely experience nasty surprises.

Poor client account management

Client account errors are one of the most serious issues a law firm can face.

I regularly see mistakes such as:

• Client money not transferred promptly

• Residual balances left unresolved

• Client funds used temporarily to cover business shortfalls

• Infrequent or incomplete reconciliations

• Poor documentation of transfers

These errors are often unintentional but they can still lead to regulatory action.

The Solicitors Regulation Authority expects firms to maintain strict controls over client money. Even small breaches must be identified, recorded, and in some cases reported.

From an accounting point of view, client accounts should be treated with absolute discipline. Regular reconciliations and clear audit trails are not optional.

Confusing drawings with profit

This is a classic mistake in partnerships and LLPs.

Partners often assume that the money they take out of the firm represents their income. For tax and accounting purposes, this is not true.

Common problems include:

• Partners overdrawing without realising it

• Assuming drawings are deductible expenses

• Failing to understand profit allocations

• Poorly maintained capital accounts

This leads to confusion at year end and can result in unexpected tax bills.

The key principle is simple. Partners are taxed on their share of profit, not on what they draw. Once this is understood, many downstream issues disappear.

Leaving bookkeeping too late

Delayed bookkeeping is a problem in almost every sector but it is particularly risky in legal practices.

When bookkeeping is left until months after transactions occur, the firm often struggles with:

• Missing invoices or receipts

• Inaccurate categorisation of costs

• Forgotten income

• Incomplete VAT records

• Guesswork around balances

This creates stress and increases professional fees because the accountant has to reconstruct rather than review.

Regular bookkeeping does not just help the accountant. It helps the firm understand how it is performing and whether corrective action is needed.

Underclaiming legitimate business expenses

Solicitors are often cautious about expenses, sometimes to their own detriment.

I frequently see firms failing to claim costs that are clearly allowable such as:

• Professional subscriptions

• Indemnity insurance

• Training and CPD

• Home working costs

• Business mileage

• Software and IT tools

Underclaiming expenses inflates profits artificially and leads to higher tax bills.

The solution is not aggressive claiming but informed claiming. Understanding what is allowable and keeping proper records ensures the firm pays the right amount of tax rather than too much.

Overclaiming or misclassifying expenses

The opposite problem also occurs.

Sometimes personal or non deductible costs are put through the business without proper consideration. This can include:

• Personal travel

• Non business entertainment

• Family expenses

• Private vehicle costs incorrectly claimed

This creates risk. If reviewed by HM Revenue and Customs, these items may be disallowed, leading to additional tax, interest, and penalties.

Good accounting involves judgement as well as accuracy. When in doubt, it is always better to ask than to assume.

Poor VAT treatment

VAT is a common source of errors in law firms.

Mistakes I regularly see include:

• Incorrect VAT treatment of disbursements

• Inconsistent VAT coding

• Failing to reconcile VAT returns to accounts

• Missing VAT on certain services

• Late VAT submissions

VAT errors rarely reduce tax in the long run. They usually create cash flow issues or trigger enquiries.

Proper VAT processes and regular reviews help ensure compliance and reduce the risk of unpleasant surprises.

Not understanding work in progress

Work in progress is one of the most misunderstood areas of legal accounting.

Problems arise when firms:

• Do not track WIP accurately

• Fail to review unbilled time

• Guess year end WIP figures

• Apply inconsistent policies

This leads to distorted profits and unreliable accounts.

WIP needs to reflect reality. That means accurate time recording, clear billing policies, and proper review at year end.

When WIP is handled properly, accounts become far more meaningful.

Mixing business and personal finances

This issue is particularly common in sole practices and smaller firms.

Examples include:

• Using the business account for personal spending

• Paying personal bills directly from the firm

• Using personal accounts for business transactions

This creates confusion, increases the risk of errors, and makes compliance more difficult.

Clear separation between business and personal finances is a basic but essential discipline. It protects both the firm and the individual.

Inadequate record keeping

Good records underpin good accounting.

I often see firms struggling because:

• Receipts are missing

• Contracts are not retained

• Loan agreements are unclear

• Supporting documentation is scattered

This slows down year end accounts and weakens the firm’s position if questions are raised by regulators or HMRC.

Organised record keeping does not need to be complex. Consistency and clarity are far more important than sophistication.

Ignoring payroll complexity

Payroll for support staff is often underestimated.

Common payroll mistakes include:

• Incorrect tax codes

• Late RTI submissions

• Errors in pension auto enrolment

• Incorrect holiday pay calculations

• Paying bonuses outside payroll

Payroll errors affect staff morale and can lead to penalties.

Whether payroll is run internally or outsourced, it needs proper oversight and review.

Not planning for tax throughout the year

Tax planning is often left until the accountant produces the draft accounts.

By then, many opportunities have already passed.

Firms that fail to plan may:

• Miss pension contribution opportunities

• Invest at the wrong time

• Take excessive drawings

• Be unprepared for payments on account

Tax should be considered throughout the year, not just at the end.

Even simple conversations and forecasts can make a meaningful difference.

Failing to review the bigger picture

Finally, one of the most subtle mistakes is failing to use accounts as a management tool.

Accounts are not just for compliance. They can highlight:

• Profitability by department

• Cost pressures

• Cash flow trends

• Staffing efficiency

• Growth constraints

When firms only look at accounts once a year, they miss these insights.

Regular review turns accounting from a burden into a source of strategic clarity.

Final thoughts

Most accounting mistakes made by law firms are avoidable.

They usually arise from treating accounting as an administrative task rather than a core part of running a professional practice. When numbers are ignored or delayed, problems grow quietly in the background.

In my experience, the firms that avoid these mistakes are not necessarily the most profitable or the most sophisticated. They are the ones that prioritise consistency, clarity, and communication.

Good accounting is not about perfection. It is about understanding what is happening in your business and having the confidence that your figures reflect reality.

When that foundation is in place, compliance becomes easier, tax becomes more predictable, and the firm is free to focus on delivering great service to clients.

You may also find our guidance on What are the SRA accounting rules and how do they work and How can an accountant help prevent breaches of client money rules useful when reviewing related SRA and accounting obligations. For a broader overview of solicitor accounting and compliance topics you can visit our solicitors accounts rules hub which brings all related guidance together.