What are common accounting mistakes made by law firms?

Law firm accounting is uniquely complex. Unlike general businesses, solicitors must keep separate records for client and office money, follow detailed SRA Accounts Rules, and prepare for periodic accountant reports. Errors can lead to financial loss, regulatory breaches, or reputational damage. Below are the most frequent accounting mistakes law firms make and practical steps to avoid them.

1. Mixing client and office money

One of the most serious mistakes law firms make is failing to keep client money separate from office money. The SRA requires all client funds to be held in designated client accounts, used only for specific client-related purposes.

Mixing funds, even unintentionally, can be seen as misuse of client money. For example, paying client disbursements from the office account or transferring funds before they are due can create compliance breaches.

How to avoid it:
Use separate client and office bank accounts, maintain up-to-date ledgers for each client, and reconcile them regularly. Accounting software built for solicitors can automate separation and flag any inconsistencies before they become problems.

2. Failing to reconcile accounts regularly

Reconciliation ensures that client and office ledgers match the firm’s bank statements. Many law firms make the mistake of leaving this task too long or completing it without proper review.

Under the SRA Accounts Rules, client account reconciliations must be done at least once every five weeks. Delays or incomplete reconciliations can mask errors, including duplicate payments, missing transfers, or even fraud.

How to avoid it:
Schedule reconciliations weekly or fortnightly. Use digital accounting systems that link directly to bank feeds and generate reconciliation reports automatically. Have a second person review reconciliations for accuracy and transparency.

3. Mismanaging disbursements

Disbursements, such as court fees or expert costs, often pass through the firm’s accounts on behalf of clients. Many firms record these incorrectly, treating them as firm expenses rather than client costs.

This leads to inaccurate financial reporting and potential VAT errors. HMRC distinguishes between disbursements (third-party costs paid on behalf of the client) and recharges (expenses incurred by the firm and billed to the client), so proper classification is crucial.

How to avoid it:
Train staff to identify true disbursements, ensure they are recorded on client ledgers, and separate them clearly from the firm’s own costs. Accountants can help ensure correct VAT treatment and reporting.

4. Incorrect VAT treatment

VAT errors are common in law firms due to the variety of transactions involved. Mistakes often occur when recording mixed supplies, out-of-scope income, or cross-border transactions. Errors in VAT on disbursements or partial exemption calculations can lead to underpayment or overpayment.

How to avoid it:
Use MTD-compliant accounting software that handles VAT automatically and updates rates in real time. Have an accountant review VAT returns regularly to confirm compliance with HMRC and SRA requirements.

5. Poor management of client interest

Law firms must pay clients a fair amount of interest on money held in client accounts, unless it is too small to calculate. Many firms either forget to calculate interest altogether or apply the wrong rate.

Under the SRA Accounts Rules, firms must have a written interest policy and apply it consistently. Failure to do so can result in client complaints and disciplinary issues.

How to avoid it:
Establish a documented client interest policy and use accounting software that can calculate interest automatically based on client balances and the length of time funds are held.

6. Delayed posting of transactions

Late entry of receipts, payments, or transfers can distort cash flow and cause errors in reconciliations. For example, if a payment is recorded days after being made, client ledgers may temporarily show incorrect balances, leading to compliance breaches.

How to avoid it:
Post all transactions daily and ensure fee earners promptly provide payment details. Regular internal reviews help confirm that ledgers remain current and accurate.

7. Lack of digital record keeping

Many smaller law firms still rely on paper-based or spreadsheet systems, which are more prone to human error. This approach also makes compliance with Making Tax Digital (MTD) more difficult, as HMRC and the SRA now expect electronic records with clear audit trails.

How to avoid it:
Move to digital, cloud-based accounting systems that integrate with your practice management software. These systems reduce duplication, improve reporting accuracy, and simplify VAT submissions under MTD.

8. Incomplete breach logs

SRA regulations require firms to record and investigate all breaches of the Accounts Rules, even if they are minor. Many firms either fail to record breaches or underreport them, assuming that only serious issues must be logged.

This can be problematic during SRA audits, as it suggests poor internal oversight.

How to avoid it:
Maintain a breach register and review it regularly with the COFA. Even small issues should be documented, reviewed, and resolved, showing that the firm takes compliance seriously.

9. Not reviewing financial performance

Some law firms focus entirely on compliance and overlook financial analysis. Without regular reviews of profit margins, overheads, and cash flow, firms risk underperforming or missing signs of financial stress.

How to avoid it:
Review management accounts monthly. Accountants can help create dashboards showing key metrics such as fee earner profitability, aged debt, and cash reserves. These insights support better decision making and strategic growth.

10. Inadequate accountant involvement

Many firms engage accountants only at year end, which can allow problems to build up throughout the year. Regular input from an accountant experienced in legal finance helps identify compliance issues early and improve efficiency.

How to avoid it:
Work with an accountant who understands both SRA and HMRC requirements. Schedule quarterly reviews, not just annual ones, to stay compliant and maintain financial health.

Example in practice

A small family law firm relying on spreadsheets struggled with delayed reconciliations and unrecorded disbursements. After switching to cloud-based accounting software and engaging an accountant for quarterly reviews, the firm achieved full SRA compliance, reduced VAT errors, and improved cash flow tracking.

Within six months, reconciliations were completed weekly, and client complaints about billing transparency fell to zero.

The role of accountants in preventing mistakes

Accountants provide oversight and structure to law firm finances. They help design systems that separate client and office money, maintain digital records, and automate reconciliations. They also support compliance by preparing annual SRA accountant’s reports and advising on tax, VAT, and cash flow management.

Partnering with an accountant ensures that errors are caught early, staff receive proper training, and the firm meets both financial and regulatory standards.

Conclusion

Common accounting mistakes in law firms often stem from poor record keeping, delayed reconciliations, or misunderstandings of compliance rules. These errors can lead to serious regulatory consequences under the SRA Accounts Rules and create financial instability.

By adopting digital accounting systems, maintaining accurate client ledgers, and working closely with accountants, solicitors can avoid these pitfalls. Proper financial management not only protects client money but also strengthens the firm’s profitability, reputation, and long-term success.