Financial Red Flags Every Law Firm Should Watch For

advanced client costs law firm compliance law firm financial health legal bookkeeping trust accounting (iolta) Feb 03, 2026

In the world of law, your books should feel like a steady hand on the wheel, not a mystery novel filled with plot twists. Yet for many attorneys, their financials spark more questions than confidence. Whether you're a solo just opening your doors or a multi-partner firm with layers of complexity, the signs of trouble often look the same: sleepless nights, nagging doubts, and that quiet, persistent feeling that something in the numbers simply isn't right.

Here’s what every law firm should know.

1. Your Trust Bank Balance Doesn’t Match Your Trust Liability

This is the red flag of all red flags.

If the number on your balance sheet doesn’t match the trust bank balance, down to the penny, something is wrong. It might be timing. It might be user error. It might be workflow. Or it might be a deeper issue entirely.

But it should never be ignored.

Accurate trust accounting isn’t optional; it’s a professional responsibility. And when things drift out of alignment, most attorneys feel it in their bones long before they understand the cause.

2. Your Chart of Accounts Doesn’t Make Sense Anymore

If your chart of accounts looks like:

Employee names
Vendor names
Years of subcategories
Duplicated accounts
Or only goes up to “4000”

…it’s time for a cleanup.

A messy chart of accounts can signal that your books were built by someone unfamiliar with legal accounting. It also makes your reports harder to read, harder to analyze, and harder for a bank or tax professional to trust when you're applying for financing or preparing for taxes.

3. Your Practice Management Software Isn’t Matching Your Books

Clio. LeanLaw. PracticePanther. MyCase.

Your legal software must match your accounting system - especially when it comes to:

Trust balances
Advanced client costs
WIP
A/R
Settlements
Disbursements

If those numbers don’t align, you’re not working with true financials. You’re working with a story that isn’t telling the whole truth.

4. Uncleared Items Are Piling Up

Uncleared checks or deposits from years ago, especially in trust, are a serious compliance concern.

Checks that are never cashed. Deposits that don’t belong. Duplicate payments that remain unresolved. These small items can snowball into major issues if they’re never reviewed, cleaned, or communicated to clients.

5. Your Advanced Client Costs Don’t Look Right

This is one of the biggest red flags we see in firms of all sizes.

Advanced client costs should not be buried in “billable expenses” or mixed with income. They should sit on the balance sheet as assets until recovered. Many firms unknowingly misclassify them, which creates massive distortion in profitability, taxes, and financial reporting.

If this account doesn’t look right - you’re not alone. Most attorneys don’t realize there's a problem until someone points it out.

6. You Don’t Have a True Managing Partner Overseeing Financial Health

Mid-size and larger firms often have a managing partner in title only. But when no one is actively shepherding:

KPIs
Realization rates
Labor productivity
Class and location tracking
Financial workflows
Software integrations
Payroll compliance
Multi-state issues

…the firm can grow in revenue while silently falling out of compliance or suffering from inefficiencies.

A law firm without a financial overseer is a ship without a compass.

7. You’re Relying on Staff Who “Had Accounting in School Once”

Every firm has one: the paralegal or office manager who’s been asked to “help with the books.”

They mean well. They work hard. But legal accounting is specialized.

Without training, and without checks and balances, even tiny errors can build into large ones. We frequently see:

Double-recorded income
Mishandled trust transfers
Incorrect 401(k) loans
Misapplied settlements
Missing invoices
Out-of-balance reconciliations
Mixed trust and operating activity
Payments recorded but never billed

This isn’t a failure of the employee. It’s simply a mismatch between duties and required expertise.

8. You Don’t Know What You Don’t Know - Yet You Still Feel Something Is Wrong

This is the red flag attorneys mention to us most often:

“I can’t put my finger on it, but I know something isn’t right.”

Your instincts are almost always correct.

When attorneys come to us with that feeling, we often uncover issues that have been quietly growing — sometimes for months, sometimes for years. What matters is catching them early and getting support from professionals who know how to decode the chaos.

The Good News? Every Red Flag Is Fixable.

Whether your firm is brand new or decades old, no financial issue is too big or too tangled for the right accounting team to help unravel.

At The Proper Trust, we:

Perform deep-dive file reviews
Clean and rebuild trust accounting
Reconstruct advanced client costs
Repair chart of accounts structures
Align legal software with your books
Create workflows that prevent future issues
And coach you every step of the way

Your financials should empower you - not overwhelm you.

If You’re Seeing Any of These Warning Signs, It’s Time to Talk

The sooner you address issues, the easier they are to fix. And the sooner you partner with specialists who understand legal accounting inside and out, the sooner you’ll feel the peace of mind that comes from having clean, compliant books.

Whether you're a solo attorney just starting out or a multi-partner firm with complex operations, we’re here to help you restore clarity and confidence in your financials.

Ready to take the next step?
Reach out to The Proper Trust today. Your books, and your future self, will thank you.