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I've worked with professional service firms for more than twenty years, and law firms are where I most often find an accounting relationship that nobody ever chose. It got inherited from a mentor who retired. It came from a referral at a bar association lunch in 2015. Or the firm needed a return filed, the deadline was three weeks out, and whoever answered the phone became the CPA.
Law firm finances behave differently from most other small businesses. Client money sits on your balance sheet as a liability while your own fees sit unbilled in a case file. Your revenue arrives on a schedule set by opposing counsel and court calendars. Your compensation comes out through draws and allocations that have their own tax treatment. None of that is visible from the outside, and when it gets missed, the miss shows either as a tax bill you didn't plan for or as a reconciliation problem your state Bar takes an interest in.
I've had this conversation with enough attorneys that I'd rather you have some idea before you're sitting across from anyone, including me. This is the first post in a series on law firm accounting and tax, and each item below gets a deeper post of its own later on. The question that opens most of those conversations is the simplest one: what should I be checking?
Six things. Each is a place where an error compounds quietly for a year or more before anyone notices. Your firm will have concerns past these six, and the weight of each one shifts depending on how you're built, but this is where I'd tell you to start.
1. Trust Accounting and IOLTA Compliance
When I open a set of law firm books, the trust liability account tells me most of what I need to know about who was keeping them. Client funds held in trust are a liability, and that liability has to tie to your IOLTA bank balance and to the sum of your individual client ledgers at the same moment in time. Most state Bars expect that reconciliation monthly.
The answer you want from a CPA is procedural and slightly boring. They should be able to describe how they'd catch a shortage, where they'd expect the mismatch to originate, and what they'd do about a client ledger that's gone negative. A CPA who responds by talking about how careful they are, without describing a process, has probably never reconciled one. Your license is not the place for someone to learn.
2. Revenue Models and the Timing They Create
Hourly work, flat fees, and contingency fees look similar on a bank statement and behave nothing alike in a forecast. Contingency fees generally aren't earned until the matter is resolved, which often falls in a different tax year than the work. Flat fees run the other way: the cash comes in first, and the work is still owed.
I'd ask a prospective CPA to walk you through a matter that is settled in a year other than the one it was filed in, and listen for whether they reach for the tax consequence, the cash consequence, or both.
3. Entity Structure and Partner Compensation
Solo practitioners, PLLCs, S corporations, and multi-partner LLPs each carry different exposure on self-employment tax, reasonable compensation, and how money reaches the partners. This is the area where I find the most unclaimed money, and also the most surprise tax bills.
A CPA should bring some of this up before you ask. Your state may have a pass-through entity election available that moves a real amount of tax off your federal return. Guaranteed payments and draws are taxed differently, and the choice between them should be deliberate rather than whatever the last accountant set up. Firms outgrow their structure faster than they update it.
If a change is on the table, our post on choosing between an S corporation and a partnership covers the questions that should drive the decision.
4. Planning Cadence and How They Communicate
There's a real difference between a CPA who prepares your return once a year and one who runs mid-year tax projections , flags an issue in July while there's still room to move, and gets you to a decision before the year closes. Both are legitimate engagements, priced differently, so find out which one you're being sold.
You went to law school, not accounting school. A return handed over with no explanation, or a question that sits for three days while you're up against something, costs you even when the technical work is clean. I record short video walkthroughs of client returns for that reason, since an attorney who understands what happened on the return makes better calls the year after.
5. The Software Your Firm Runs On
Law firms rely on multiple systems to manage billing, payments, trust accounting, and financial reporting. A CPA should understand how platforms like Clio, MyCase, PracticePanther, Tabs3, and QuickBooks work together, and should be able to tell you what happens in the handoffs between them.
A few of the places this commonly goes sideways:
- Practice management to accounting sync. When your practice management platform pushes data into QuickBooks, someone has to decide how each transaction type maps to your chart of accounts. A bad mapping puts trust deposits into income or client costs into expenses, and neither one is visible from the face of a P&L.
- Trust liability accounts. Client funds sitting in trust belong on your balance sheet as a liability, since the money is still the client's. If your books don't carry a trust liability account that ties out to your IOLTA bank balance and your client ledgers, you can't do a three-way reconciliation at all.
- Payment processors and merchant fees. Legal payment processors handle trust and operating transactions differently, starting with which account the fee comes out of. Fees pulled from the wrong account are one of the most common ways firms accidentally dip into client funds.
- Advanced client costs. Costs you cover for a client, from filing fees to an expert witness invoice, are receivables. Once they're mixed in with the firm's own spending, nobody bills them back.
- Duplicate entry. Firms that run billing in one system and deposits in another frequently end up recording the same money twice, then spend the year chasing a variance nobody can explain.
6. Can They Help You Grow the Firm?
Filing an accurate return and helping you run a bigger firm are two different jobs. The second one sounds like: where your profit is coming from, how partner draws should change as you add people, what a lateral hire does to your numbers before you make the offer, and how your financials would read to a bank or an incoming partner. Some firms buy that as fractional CFO support and some get it from a CPA who works that way by default.
Plenty of firms only need the first job, and there's nothing wrong with buying it. Once you're past keeping the firm compliant, ask the question directly, because a CPA who does the second kind of work will have opinions ready and one who doesn't will change the subject to your return.
Where I'd Start
These six don't carry equal weight for every firm. If you're solo with a small trust balance, items one and three deserve most of your first conversation. If you have equity partners, start with how money reaches them, since those are the numbers that create arguments. If you've grown past three attorneys with the same books you had at one, the software mapping is probably already wrong and everything you're reading off your financials is suspect.
Underneath all of it, you're listening for one thing: is this person thinking about your firm as a single system? Your trust setup runs through your software, your software feeds your financials, your financials drive your draws, and your draws land on your entity return. A CPA strong on one of these and blank on the rest will still leave you exposed, and a good one will tell you plainly which parts fall outside their experience.
Talk to me about your firm. I work with law firms and professional service practices and the first conversation is mostly me asking questions about how your firm runs. If some of the six above hit close to home, book a meeting and we'll get a read on your firm either way. If I'm not the right fit, I'll say so and point you at someone who is.
Next in this series: trust accounting and IOLTA compliance, where the cost of a mistake is measured in disciplinary terms rather than dollars.
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Frequently Asked Questions
What should a law firm look for in a CPA?
Experience with IOLTA and trust reconciliation comes first, since that one carries Bar consequences. From there: how hourly, flat fee and contingency revenue behave over time, entity structure and partner compensation, a planning cadence that runs through the year rather than after it, and familiarity with the practice management software your firm already runs on.
Do law firms need a specialized CPA?
No rule requires one. Trust accounting is a Bar compliance matter with disciplinary consequences, and partner compensation and contingency timing are areas where the usual small business assumptions produce expensive results. Ask any CPA you're considering how many IOLTA accounts they've reconciled and take a vague answer seriously.
What is a three-way trust reconciliation?
Matching three balances at one point in time: your trust bank account, the trust liability account in your books, and the total of every individual client ledger. All three must agree. Most state Bars expect it monthly, and a mismatch is the earliest signal that client funds have been touched.
How is contingency fee revenue recognized?
Contingency fees generally aren't recognized until the matter resolves and the fee is earned, which often falls in a different tax year than the work. That timing drives estimated payments, distribution planning, and hiring decisions.
What software should a law firm CPA know?
The major practice management and billing platforms attorneys use, including Clio, MyCase, PracticePanther, Tabs3 and LeanLaw, along with how each integrates with QuickBooks or your general ledger. Knowing the platform names counts for less than understanding how transaction types map into the chart of accounts.
