Trust accounting compliance: 10 things Australian law firms should always look out for

Trust account compliance is one of the most critical obligations for Australian law firms regardless of size, structure or location. 

Regulators across all jurisdictions continue to focus heavily on how client money is received, safeguarded, recorded and disbursed.

While technical requirements differ slightly between jurisdictions, the principles outlined below apply broadly to Australian law practices: Trust money does not belong to the firm and law practices are expected to maintain systems and records that always demonstrate full compliance.

Importantly, most trust account issues do not arise from dishonesty, instead breaches typically stem from process failures, overreliance on key staff, lack of training or insufficient oversight. A proactive approach to trust accounting compliance is therefore essential.

Below are ten key areas Australian law firms should regularly review to reduce risk and maintain strong trust accounting compliance.  

1. Clearly understand what constitutes trust money

Trust money is broadly defined and can include far more than a straightforward client deposit. It may cover funds received in connection with legal services, such as money received in advance of costs, controlled money, investment money, transit money, money subject to a power and others.  

Misclassifying funds at the outset is one of the most common causes of compliance issues later on, often leading to error in receipting, recording and disbursement. 

2. Reinforce the principle that trust money is never   the firm’s money

Trust money must never be used for firm purposes, whether as working capital, to cover cashflow shortfalls or simply for administrative convenience. Even temporary, shortterm or accidental use can constitute a breach, regardless of intention. 

Maintaining a strong internal culture that reinforces this principle is fundamental to compliance. 

3. Maintain compliant trust account structures

Law practices must ensure their trust accounts are established correctly and maintained in accordance with applicable legislation, including correct naming conventions, approved financial institution, and regulator notification requirements.

Seemingly minor administrative oversights, particularly missed notifications when accounts are opened or closed, are frequently identified during external examinations.

4. Complete monthly reconciliations accurately and on time

Monthly trust account reconciliations are a fundamental requirement of trust accounting compliance. Reconciliations must be completed within required timeframes and must reconcile the trust bank account, trust cashbook and individual trust ledger balances at the end of the month (three-way reconciliations).

Just as important is evidence of review by a principal of the law practice. A reconciliation that is prepared but not reviewed provides limited protection and may indicate that oversight is not meeting regulatory expectations. 

 5. Receipt trust money promptly and correctly

Trust money must be receipted as soon as practicable, using receipts that contain all mandatory information and are issued in proper sequence. Where the date of receipt differs from the date a receipt is issued, both dates should be recorded (dual dating).

Funds should be deposited promptly into the trust account, typically on the day of receipt or the next business day where that is not reasonably practicable.

6. Ensure trust payments are properly authorised

Payments from trust must only occur with proper authority and for the correct client, matter and amount. Common errors include paying costs from trust before entitlement arises, processing payments without appropriate authorisations or misallocating payments between matters.

Strong controls around authorisation and review are critical to reducing these risks.

7. Maintain complete and compliant trust records

Trust accounting extends beyond the general trust account. It also requires robust recordkeeping for controlled and transit funds, investment monies, unclaimed funds, and amounts held under  power.

Common compliance gaps we see include incomplete registers, poorly maintained ledgers, and reliance on  accounting systems that don’t meet regulatory requirements.

8. Identify and respond to irregularities early

Trust account irregularities and control deficiencies must be taken seriously. Any error, whether a shortfall, incorrect postings, or improper mixing of trust money with other funds should be investigated immediately, clearly documented, and rectified in a transparent and timely manner.

In many jurisdictions, practices must notify the relevant regulator as soon as an irregularity is identified. Attempting to ‘quietly’ correct errors without a clear audit trail can significantly increases regulatory exposure.

9. Understand that delegation does not remove responsibility

While trust accounting tasks can be delegated to internal finance staff or external service providers, accountability cannot. Ultimately responsibility remains with the principals of the law practice; regulators assess the effectiveness of oversight, not simply who processed the transaction.    

Regular internal reviews, adequate training and clear accountability structures are essential safeguards.

10. Treat trust accounting compliance as a year round obligation

Trust compliance should be embedded in day-to-day operations, and not treated as an annual exercise linked only to an external examination. Reconciliations, internal reviews and issue resolution should occur throughout the year, as part of a consistent control cycle.

Proactive engagement with external examiners, clear communication and timely lodgement of required forms all contribute to smoother external examinations and reduced compliance risk.

A disciplined, yearround approach to trust accounting not only minimises regulatory exposure, it also builds confidence across firm leadership, staff and clients.  

Why engage RSM?

RSM supports law practices across Australia with solicitor trust account compliance and annual external examinations, delivered by our specialist teams who understand both the technical trust accounting requirements and the practical challenges faced by legal practices.

We work closely with principals and management teams to identify risk areas early, provide  practical guidance, and help maintaining compliant, well controlled trust accounting systems, supported by a consistent methodology and detailed management letter recommendations to strengthen processes and oversight.  

With RSM, you gain a trusted adviser who understands regulatory expectations, works closely with law firm principals and helps protect your firm, your clients and your professional standing.  

FOR MORE INFORMATION

For help with your solicitor trust account, get in touch with our audit and assurance team.