Law Firm Law Firm Billing and Finance 1 — Questions and Answers
Question 1: What is an 'IOLTA account' as used by US law firms?
- Interest on Lawyers' Trust Accounts — a pooled trust account for small client funds (Correct answer)
- An interest-bearing operating account for law firm revenues
- An investment account for law firm retirement funds
- An IRS-designated account for tax-exempt legal fees
Correct answer: Interest on Lawyers' Trust Accounts — a pooled trust account for small client funds
IOLTA (Interest on Lawyers' Trust Accounts) accounts pool small or short-term client funds; the interest generated goes to fund legal aid programs rather than accruing to the client or firm.
Question 2: What does 'realization rate' measure at a law firm?
- The percentage of billed hours actually collected as payment (Correct answer)
- The ratio of associates to partners
- The percentage of matters that go to trial
- The number of new clients acquired per quarter
Correct answer: The percentage of billed hours actually collected as payment
Realization rate measures what percentage of the fees billed to clients is actually collected — it accounts for discounts, write-offs, and uncollected invoices.
Question 3: Which billing method charges clients a fixed amount regardless of actual time spent on the matter?
- Flat fee billing (Correct answer)
- Hourly billing
- Contingency billing
- Blended rate billing
Correct answer: Flat fee billing
Flat fee billing charges a predetermined fixed amount for a defined scope of work, giving clients cost certainty regardless of how long the matter actually takes.
Question 4: What is a 'write-down' in law firm billing?
- A reduction in billed hours or rates before the invoice is sent to the client (Correct answer)
- The process of writing off a fully uncollectible account
- An increase in a client's billing rate
- A firm's year-end tax deduction for bad debts
Correct answer: A reduction in billed hours or rates before the invoice is sent to the client
A write-down occurs when a supervising attorney reduces the hours or rates on a draft invoice before sending it to the client, typically for quality control or value adjustment.
Question 5: What does the term 'matter origination credit' refer to at a law firm?
- Credit given to the attorney who brought the client or matter to the firm (Correct answer)
- The number of matters opened in a quarter
- The initial retainer payment from a new client
- The tax credit for pro bono hours
Correct answer: Credit given to the attorney who brought the client or matter to the firm
Origination credit is compensation given to the lawyer who originated (brought in) a client or matter, often factored into partner compensation decisions.
Question 6: What is a law firm 'retainer' in the context of billing?
- An advance payment held in trust and drawn down as fees are earned (Correct answer)
- A monthly flat fee for unlimited legal services
- A success bonus paid after a favorable verdict
- A filing fee paid directly to the court
Correct answer: An advance payment held in trust and drawn down as fees are earned
A retainer is an advance payment held in the firm's trust account; as the attorney earns fees by performing work, those funds are transferred from the trust account to the firm's operating account.
Law Firm Law Firm Billing and Finance 1
What is an 'IOLTA account' as used by US law firms?