How to Protect Your Law Firm from Embezzlers

Fraud is on the increase, reports the Association of Certified Fraud Examiners (ACFE), and leading the pack is the category of occupational fraud. That means employee fraud and in a law office that can cost you big time, in both dollars and client relations.
The ACFE is the world's largest anti-fraud organization, dedicated to reducing business fraud. In their 2008 Report to the Nation, they found that nearly a trillion dollars of business annual revenues were siphoned off due to fraud. Now, their newest report indicates the level of business fraud is rising.

Driven by hard economic times, a recent ACFE national report says that instances of fraud have increased in the last year over past years and they report it is expected to continue to increase.

The report, "Occupational Fraud: A Study of the Impact of an Economic Recession", blames the increase on "intense financial pressures during the economic crisis." The mere existence of an opportunity for fraud to occur was not enough, according to ACFE.
Occupational fraud includes law firm embezzlement. The National Law Journal recently reported on a host of examples of law firm embezzlements, which are more commonly commited by support staff, usually those in charge of check writing or other accounting tasks that involve firm funds. Often, the victimized law firm doesn't even report the embezzlement. Almost always, the firm owes a fiduciary duty to its clients and partners can end up having to make up the loss themselves.
It all heightens the importance of careful hiring and monitoring of employees, particularly those charged with money responsibilities. Most law firm staffers are hard-working and honest to a fault. But in every barrel, there's probably a bad apple somewhere.
Still, there are things that can be done to protect a firm from financial loss or to catch it before it becomes huge. Here are a few tips.
1. hire carefully, check references carefully and require consent to a criminal background check. After all, if the thief doesn't get in the door, you're ahead of the problem. Sometimes just knowing that you are going to do a background check can discourage a bad applicant.
2. require 2 signatures on checks. The vast majority of employee embezzlement occurs because one person has check writing authority and that just makes it too easy.
3. review all accounts monthly. A partner who has no check writing involvement should review account statements monthly and very, very carefully. It takes more time to be careful, but only minutes to lose thousands. Catching a problem early can't end the problem before it becomes devastating to the firm. And change your reviewer periodically too so that all partners share the responsibility. You don't have to know how to balance a check book to wonder why the same person's name keeps showing up in the payee column or other regularities.
4. account reviews should alternately be private and with the check writer. One month the partner should request the account records from the check writer and do a private closed door review by himself or herself. The next month, the check writer should sit down with the partner and go through the review together.
5. change check writers periodically. Many law firms leave the same person in charge of firm accounts for years or even decades. Changing account control just simply helps to keep people honest.
6. watch for signs of drug or alcohol or gambling problems with key employees. Those are frequently involved as causative factors in employee theft.
7. don't count on your accountant to catch anything. Accountants just add numbers up. Generally they can't tell you anything about the entries being made themselves. But an accountant can tell you if something looks out of line. For instance, they may spot too many or too large a "Misc" expense category.
These are just a few tips that come to mind. In these times, economic pressures are everywhere. With a few precautions you can sharply reduce the dangers to your firm.
Burdge Law Office
Helping lawyers help their clients since 1978.