Five Tips for Reducing Fraud at Your Firm
Joel A. Herman
Because they foster a collegial, trusting environment, law firms can be more vulnerable to fraud than many other types of businesses. Enforcing internal controls may simply seem unnecessary in an office of professionals dedicated to the law. Unfortunately, occupational thieves take advantage of such complacency.
There are as many ways to defraud a law firm as there are individuals to dream up scams. Your accounting function — payroll and accounts payable and receivable — are particularly vulnerable. To protect your firm from financial losses and possible public embarrassment, implement and enforce these five basic controls:
- Screen Employees
Require all prospective employees, regardless of level, to complete an employment application with written authorization permitting your firm to verify all information provided. Then, call references and former employers and conduct background checks (or hire a service to do it for you). These checks search criminal and court records, pull applicants’ credit reports and driving records, and verify their Social Security numbers.
- Use Fraud-Proof Documents
The design of financial documents can ensure proper authorization of transactions, completeness of transaction histories and adherence to other control elements. For example, use pre-numbered payment vouchers on which a designated partner indicates approval for processing disbursements.
- Require Authorization
Authorization procedures can prevent transactions from occurring without proper approval. In the example above, the designated partner is the authorizing party. This control is effective because the designated partner is in a position to know what the transactions are and how they pertain to the firm’s clients. Similarly, be sure to restrict access by maintaining current signature cards at your bank and protecting accounting and billing system access with difficult passwords that are frequently changed.
- Segregate Duties
Proper segregation prevents people who are in a position to perpetrate fraud from doing so. Often, smaller firms make the same person responsible for opening mail, making bank deposits, recording book entries and reconciling monthly bank statements. In this environment, fraud’s not only possible, it is likely. One simple way to prevent criminal activity is to delegate these tasks to two or more people.
- Provide Independent Oversight
Although your firm’s accounting department should maintain control of your accounting function, independent oversight is necessary. For example, a designated partner should open bank statements. Even if he or she does not review all items individually, this reminds employees that transactions are verified. Someone outside the accounting department, such as your firm’s CPA, should also review transactions as they are processed and financial statements at the close of the accounting cycle reconciliations.
A Strong Defense
In a lax environment, otherwise honest and trusted employees can be tempted to steal. So even if your firm is like family — especially if your firm is like family — you need to reduce fraud opportunities. This means updating and enforcing internal controls. If you are not sure if your policies are adequate, or if you have experienced a fraud incident recently, talk with your financial advisor for advice on strengthening your firm’s defenses. If you would like to discuss implementing internal controls in your law firm’s accounting department, email Joel Herman at [email protected] or call him at 312.670.6210. Visit ORBA’s Law Firm Group webpage for more helpful tips.