The Call’s Coming From Inside: Fighting Fraud in Your Firm
Joel A. Herman
Law firms usually are known to be staffed with highly educated and intelligent people, but they are not immune to fraud. In fact, law firms generally share characteristics with other businesses that can make them particularly vulnerable. That is why your law firm needs to know what to look for and how to protect itself from fraudulent schemes perpetrated by attorneys, managers or support staff.
Law firm vulnerabilities
Law firms may be particularly susceptible to fraud because of how they delegate responsibilities. Attorneys generally focus primarily on their practices, leaving management of day-to-day operations to employees. These staff members can have significant authority and little oversight. This can prove especially dangerous in firms with small, seemingly loyal staff that require employees to wear many hats. The costliest frauds often are perpetrated by long-term, trusted employees.
In addition, ethics rules and regulatory requirements can make firms susceptible. For example, law firms are required to avoid commingling their funds with client funds. As a result, they can have large amounts of money sitting idle in non-operating accounts and not closely monitored for lengthy periods.
Individuals who commit fraud on the job frequently display behavioral red flags. What should your firm look for as potential signs of fraud? Be on the lookout for employees experiencing financial struggles, gambling or substance abuse issues or ongoing health problems that might lead to expensive medical bills.
Other signs can include appearances of employees living beyond their means; for example, driving luxury cars, buying a new residence or vacation home or wearing expensive jewelry or designer clothing. Beware of employees who do not take vacations because they may feel the need to be in the office to cover their tracks. Fraudsters might exhibit control issues or an unwillingness to share duties. Close relationships with vendors and complaints about inadequate pay can signal potential fraud, too.
Controls to consider
The first step to reducing the odds of fraud is to conduct a risk assessment. Such an assessment identifies the types of risks your firm faces and their likelihood of occurrence. Based on those risks, you can implement appropriate controls, including:
- Employee Controls
Conduct background screenings of all prospective employees. This should include verification of work history, education and references. Also, segregate duties to ensure, for example, that employees who process invoices don’t also process payments or receive and reconcile bank statements. Rotate job duties so no single employee “owns” certain functions. In addition, impose mandatory vacation time.
- Bank and Trust Accounts
Bank statements should be reconciled every month by someone not involved in disbursements. Also, be sure to:
• Monitor online bank accounts regularly to check transactions for irregularities;
• Prohibit the use of signature stamps to issue or endorse checks;
• Require dual signatures for outgoing checks from operating accounts, including the managing partner’s
signature, on checks above a specified threshold amount;
• Have partners review and approve vendor lists;
• Mandate dual signatures for trust account transactions;
• Have an independent professional, such as a CPA, monitor trust accounts; and
• Consider giving individual clients access to their trust accounts to review their activity.
- Other Areas
Review manual journal entries, credit or debit memos and voided transactions in your accounting transactions. Regularly review the firm’s budget for unexplained variances between budgeted and actual amounts. Perform unannounced internal audits of your firm’s financial records; for example, a detailed review and verification of paid vendor invoices or employee expense reports. Finally, establish an anonymous and confidential fraud reporting hotline for employees, clients and vendors.
Regardless of the controls selected, you should establish measures that will prevent partners and other high-ranking employees from overriding internal controls.
Related Read: “How to Tackle Expense Report Fraud“
It starts at the top
Internal controls can go a long way toward deterring and detecting fraud, but firm culture also plays a critical role. Prioritizing ethical behavior through training, policies and procedures is not enough. Make sure your firm’s leaders emphasize the importance of such behavior through their words and, most importantly, their actions.
For more information, contact Joel Herman at email@example.com 312.670.7444. Visit ORBA.com to learn more about our Law Firm Group.