September 6, 2006
Embezzlement in the Law Firm
The untold story of embezzlement within law firms is that the story usually goes untold. Law firms are understandably reluctant to expose the episode publicly, and perpetrators often go unprosecuted.
As a CPA that worked with businesses of all types before founding Juris, Inc., I can say that I have never encountered a single case of embezzlement outside of the legal community and found it relatively commonplace among law firms. There are several factors making law firms more susceptible to misappropriation of funds—part-time executive management, absent or weak financial management, inadequate internal controls, high volume of pass through disbursements, decentralized approval and signing authority plus a tradition of deadline or crises driven transactions.
Jarmila Pencikova with Osler, Hoskin & Harcourt LLP and Doug Miller with Kahn Kleinman, LPA, teamed up to discuss the subject at the August 2006 annual meeting of ILTA. They presented the following profile of an embezzler:
- Completely trusted and never checked
- Several years service with firm
- Rarely takes vacation/holidays
- Secretive and rarely delegates to others
- Personal/Family health or financial problems
- Lifestyle inconsistent with income
- Rumors of affair or drug/alcohol abuse
- Unusually close relationship with vendor
A KPMG survey in 2002 reported that the average incident goes on for eighteen months before detection. More than half of the time the defalcation is exposed only through a tip or by accident. External audits are not the answer. Less than 11 percent of embezzlers are caught as a result of external audits. Fraudulent checks, credit cards, payroll, petty cash and outside vendor accomplices are all favorite tools of the law firm embezzler.
What should you do to protect your firm? First, select business software with built-in audit trails and controls. Remain alert to the reality that it can happen in your firm. Keep your eyes and ears open. Obtain professional assistance to implement appropriate internal controls including segregate of duties. Insist that employees take vacations as consecutive days under an arrangement where others assume their duties. Do not let a crisis take over and circumvent normal controls and procedures. Budgeting, comparative financial results, and detailed review and questioning of monthly financial statements are an essential function of law firm management and play a vital role in protecting and preserving the assets of the firm.
Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.
Related posts
Filed under Risk managment by Tom Collins