April 2, 2007
$30 Million Law Firm Embezzlement; How Can That Happen?
“Hardworking” attorney embezzles thirty million dollars! My brother J. Steven Collins, the Knoxville attorney and one of the founding partners of Burroughs Collins & Jabaley, PLC, forwarded the story to me and asked, “How can that happen?”
Unfortunately, law firm embezzlement is hardly an infrequent event. The amounts change and the embezzlers can be a billing attorney, administrator, office manager, accountant, or bookkeeper, but many similarities are present in reported cases.
Back to my brother’s question, how can this happen? 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 crisis-driven transactions. Many law firms have to add to the list the power of unchecked individual attorneys to create their own rules when it comes to “their” clients.
One study by a major CPA firm reported that the average incident goes on for 18 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.
According to the ABAJoural EReport story, Lawyer Stole Millions, Indictment Says, by Stephanie Francis Ward, this New Orleans partner sent clients fictitious billing statements with enclosed self-addressed envelopes, directed to the attorney’s attention. Funds received were deposited to the firm’s trust account for the client. The partner would then ask the firm’s accounting department to write checks from the trust account to businesses he set up and controlled. Those businesses were disguised as transaction participants. The partner allegedly created phony paperwork, such as closing documents, to make the transactions appear legitimate. The attorney was described as hardworking and was one of those who insisted that any billing questions related to “his” clients be referred to him for resolution. He was discovered because a temporary worker, who didn’t know about his hands-off rules, received a call from a client asking about a bill.
Perhaps the most common characteristics of the embezzler are the following:
-
Completely trusted and never checked
-
Several years service with firm
-
Rarely takes vacation/holidays
-
Secretive and rarely delegates to others
While they apparently did not apply in the $30 million case, four other characteristics are often present:
-
Personal/family health or financial problems
-
Lifestyle inconsistent with income
-
Rumors of affair or drug/alcohol abuse
-
Unusually close relationship with vendor
What should you do to protect your firm? First, select business software with built-in audit trails and controls. Do not allow chiefdoms within the law firm. It is a business, and no attorney should be allowed to create their own rules, bypassing internal and business controls, for the handling of “their” clients.
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 segregation of duties. Insist that employees and attorneys take vacations as consecutive days under an arrangement where others assume their duties. Send trust and accounts receivable statements showing all transactions independent of the individuals responsible for billing. 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
Leave a Comment