March 24, 2008
Law Firms' Lack Of Oversight Risk More Than Money
The Estrin Report is a great resource for paralegals and other legal support professionals. The March 22nd post quotes a Maryland Daily Record article where an attorney has been suspended twice - TWICE - for mismanagement of client trust funds. He never took one penny, however. Instead, he was the victim of two consecutive bad hires.
The Maryland solo practitioner hired a paralegal, among other things, to manage a client trust account. The paralegal, without oversight, embezzled nearly $150,000 before being caught. After being disciplined, the attorney hired another paralegal to "clean up the financial mess left by " the predecessor. This one took over $170,000 from his clients.
The attorney complained that he had several hundreds of cases he managed and was in court a lot. "You’ve got to delegate things. You can’t be there to sign every check.”
Whether these were paralegals or not isn't the point. What is noteworthy is the exposure attorneys have, especially in small firms, when trusting unmanaged staff to control firm finances. Embezzlement is more common than we'd like to believe. (Admin charged with embezzling over $200,000 from firm; Bookkeeper embezzles over $400,000 from firm; New Orleans firm dissolves after Chief Financial Officer embezzles $2 million; Office Manager embezzles $700,000 from firm; Bookkeeper accused of taking over $4.3 million from escrow accounts)
Ignorance is no defense. You can't spend all day watching your staff either. “You’ve got to have some trust in your employees,” the aggrieved attorney said. “You pay them good money.” In his case, you'd think a little skepticism would have been prudent.
What are some things that can be done to avert a would-be-embezzler? Tom Collins wrote the following in his September 6, 2006 post:
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 segregation of duties. Insist that employees take vacations on 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.
Scott Barrett wrote an article in 2004 that addresses ways to avoid being a victim of embezzlement. Read it by clicking here.
We have begun taking submissions for the 2008 Law Firm Economic Survey. If your firm is interested in participating, please contact Brian by clicking here.
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Filed under Management, Operations by Brian J. Ritchey
