The National List of Attorneys - Do You Have an EMBEZZLER in Your Law Firm?
The article below was published in The National List of Attorneys October 2011 Quarterly eNewsletter.
Do You Have an EMBEZZLER in Your Law Firm?
by Nancy Lender of The National List
“Embezzlement: The fraudulent conversion of another's property by a person who is in a position of trust, such as an agent or employee.” Encyclopedia.com
We all know what the word means and have heard examples of the crime being committed, but do we ever think it could happen to us?
Maybe we think no one would be stupid enough to embezzle money from a law firm. Not true! In 2009, the National Law Journal reported, "Law Firms Make Easy Pickings for Embezzlers." According to a 2010 Report to the Nations on Occupational Fraud and Abuse, small organizations are disproportionately victimized by occupational fraud because they are typically lacking in anti-fraud controls.
Maybe we think no one would be stupid enough to embezzle money from a law firm. Not true! In 2009, the National Law Journal reported, "Law Firms Make Easy Pickings for Embezzlers." According to a 2010 Report to the Nations on Occupational Fraud and Abuse, small organizations are disproportionately victimized by occupational fraud because they are typically lacking in anti-fraud controls.
Recent headlines:
A small sample of recent headlines reporting embezzlement in law firms include:
- Former law firm office manager to plead guilty in a $1.3 million embezzlement scheme, Central Valley Business Times, Aug. 14, 2009
- Major law firm victim of forgery, embezzlement, Nashville Post, Aug. 11, 2009
- South Florida paralegal charged with embezzling from law firm, Miami Herald, July 19, 2011
- Law firm office manager pleads guilty to embezzlement, spent money on pet spas, jewelry, vacations, LA Times, May 23, 2011
- Law firm manager charged with embezzling $880,000, Chicago Tribune, May 12, 2010
How law office embezzlers—attorneys, bookkeepers, office managers—do it:
Some of the tactics used by embezzlers who’ve been caught might surprise you. They have:
- Paid off personal bills and written checks from Partners’ accounts
- Diverted checks meant for firm partners to other recipients
- Put fraudulent checks in front of the boss for signing during the busiest time of the day
- Illegally wired money from the firm’s account to a spouse’s account
- Used the firm’s computer system to inflate the person’s salary and bonus
- Written unauthorized checks with forged signatures
- Filed a false tax return omitting the fraud-procured income
- Told lies to cause firm partners to authorize checks that were used for other purposes
- Issued unauthorized checks from the firm’s escrow account
- Falsified financial records in order to skim money from the law firm
How to prevent it:
Of course, preventing the crime from happening is the best course of all. Joseph S. Barbagallo, gives the following advice on preventative measures in the March 2011 issue of The Legal Intelligencer:
- Employing solid anti-fraud measures, including separations of various accounting duties, and physical safeguards
- Requiring dual signatures on all large checks
- Conducting reconciliations of escrow accounts to subsidiary ledgers
- Educating management and employees by implementing an anti-fraud training program
- Implementing an anonymous and confidential fraud reporting mechanism
- Conducting random fraud audits in addition to regularly scheduled fraud audits
- Implementing a process for oversight of fraud risks via a governance or audit committee
- Implementing HR background checks (when permitted by law) that include past employment verification, criminal and civil background checks, credit checks, drug screening, education verification and reference checks
In addition to this startling statistic, “One out of five law firms in my client sample has actually lost funds due to some form of embezzlement and caught the offenders,” you will find some very detailed suggestions for prevention in this lawyer’s blog: Scroll down to the June 1, 2011 posting, “How Can I Protect My Law Firm from Embezzlement?”
How to minimize your losses:
Even when embezzlers get caught—which can take years—it often takes several years to get a conviction, or to recoup any of the money. This is why internal company policies as well as purchased insurance policies covering employee crimes and dishonesty can be so valuable. Also in this issue of the newsletter, read about Gary Reik and the insurance opportunities he provides. We recommend that you take a look at what he has to offer NL members.
Occasionally, attorneys steal money from their clients. We will address this scenario in a future newsletter article or blog. We will include real-life examples where this has happened. This unfortunate situation is why the insurance program offered by the National List can be so valuable. At no cost to our clients and with proper notification, the NL protects the accounts placed for collection with our recommended collection law firms up to $3.5 Million. NL insurance does not cover employee theft or embezzlement. That is why we are recommending that our readers research additional insurance coverage. For Terms & Conditions of the NL Insurance, Click Here.
Don’t be a victim! Be alert to the telltale signs that embezzlement could be a threat to your firm. Do everything you can to prevent it and to ensure that, if you do get stung, you have adequate protection against loss.