Joe Epps 2013-12-27 11:27:10
Fraud in the Law Office Attorneys are very smart people. Okay, most attorneys are very smart people. But certainly all of my client attorneys are extremely smart people. Yet, being smart does not insulate you from being the victim of employee dishonesty. In my 36 years of forensic accounting experience, I have worked on a number of cases involving employee dishonesty at law firms. In this article I will provide an example of one fraud case I worked on involving a law office. I have also included a few tips that can help minimize the potential for fraud in your office. Emily had been the bookkeeper in a law office for more than 20 years. She was a trusted and valued employee who rarely if ever missed a day of work. Her one major idiosyncrasy was that she collected items purchased on the Internet. The joke in the law firm was how Emily’s office almost looked like a retail store with many, many boxes of unopened items. One day there was a change in management at the law firm and a new partner, Mary, was put in charge of firm administration. This was a duty that no partner in the firm wanted and was looked at as something the new partner should take care of almost as a rite of passage. In the past, whenever a new partner was put in this position they would go to Emily with questions only to be rebuffed with Emily’s hostile and aggressive attitude. It seemed that everyone was walking on eggshells around Emily, but she was a favorite of the managing partner and founder of the firm. For that reason, no one ever really challenged Emily. However, in Mary, Emily had met her match. Mary simply did not back down from anyone. Even though Emily complained to the managing partner, she was told that she must comply with Mary’s request to have access to documents no one had ever seen. Among the documents Mary requested were the company credit card statements. Emily and all of the partners had company credit cards for company business purposes. Each month, the company credit card statements came to Emily, who would pay the bill. She was the only one to see these statements. It didn’t take Mary long to realize that Emily had been making her Internet purchases using the company credit card. When confronted with this, Emily confessed that she was a shopping addict and insisted she did not mean any harm and that the firm could afford her purchases. She even offered to give the unopened items to the partners in the firm as restitution. Ultimately, it was determined that Emily had misused more than $500,000 of company money through credit card purchases. A complaint was filed with the local police department who, upon entering Emily’s house with a warrant, found that almost every square inch of the house and the garage were filled to the ceiling with unopened boxes. The above example is not uncommon. People who are trustworthy tend to trust others. In small businesses it can be a challenge to have internal control systems which provide for a separation of duties. Also, it can be very awkward within a small business to inform people that someone is looking over their shoulder. While these problems exist, there are some straightforward solutions which can minimize the potential for an employee to steal company funds and misuse company assets. Some suggestions are: • Set up a meeting with the company CPA at the law office. Following that meeting, inform employees that the CPA has recommended to all of their clients that internal controls be implemented. Let employees know that you are going to follow the accountant’s recommendation and that it is nothing personal. • Let anyone handling company funds including credit cards, bank accounts, trust accounts etc. know that the documents and their work will be reviewed periodically. Of course this means you must follow up. Avoid doing this on a regular basis where it can be predicted. Talk to your CPA about random tests that can be performed on various types of accounts and financial documents. If the employee does not know when you are going to review documents or what documents you are going to review, it is far harder for them to hide things. These are only two suggestions. Certainly there are many more procedures that could be followed to minimize the potential for the law firm to become a victim of employee fraud. Talk to your CPA or to a forensic accountant to get advice on procedures and policies. Joe Epps is a CPA and CFE with over 30 years of experience in forensic accounting. His litigation support experience includes contract disputes, antitrust, economic damages, fraud investigations, business valuation and intellectual property litigation. Joe is currently president of Epps Forensic Consulting and teaches a graduate course on forensic accounting at Arizona State University. For more information, please call (480) 595-0943 or visit www.eppsforensics.com
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