Question of the Week: How Can I Prevent Embezzlement at My Law Firm?
Running an effective law practice means you can’t always be involved in every single detail of the firm’s operations. If you did, there would be no time left to do actual billable work. So how do you prevent embezzlement without handling the accounting yourself?
Employee theft costs U.S. businesses $50 billion every year and due to the nature of their business and operations, solo and small firms are especially vulnerable to embezzlement. With many lawyers leaving their accounting tasks to another individual or team so they can focus on billable work, it’s critical to take the proper steps to prevent fraud and its associated losses. Effective policies, keeping an eye on your employees and their tasks, always being on the lookout for suspicious behavior and being aware of the firm’s financials can help avoid embezzlement.
Keep an eye out
There are some very tell-tale signs that are common indicators of embezzlement, such as:
- Spending outside of their means or salary
- Refusing to take vacations (worried someone will find out about what they are doing if they take over the responsibilities)
- Working excessive hours
- An unusual drop in profits
- Duplicate payments
- Missing documentation
If you notice any of these it may be time to do a thorough review of the firm’s financials or bring in an auditor.
Stay on top of financials
Work to eliminate opportunities and motivation for theft, including making daily deposits so large amounts of cash aren’t lying around as well as conducting regular reconciliations. Bank account statements should be delivered to and reviewed by the firm owner or partner, letting your staff know you’re actively involved in the financials. Walking around from time to time can also let your employees know that you’re keeping a watchful eye on what’s taking place, leaving little room to wonder whether or not you’d notice if something was off.
Check and balances and divided responsibilities can help ensure no one individual has access and the power to commit fraud. For example, when the person who signs the checks should not be the same individual who completes the reconciliations. Financial and bookkeeping duties should always be handled by separate people.
These policies should be put into effect before hiring takes place. Use a thorough screening process to make sure there is no history of theft and consider running a credit check on individuals who will be dealing with the financials. All of this should be in accordance with your state and local employment laws and regulations.
Require supporting documents for travel expenses and reimbursements. If you don’t want to seem too overbearing, consider requiring them for any amount over a particular threshold. Also limit the use of company cards and who they are provided to, along with requiring approval for larger purchases.
An employee handbook is an effective way to communicate these policies, spelling out what is expected and how repercussions are handled. Be sure to include a code of conduct policy and review each year.
It could happen to you
Many times employee theft and embezzlement are committed by those who the firm trusts the most. Don’t ever assume you can put full trust and handling of your firm’s funds into someone else’s hands. For any business, employee theft can have an impact, but for small and solo law firms the misplaced funds can result in long-lasting, negative effects.
For more information on how to prevent embezzlement check out What Steps Can I Take to Protect My Firm From Embezzlement?