An Inside Track To A Fraud-Free Firm

You might think that the hardest part of being a professional accountant is crunching numbers—getting long lists of debits and credits to match up to an exact number, down to the penny.

After consulting for law firms for the last eight years, the hardest part of my job is telling law-firm partners that someone from their staff has been stealing from them. The initial reaction is generally shock or anger, but that doesn’t take long to turn into painful disappointment because it’s a total violation of trust. Someone they gave a chance to, and even worked with for years and years, has been stealing from them.

ONE FIRM, 10 YEARS OF EMBEZZLEMENT

I remember one law firm that discovered a bizarre transaction while using an outside CPA firm to reconcile accounts. They were concerned that this unusual transaction was done to hide the fact that money was embezzled. I was brought in to investigate the suspicious transaction and ended up having to break the disappointing news to the partners that it appeared that their bookkeeper was embezzling from them.

The law firm handled a lot of cash transactions that stemmed from criminal defense cases and divorces, where the spouse didn’t want any record of hiring a lawyer before proceedings began. Which in turn gave the bookkeeper an opportunity to pocket the cash and then enter it into Juris^® as a completed payment.

Once the firm decided to reconcile accounts, this person cleared items that hadn’t really cleared, then plugged in numbers to try and balance accounts. Numbers weren’t matching, which set off errors in Juris. So the bookkeeper made journal entries to their Client Cost Advance accounts to try to hide the Juris error messages.

Because of my consulting experience with law firms on accounting issues (and I’m an expert Juris user), it didn’t take me long to recognize that the bookkeeper was trying to cover something up. There was no supporting documentation or data to support the journal entries.

Fortunately, I was able to show that deposits entered into Juris didn’t match hand-written receipts and didn’t match deposits into the bank. Because Juris tracks the machine that each transaction is made through, I could pinpoint the fraudulent transactions to the bookkeeper’s computer.

WHAT MADE EMBEZZLEMENT POSSIBLE

First, the firm had about seven bank accounts but hadn’t reconciled them for years. This made it possible for the bookkeeper to enter payments as completed and pocket the money without setting off any software alerts. There was no accountability for reconciling the accounts, outside of the bookkeeper.

Second, the firm had defunct accounts that hadn’t been cleaned up. So the bookkeeper was able to move money in, out, and between those accounts once she had to try and reconcile some of the accounts—and the Juris errors started popping up.

Third, the law firm allowed the same person who handled cash and entered transaction details into the system to also be in charge of reconciling accounts.

These factors not only made it possible for the bookkeeper to embezzle $100,000 a year for over a decade, but it made taking money possible, even after the CPAs began reconciling the accounts. Ironically, once the CPAs started investigating, the bookkeeper didn’t stop stealing, but rather changed how she disguised her maneuvers.

WHY DOES SOMEONE EMBEZZLE

The environment that incentivizes internal fraud centers around three areas:

1. The person is motivated. They may have:
   a. Financial problems
   b. Resentment toward the firm or management
   c. Vices (such as drugs, alcohol, gambling, etc.)
   d. A situation where they live beyond their means
2. They have the opportunity.
   a. They have an underserved level of trust
   b. Lack of segregation of duties
   c. Lack of oversight and monitoring
   d. There is a poor control environment
3. The perpetrator rationalizes or has mental justification.
   a. “They owe it to me”
   b. “No one gets hurt”
   c. “I’ll repay it as soon as I can” (a self-authorized loan)

WHO COMMITS FRAUD

1. People with Motivation, Opportunity, and Rationalization
2. Well-trusted, long-term employees
3. No-good “rotten-to-the-core” people
4. Nice people, with personal problems that are overwhelming
5. Regular folks

4 STEPS TO PROTECT YOUR FIRM

I would love to never have to tell another partner that someone they trusted was stealing from his or her firm. However, there are some steps you can take to help protect your firm:

1. Keep bank accounts reconciled
   Everything on your balance sheet, all of your assets and liabilities, should be tied back to something outside the firm. A bank statement, loan statement, some financial documentation that shows your account balance. Bank accounts should be reconciled as soon as possible each month.
2. Separation of duties
   Bank reconciliations should not be performed by someone who does any of the following:

    

   a. Write checks
   c. Perform online transfers, wire transfers, and/or ACH payments for the firm<
   b. Has access to check stock
   d. Handles cash receipts and client payments
3. Segregate bank accounts
   The idea here is to protect the firm’s cash in a bank account with account information that no one will know. This is to prevent fraud from outside of the firm.
4. Take advantage of professional services
   Utilizing the services that you can get with Juris is invaluable—training, implementation, reconciliation assistance, best practices, processes, and more. This is how you get the most out of Juris, and it ensures that your firm’s accounting practices are sound and the safest possible.

Be sure to drop by at Juris Conference 2019. Let’s talk about fully integrated accounting and billing software, as well as credit card issues. I will also be available to answer any questions you have about protecting your law firm’s assets.