Fraud in corporate America is nothing new. Yet, many law firms overlook the issue in their own organization. Lawyers tend to place the firm's day-to-day operations on a back burner, or to delegate it out to an employee who has been given a great deal of autonomy with little oversight, while the attorneys in the firm focus on serving their clients. Does this sound familiar?

Does your firm have written policies and procedures in place that are designed to prevent fraudulent activities? For example, have you separated the responsibilities for opening the mail and preparing the bills? If you do have a system, when was the last time those controls were reviewed and updated?

Identifying Risks

Law firms enjoy certain protections from fraud; however, they also harbor specific risks. For example, onsite management by a team of professional owners can make it more difficult for thieves to carry out elaborate and costly schemes. However, law firm partners also are more likely to override internal controls. Even if you have internal controls, you must enforce and regularly update them. Otherwise, your firm may be just as vulnerable to fraud as firms that have taken no precautionary measures.

What's more, work environments where there is considerable pressure to meet ambitious financial and performance goals can turn normally upright employees into lawbreakers. And, it does not help matters that some firms are lax in punishing perpetrators because of the fear of bad publicity.

Preventing Fraud

So, where to start? Review your firm's policies, procedures and processes, and identify potential vulnerabilities. This includes hiring, payroll, billing, collections and IT security. At the very least, ensure that your firm follows these processes:

  • Screens Employees
    When you hire anyone (including lateral partners), perform credit and criminal background checks and verify résumé items related to past employment, education, military service and professional certification. The federal Fair Credit Reporting Act generally requires you to obtain a person's permission to run a credit check, and some states allow credit checks only for positions with certain financial responsibilities.
  • Separates Duties
    Make sure no single employee is in charge of purchasing and approving vendors or receiving payments and depositing them. It can be difficult to spread duties among several employees in a smaller firm, so consider outsourcing some accounting functions. Also, never let a non-partner sign checks; this is perhaps the easiest avenue for fraud. You may even want to require that two partners sign checks above a certain amount.
  • Reconciles Records
    Reconcile overlapping financial records periodically. For example, compare receipts that are recorded in your billing system to revenues recorded in your accounting system and then cross-check those numbers with your bank deposits. Review paper and online bank statements regularly, looking for inappropriate transactions.
  • Conducts Surprise Audits
    Audits do not have to be top-to-bottom reviews of your firm's finances; they can focus more narrowly on areas of concern, such as accounts payable. To discourage fraud, let employees know that unannounced audits are possible at any time, but do not let them know what data or records the auditors will review.

Training Attorneys and Staff
It should come as no surprise to you that effective fraud prevention starts at the top. In addition to a system of strong internal controls, no matter how large or small your firm is, management must project and encourage integrity and ethical behavior.

The first step in any internal control program is to make sure attorneys and staff members understand what constitutes fraud, and how they can steer clear of it. Describe and provide examples of illegal and unethical behavior, and explain how employees can help prevent and deter them by adhering to your firm's internal controls. Also, specify the consequences of breaking the rules. For example, an employee who falsifies timesheets may be immediately terminated.

Train partners and managers in spotting potential perpetrators and suspicious behavior. People who commit occupational fraud may exhibit control issues, such as an unwillingness to share duties, files or billing records, irritability or defensiveness when confronted about irregularities, or unusually close associations with vendors. Provide reporting guidelines and a process for investigating such suspicions.

Avoiding Surprises

You may think that fraud happens only in the nonlegal sector at other law firms. To avoid any unpleasant surprises such as your firm's sustaining damaging financial losses, ask your financial advisor to perform a thorough risk assessment. Use your advisor's findings to create or bolster a comprehensive internal controls program. Then, make sure that these rules are enforced regularly and consistently.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.