Solo & Small Firms Vulnerable to Embezzlement

Solo and small firms are particularly vulnerable to embezzlement according to Michael Downey of Hinshaw & Culbertson.

He is quoted in the Law.com article Law Firms Make Easy Pickings for Embezzlers:

Law firms are especially vulnerable to embezzlement for a number of reasons, said Michael Downey, a partner in the St. Louis office of Chicago-based Hinshaw & Culbertson. His practice focuses on legal ethics and professional service risk management. Embezzlement happens most frequently within solo and small firms, Downey said. (About 80% of the nation's 1.1 million attorneys work in law firms of 50 attorneys or fewer, according to the latest information available from the American Bar Foundation).

Attorneys tend to delegate business matters to employees and provide too little oversight, he said. In small firms, one person often is handles accounts payable and receivable. "It's someone whom they rely on for almost everything," Downey said. Lawyers are more interested in practicing law and too seldom trained to run businesses, he said; they're eager to hand over financial responsibilities to staff.

Some important things you should consider:

• Never, never give staff access to the trust account
• Regularly check the books yourself - very often the embezzler is a trusted employee who is given authority over accounting matters
• Work with your accountant to develop procedures for accountability
• Look for irregularities - for example, several million dollars of embezzlement were discovered when a paralegal noticed that a signature on a settlement looked suspiciously like the attorney's signature
• Be on the lookout for life issues - chemical dependency, gambling addiction, depression, even family issues that may tempt an employee or partner to start stealing

Even taking precautions is no guarantee that employees or even partners will not steal from the firm.  But you can decrease the chances by simple precautions.

- Peter H. Berge

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written by Eric Cooperstein, June 12, 2009

One additonal precaution is to have the bank statements mailed to the home address of someone in the firm who is not responsible for reconciling the bank accounts. Makes it much harder for the bookkeeper to engage in fraud.

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