25 Ways to Protect Your Practice Against Embezzlement
By Beverly Michaelis
Practice Management Advisor, Professional Liability Fund
In 1994 a North Carolina lawyer was disbarred checks is an unnecessary liability. The same
for “gross negligence in overseeing trust is true for your operating account.
accounts” after his secretary misappropriated Determine what is reasonable for your office
$35,000. Although the lawyer had no and make the appropriate adjustment in your
knowledge that his secretary was stealing and next check order. If you are concerned about
took no money himself, the state bar found the the amount of checks you have on hand
lawyer’s inattention to finances grounds for now, consider destroying some of them. See
disbarment. discussion, infra.
In another instance, a long-term employee 3. Never allow checks to be written from your
embezzled thousands from a trust account and trust account to cash. Pay yourself by
then forged a resignation letter from the lawyer writing a check payable to your operating
to the state bar so the bar wouldn’t investigate account. Pay costs on behalf of the client
the loss. directly to the entity in question, i.e., the
court, county recorder, sheriff, process
These horror stories, reported in Lawyers Weekly server, etc..
USA1, have had their counterparts in Oregon.
Each year the Professional Liability Fund (PLF) 4. Require supporting documentation (invoices
receives calls about embezzlement, or detailed check request forms) when
misappropriation of funds, and office theft. signing checks. Question check requests for
Trusted law office staff, attorneys, janitorial any vendors whose name you don’t
help, and even clients have been suspect in past recognize. In larger firms, take the extra
incidents. precaution of requiring two signatures when
a check is written for more than a specified
What can you do to protect yourself? The truth dollar amount. Never sign a blank check.
is that nothing will stop a thief who is absolutely
determined to steal. Although protection from 5. Establish clear written policies for employee
outside risk is beyond the scope of this article, expense reimbursement. Use standardized
here are a few simple steps virtually every firm reimbursement forms and require original
can take to minimize the risk of loss internally receipts.
and to protect clients.
6. Limit the amount of petty cash on hand.
Establish procedures for reimbursement,
25 Ways to Prevent Financial Loss to You or
require original receipts, and use
Your Clients
standardized forms.
1. Lock up your trust and operating account
7. Use a signature stamp? If so, this
checks and deposit slips. Store them in
convenience may pose a substantial risk for
separate locations. Not only will this make
you and your clients. During a three year
the thief’s job more difficult, it will lessen
period from 1992 to 1995, a legal assistant
the chance of mistakenly writing a check on
in North Carolina successfully used a
or making a deposit into the wrong account.
lawyer’s signature stamp (and other means)
to misappropriate over $250,000 in client
2. Limit the number of blank checks on hand at
funds.2
any one time. If your trust account activity
is nominal, an order of several hundred
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8. Start protecting client money the moment ATM access to your trust account. Consider
you receive it. Take steps to avoid doing the same for your operating account.
misplacing or misfiling client funds.
Immediately endorse and photocopy all 13. Think twice about setting up online banking.
incoming checks, money orders, drafts, or Unless special precautions are taken, the
other instruments using a “for deposit only” convenience may not be worth the potential
endorsement stamp. To protect yourself and risk.
your clients, make deposits daily.
Remember, the sooner you deposit client 14. Know your accounting and check writing
funds in trust, the more quickly the funds programs. Many a lawyer has been lulled
will clear and be available for disbursement. into complacency thinking nothing will go
If you have client money on the premises wrong because a process is “computerized.”
and cannot get to the bank, you must make Anyone who has ever experienced data
other secure, appropriate arrangements. corruption, a virus, or computer crash
understands the danger of this attitude. In
9. Discourage clients from paying cash. But if some instances, computerization can make a
cash is accepted, issue a written receipt and firm more vulnerable to theft. If you don’t
deposit the cash immediately. Ideally staff understand how your program works, you
should not receive cash, but it may be can’t supervise others who are performing
unavoidable in some circumstances. If accounting duties with it.
possible, have a second person in the office
witness the receipt. Whatever you do, do not 15. Use passwords to protect and limit access to
attempt to establish a better paper trail by financial data stored on your computer.
pocketing the cash and substituting your
own personal check for deposit into your 16. Back up all data on your computer,
account. especially financial information, on a regular
basis and test the integrity of your back ups.
10. If you accept Visa or Mastercard, protect the
credit card numbers of your clients from 17. Know your people. Don’t enter into a
being used inappropriately or released partnership, office share, or hire a
inadvertently to unauthorized persons. bookkeeping service on blind faith—check
Limit access to credit information and retain the background of your potential partners,
transaction slips and other records in a office mates, or independent contractors. If
secure location. you’re hiring staff, check references as
thoroughly as possible. Once in practice,
11. Avoid wire or phone transfers. The lack of a keep an eye out for unexplained changes in
paper trail can cause major headaches at lifestyle, spending habits, or other behavior
reconciliation time and make your firm and that might tip you off that something is
your clients more vulnerable to theft. If you wrong.
need to transfer funds from one account to
another, make your check payable to the 18. Make sure partners and associates are not
specific account you wish to transfer funds paid directly by clients. Audit billing
to and not to your bank. Checks made statements periodically to make sure they
payable to your bank can be deposited into a match the actual work done by the
thief’s personal account. partner/associate.
12. If you received an ATM card when you 19. Separate accounting duties (accounts
opened your trust account, cancel your PIN receivable, accounts payable, billing, etc.) if
code immediately, cut up the ATM card, and staff size allows. Centralized accounting
do whatever else is necessary to prevent responsibilities make it more difficult to
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detect theft or other problems. Payroll in 23. Keep good records. Following the paper
particular should be scrutinized by someone trail is often the only way to catch a thief.
other than the person responsible for cutting
the payroll checks. Consult a CPA firm for 24. If you destroy or recycle financial records,
assistance in setting up proper controls and protect client confidentiality. Take
accounting procedures. appropriate precautions and dispose of
materials securely. See Formal Opinion
20. If accounting duties have been delegated to No.1995-141. ORPC 1.15-1(a) requires that
staff, it is critical that a partner take complete records of trust account funds and
responsibility for reviewing all notices, other property be kept for a period of five
correspondence, or statements received from years after termination of the representation.
the firm’s bank(s). Instruct staff to date
stamp and deliver bank mail unopened to the 25. Purchase adequate insurance coverage—
partner in charge of this review. If you are a money and securities; valuable papers;
sole practitioner, have bank mail sent to business interruption; liability; theft,
your home address. When the bank disappearance, and destruction—for both on
statement arrives, do the following: and off the premises to protect against third
party loss. Consider fidelity bonds for
• employees. (Available by name, position, or
Reconcile the account. (The trust account
on a blanket basis.) Find out if your
bank statement should reconcile to the check
janitorial service is bonded. To cover
register and client ledgers.)
• partners or shareholders or protect against
Examine transactions for any irregularities.
credit card forgeries, purchase separate
Verify that deposits were made timely and
endorsements. For the best possible
that no deposits were reduced by cash
protection, combine bonding with the other
returned to the person making the deposit.
• forms of insurance described above—bonds
Examine canceled checks (including
alone are insufficient unless you can prove
endorsements) for forgeries.
• the loss was sustained as a result of
Keep an eye out for counterfeit checks.
employee dishonesty.
• Make note of any missing checks or breaks
in check sequence and investigate.
Above all, use your common sense. The size of
your firm will dictate what you can or can’t do
21. In a larger firm, an administrator may be
to protect yourself and your clients. Adapt the
responsible for some or all of these duties;
ideas that make sense for your particular setting.
however, some mechanism should exist for
appropriate review and supervision by the
How to Get Help
managing partner.
• Consulting with a CPA firm is probably one
22. Even small offices should have the
of the best moves any practitioner or firm
capability to generate financial statements—
can make in establishing proper accounting
an overall picture of the financial health of
systems and controls. If you don’t have a
the firm. Financial statements, or their
CPA firm in mind, contact the Oregon
equivalent, should be reviewed at least
Society of Certified Public Accountants at
quarterly for any radical changes in
(503) 641-7200 or (800) 255-1460 and ask
expenditures. Look long and hard at
for the Client Referral Service.
categories such as payroll or office expense.
In larger offices, embezzlers have been
• Insurance brokers can provide quotes on
known to create fictitious employees or pay
commercial insurance and fidelity bonds as
personal bills using the office expense
well as any special endorsements you or
account as a means of siphoning off money.
your firm might need. Rates depend on the
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amount of coverage, deductible, number of ABA web site at www.abanet.org or call the
locations, number of employees, nature of ABA at (312) 988-5000.
employees’ positions, and internal
•
accounting controls and procedures. The PLF has a variety of resources for
Generally, purchasing a blanket bond for all practitioners who need help with the
employees is less expensive than bonding mechanics of setting up trust accounts or
specific individuals. bookkeeping systems, including free and
confidential office consultations. For
• The American Bar Association has many further information, contact a PLF practice
excellent practice management publications, management advisor at (503) 639-6911 or
a number of which touch on bookkeeping, (800) 452-1639.
accounting and related issues. Check out the
The author gratefully acknowledges the ABA Practice Management Advisors Task Force, Barbara S. Fishleder,
PLF Director of Personal and Practice Management Assistance, colleagues Carol Wilson and Dee Crocker, Norma
Johnson of the Portland CPA firm Geffen Mesher & Company, P.C. and Jill Husemann of JBL&K Insurance for
their assistance in compiling this article.
1
This excerpt reprinted with permission from Lawyer Weekly USA (September 9, 1996), the National Newspaper
for Practicing Lawyers. $125.00 per year. For subscription information, call 1-800-451-9998, or write Lawyers
Weekly Publications, 41 West Street, Boston, MA 02111.
2
Second Lawyer Disbarred for Gross Neglect of Finances. 8NCLW1085.
Originally printed in the Oregon State Bar Bulletin. Revised January 2005.
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