Fraud: Don’t Be the Next Victim
by Steve Cleland
(County Bar Update, February 2004, Vol. 24, No. 2)


Fraud: Don’t Be the Next Victim


By Steve Cleland, C.P.A. at the request of the Law Practice Management Section Executive Committee. Cleland is a partner at Banderi, Beach & Lim, LLP. He specializes in financial and management consulting to law firms, including partner compensation, profit improvement studies, budgeting, operational reviews, internal control reviews, partner retreats, and turnaround consulting. In addition, he is a fraud prevention expert and has written several articles and lectured on prevention in law firms. The opinions expressed are his own.


You hear it all the time -- “He is the last person I would have expected this from. He was like family to me.” In many cases, that is the first phrase uttered when a firm discovers employee fraud.


Long-time, trusted employees embezzle cash over a period of years -- These stories appear regularly in just about every legal and business publication. It happens in firms of all sizes -- small, medium, and large -- and at all employee levels (even partners). The crime knows no gender bias, and in the majority of cases the perpetrator has no prior criminal record. It usually starts off in small amounts and grows with increasing fearlessness. By the time the employee is caught, thousands (sometimes millions) of dollars have been lost. For every embezzled dollar, it will take approximately three dollars in additional collected fees to replace it.


This is a serious problem that is not going away. In fact, during economic downturns, the problem only gets worse. Many managing partners or executive directors think, “Not my employees,” but this type of blind trust mixed with a lack of internal controls can lead to trouble. Your employees could be doing it right now.


The number one reason people embezzle from their firm is because they can -- It is too easy. A well designed, functioning internal control system is your number one defense against both errors and fraud. Three components of a successful internal control system must be in place and functioning for the system to operate effectively: the control environment (the firm’s emphasis on control and quality), control policies and procedures, and monitoring and adjustment. In a normal environment, just knowing that the firm is serious about prevention and that someone is consistently watching is often enough to deter most people.


Fraud schemes are uncovered in various ways, including internal control systems, an employee tip, or a partner/employee accidentally stumbling upon them. In general, the signs are there, but someone must be paying close attention and needs to follow up with any possible loose ends. Strong indications of possible fraud that should be investigated until resolution include the following signs: bank reconciliations not being done on a timely basis or at all, extremely late financial reports, consistent errors in financial reporting, employees who will not take vacation time, employees living beyond their means.


Fraud is prevalent in businesses today. If anything, law firms can be easier targets than other businesses because of the usually “thin” administrative structure and the “trust” element. Don’t fool yourself by having a “not us” mentality. Do something now to minimize your risk before it is too late. Ensure that you have healthy skepticism; are conscious of your employees’ situation(s); have a strong control environment, effective policies, and procedures in place; and that these policies and procedures are monitored and adapted on a timely basis. You can never eliminate the risk that someone will defraud the firm, but by performing the above tasks, you should be able to sleep better at night knowing that you are doing something to prevent your firm from being one of the statistics.


For more information on preventing embezzlement in your firm or to obtain a copy of the “Ten Policies & Procedures All Law Firms Should Have in Place” checklist, contact Steve Cleland, C.P.A. at or (310) 447-1234.

# # #