Spotting the Embezzler…

As the economy remains depressed, most who still have a job feel fortunate, however, lack of economic growth usually translates into steady or even declining compensation – often in the face of demands for greater productivity.  Hard times like these, in turn, sometimes motivate workers, from the lowest paid to the highest, to seek to supplement their income through skimming profits from their employer  How do you spot a person who is likely to engage in dishonesty within the firm, and how do you prevent it?

Those who embezzle usually have one (or more) of these motives:

• Need for cash for a separate business opportunity
• Need for cash for an opulent lifestyle
• Need to “correct” compensation inequities

Those who embezzle are almost always presented with the opportunity to do so as a result of weak policies and procedures within the firm.  For example:

•  Partners find it easier to steal from the firm by diverting money through the types of transactions they regularly handle as lawyers or by “writing off” work that they have instructed clients to pay them directly for “outside” the firm.  This is one reason why it’s so important to generate and regularly review financial reports, including one on WIP and AR that are written down or off.
• Staff members are more likely to take advantage of flaws in the accounting systems and internal controls, such as failure to tie all funds received, whether as checks or cash, to a receipt number which is tied to the deposit slip and the ledger entry, or to forge a partner’s signature or “rush” something needing a signature past a busy partner who doesn’t have time to examine it properly.

The tell-tale signs of an employee who is helping him or herself to firm or client funds include:

• Refusal to delegate work, or to let anyone see what they’re working on
• Desk or file cabinet draws that are suddenly locked when they weren’t before
• Excessive work hours – there from “can” to “can’t” and never out on vacation or sick
• Sudden change in personality, becoming withdrawn
• Obvious stress level that is out of line with the person’s work responsibilities
• Sudden bursts of consumption that don’t fit with what you know about their salary or personal situation

The best way to avoid these problems is by the use of strong procedures, separation of duties, rotation of duties, and spot audits, such as having someone not associated with bill paying or disbursements to clients pick several transactions randomly and place follow-up calls to make sure the transactions actually went as recorded.

Hat tip to LawPRO magazine’s The Many Faces of Fraud issue.