Preventing Embezzlement

It is an unfortunate fact of life that the most trusted of employees could be stealing money from their employer.  Ian Doddington, CA, an accountant who advises law firms, states that the main areas of risk are:

1. Theft due to lack of internal controls and supervision of accounting transactions:

This is demonstrated by the IBM Selectric typewriter ‘lift-off’ fraud. Ian suspects this was quite common. He states he is aware of one bookkeeper who carried this fraud on for six years in a firm of five lawyers. Her thefts averaged $60,000 per annum.

In her case, cheques were prepared payable to an innocuous payees such as “Minister of Finance” or similar government registry. These cheques were then presented to a lawyer signatory by the employee. After signing, the employee would lift-off the payee and insert her own name and negotiate the check. At month end, the employee picked up the bank statements and put the cheque back into the IBM Selectric to ‘lift off’ her name as payee and re-insert the original payee name. This slight-of-hand enabled the fraud to fool the annual audit.

Special circumstances:

a. The employee would ‘signature shop’ ie pick the signatories who rarely asked questions – usually one of the two litigators when they returned after a hard day in court (she rarely used the paper lawyers)
b. the employee gave her bank a cover story – she was going through a matrimonial separation, her employers were acting for her and she would be cashing regular pay out cheques from her employer.

2.Unsupported payments:

Another fraud occurred where the employee would draw cheques payable to a credit card company in payment of each of the partners’ monthly credit card statements. After signature, he would prepare a covering letter and include his own credit card statement and instructions to spread the payment over the partners accounts and pay off all of his own credit card balance.

Over time this became quite diverse and included payments of his hydro, telephone, cell, and department store accounts.

To add insult to injury, in the season of giving, he would make donations of the firm funds to various charities and obtain charitable receipts in his own name for tax deduction.

3.Inappropriate client disbursements

Client disbursements are quite vulnerable to fraud. Lawyer signatories don’t question validity as strongly when the cheque is charged to disbursements. Ian states he has seen examples of office supplies, entertainment and similar expenses of employees charged as disbursements. If they could not be buried in the bill to the client, the employee would authorize write-offs. There were other situations where junior lawyers have charged personal travel and vacation trips in a similar manner.

Personal injury practices can foster an environment for manipulation. Often the lawyer is involved in structured settlements or paying re-habilitation expenses for the client-medical and home renovation expenses etc. Again, Ian has seen examples where employees personal expenses were run through as disbursements.

4. Air miles

An employee, secretary, would occasionally travel on business with the lawyer (don’t ask me why). Tickets would be obtained using travel miles and the lawyer would get another ‘friend’ who had a travel agency, to provide an invoice for the trip which would then be re-imbursed by the firm.

5. Computer upgrades

Few firms keep an inventory record of their hardware and software acquisitions. One employee had a personal deluxe system and software set up at their home and paid for by the firm- $10,000. This only came to light when the firm was going through an upgrade and the supplier raised  a question about the employees system.

So as we can see, fraud can come in many forms – the common denominator being the reliance on trust by the employer.  While trust is generally a good thing, it is important that the firm also put into place internal controls and checks that ensure that this trust is well-placed.