How to avoid embezzlement

Embezzlement in law firms in not so uncommon, as noted by Tom Collins who reports the following:

"As a CPA that worked with businesses of all types before founding Juris, Inc.,  I can say that I have never encountered a single case of embezzlement outside of the legal community and found it relatively commonplace among law firms. There are several factors making law firms more susceptible to misappropriation of funds—part-time executive management, absent or weak financial management, inadequate internal controls, high volume of pass through disbursements, decentralized approval and signing authority plus a tradition of deadline or crises driven transactions.

Jarmila Pencikova with Osler, Hoskin & Harcourt LLP and Doug Miller with Kahn Kleinman, LPA, teamed up to discuss the subject at the August 2006 annual meeting of ILTA.  They presented the following profile of an embezzler:


¨      Completely trusted and never checked

¨      Several years service with firm

¨      Rarely takes vacation/holidays

¨      Secretive and rarely delegates to others

¨      Personal/Family health or financial problems

¨      Lifestyle inconsistent with income

¨      Rumors of affair or drug/alcohol abuse

¨      Unusually close relationship with vendor


A KPMG survey in 2002 reported that the average incident goes on for eighteen months before detection. More than half of the time the defalcation is exposed only through a tip or by accident.  External audits are not the answer. Less than 11 percent of embezzlers are caught as a result of external audits.  Fraudulent checks, credit cards, payroll, petty cash and outside vendor accomplices are all favorite tools of the law firm embezzler."

Read the Disciplinary Board cases for more examples.  Being a trusted staff person who seldom takes vacations is a real clue to opportunity. It’s when vacations are taken that the embezzlement is exposed. In one case, a 75 year old attorney, with a spotless career, learned on the day before his disbarment that the State Bar had inquired about his trust account irregularities. His secretary, on a rare vacation that day, had taken money and hidden the State Bar letters of inquiry when she opened the mail.  The amount of money involved? Close to $250,000!  A significant dent in one’s retirement plans!

How can one reduce the chances of embezzlement?

  • First, have checks and balances in place.
  • Don’t allow the person who opens the mail to also create the bank deposits; don’t allow the person who deposits the money to also do the bank reconciliations.
  • Take care to coordinate the accounts receivable with deposits.
  • Review all vendors bills, approve them and only then authorize checks for payment; sign the checks yourself, don’t delegate this function.
  • Make sure that your staff does take periodic vacations.
  • Ask an outside accountant to check your key financial metrics from time to time.
  • Be alert!

These simple steps will reduce and possibly eliminate your exposure to embezzlement.


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