As counterintuitive as it may seem, law firms aren’t immune to criminal activity. Because some firms place enormous pressure on attorneys to produce billable work, they may be particularly vulnerable to fraud. Your firm needs to know what to look for and how to protect itself from potential schemes perpetrated by partners, associates and support staff.

Hold everyone to high standards

A firm’s accounting department — payroll and accounts payable and receivable — is where fraud often occurs. But even trusted partners should adhere to your firm’s internal controls and fraud-prevention processes.

All prospective employees, regardless of level, need to complete an employment application with written authorization permitting your firm to verify information provided. Then, call references and conduct background checks (or hire a service to do it). These checks search criminal and court records, pull applicants’ credit reports and driving records, and verify their Social Security numbers.

Protect with oversight

The design of financial documents can help protect your firm’s financial transactions from fraud. For example, use pre-numbered payment vouchers that a designated partner must approve. This is effective because the designated partner knows what the transactions are and how they pertain to your firm’s clients.

A designated partner should also open all bank statements. Even if the partner doesn’t review every item individually, employees will get the message that transactions will be verified. Someone outside your firm’s accounting department, such as your CPA, might review transactions as they’re processed and financial statements at the close of accounting cycle reconciliations.

To prevent fraudsters from manipulating financial records, ensure that accounting and billing systems are accessible only to those partners, managers and accounting staffers who need to use them. Change difficult passwords frequently and keep your firm’s cybersecurity software current.

Special risks

Some smaller firms assign the same person to open mail, make bank deposits, record book entries and reconcile monthly bank statements. In this environment, fraud is not only possible — it’s likely. It’s critical that your firm distribute these tasks to two or more people. If this is impossible, consider outsourcing at least some accounting functions.

Firms of all size — and, in fact, professional service firms in general — need to be especially wary of expense report fraud. A manager should review all expense submissions before they go to accounting for payment. Require backup documentation and an explanation of how expenses relate to client or firm business.

Ethical culture

In the collegial environment of the typical law firm, partners and employees are more likely to be influenced by their peers. Make sure you’ve built a highly ethical culture in which everyone works to deter fraud and is committed to reporting behavior that violates policies.

(This is Blog Post #1022)