Embezzlement in the Law Firm

Admin — Wed, 06 Sep 2006 18:17:00 GMT

The untold story of embezzlement within law firms is that the story usually goes untold. Law firms are understandably reluctant to expose the episode publicly, and perpetrators often go unprosecuted.

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.

What should you do to protect your firm? First, select business software with built-in audit trails and controls. Remain alert to the reality that it can happen in your firm. Keep your eyes and ears open. Obtain professional assistance to implement appropriate internal controls including segregate of duties. Insist that employees take vacations as consecutive days under an arrangement where others assume their duties. Do not let a crisis take over and circumvent normal controls and procedures. Budgeting, comparative financial results, and detailed review and questioning of monthly financial statements are an essential function of law firm management and play a vital role in protecting and preserving the assets of the firm.

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Stolen Laptops, a Wake-Up Call For Law Firms

Admin — Thu, 29 Jun 2006 17:35:02 GMT

I received a letter from Susan A. Davis, Executive Vice President with a division of Wells Fargo, which read as follows:

“Wells Fargo computer equipment containing information about you, including your name, address and social security number, is missing and may have been stolen.” To be fair, Ms Davis added, “The computer has two layers of security, and we have no indication that the information has been accessed or misused.”

Now imagine that instead of Wells Fargo, the missing equipment belonged to one of your law firm’s attorneys.

I asked one of the smart guys at Juris, Inc. for his thoughts on the subject. Barry Lancaster, Senior Director of Client Services at Juris. Inc., spent 15 years at Accenture before joining the Juris team. Accenture is one of the world’s leading global management consulting and technology services companies. A graduate of Vanderbilt University, his experience includes leadership of technology and development teams, business analysts, consultants, and implementation of business process quality initiatives.

According to Lancaster, the recent compromise of veteran information was due to an employee taking data home against policy for work purposes. His computer was stolen from his home, and it contained social security numbers for millions of veterans. Dr. Jacobs, CEO of Qualcomm, had his laptop stolen while giving a presentation at a hotel. The FBI was involved due to the sensitive nature of the data on his laptop.

“The firm’s IT staff should look at methods to password-protect critical data on a laptop in case the laptop is compromised,” Lancaster pointed out. “Firms also need to have a policy concerning what data can reside on a laptop. Employees must be aware when there is secure information on the laptop, it is the employee's responsibility to protect the laptop as if it were their own. In fact, when I worked with Accenture, we signed a statement about our responsibility for our laptop before we were given it. Basically, if we lost it under ‘our watch,’ it was our responsibility to replace it.

“Theft in the office is also an issue,” Lancaster continued. “Laptops are easy to take. Cleaning crews can easily hide a laptop and remove it from the building. Firms should have a policy to use lockdown cables at all times for laptops. It is an inexpensive way to secure not only hardware but the data on the laptop. Desktop PCs are getting smaller and smaller as well. Firms should consider the same policy for the new mini PCs.”

In addition to physical security, there are now new innovative steps you can take to protect data on laptops. One example is the technology offered by a company called Absolute Software.Absolute Software has a suite of security, inventory, and recovery tools made specifically for portable computers. These include solutions that will "call home" when connected to the Internet and can be configured to wipe the hard disk of sensitive information. The same technology can also aid in the recovery of a lost laptop by transmitting a location when it is connected to the Internet.

Solutions like those from Absolute and Lojack would not have prevented the information breach involving the veterans’ data. In that case, the data was not contained on the hard disk of the laptop, but a CD that was in the CD-ROM drive of the laptop. The advancement of portable media, i.e. CD-ROM, DVD, USB drives, etc., has made transporting law firm data easy. With this advancement, there has been a material increase in the risk of sensitive information falling into the wrong hands. To protect against such risk, some USB drives have built-in software that encrypts files. There are also software applications for CD/DVD media (such as that available from GuardianEdge) that will encrypt the data while it's being burned to the CD/DVD.

Lancaster continued, “Law firms work with sensitive data related to their clients. It could be very damaging to the firm if that data was compromised. Managing partners should charge their firm’s in-house or external IT person with the responsibility to develop and propose a strategy for protecting the firm from such damage.”

Morepartnerincome.com is sponsored by Juris, Inc. For information about Juris® products and services for increasing law firm performance and partner income, go to www.Juris.com.

Make More Rain : cash flow issues, risk managment

Embezzlement in the Law Firm

Stolen Laptops, a Wake-Up Call For Law Firms