Make More Rain : technology, risk managment

$30 Million Law Firm Embezzlement; How Can That Happen?

Admin — Mon, 02 Apr 2007 17:07:11 GMT

“Hardworking” attorney embezzles thirty million dollars! My brother J. Steven Collins, the Knoxville attorney and one of the founding partners of Burroughs Collins & Jabaley, PLC, forwarded the story to me and asked, “How can that happen?”

Unfortunately, law firm embezzlement is hardly an infrequent event. The amounts change and the embezzlers can be a billing attorney, administrator, office manager, accountant, or bookkeeper, but many similarities are present in reported cases.

Back to my brother’s question, how can this happen? 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 crisis-driven transactions. Many law firms have to add to the list the power of unchecked individual attorneys to create their own rules when it comes to “their” clients.

One study by a major CPA firm reported that the average incident goes on for 18 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.

According to the ABAJoural EReport story, Lawyer Stole Millions, Indictment Says, by Stephanie Francis Ward, this New Orleans partner sent clients fictitious billing statements with enclosed self-addressed envelopes, directed to the attorney’s attention. Funds received were deposited to the firm’s trust account for the client. The partner would then ask the firm’s accounting department to write checks from the trust account to businesses he set up and controlled. Those businesses were disguised as transaction participants. The partner allegedly created phony paperwork, such as closing documents, to make the transactions appear legitimate. The attorney was described as hardworking and was one of those who insisted that any billing questions related to “his” clients be referred to him for resolution. He was discovered because a temporary worker, who didn’t know about his hands-off rules, received a call from a client asking about a bill.

Perhaps the most common characteristics of the embezzler are the following:

Completely trusted and never checked
Several years service with firm
Rarely takes vacation/holidays
Secretive and rarely delegates to others

While they apparently did not apply in the $30 million case, four other characteristics are often present:

Personal/family health or financial problems
Lifestyle inconsistent with income
Rumors of affair or drug/alcohol abuse
Unusually close relationship with vendor

What should you do to protect your firm? First, select business software with built-in audit trails and controls. Do not allow chiefdoms within the law firm. It is a business, and no attorney should be allowed to create their own rules, bypassing internal and business controls, for the handling of “their” clients.

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 segregation of duties. Insist that employees and attorneys take vacations as consecutive days under an arrangement where others assume their duties. Send trust and accounts receivable statements showing all transactions independent of the individuals responsible for billing. 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.

Client Attrition Risk Scorecard for Law Firms

Admin — Thu, 15 Mar 2007 18:11:24 GMT

A recent study by Redwood Analytics as reported by Larry Bodine identified the distinguishing characteristics of clients retained by law firms. The absence of those characteristics and the presence of others can identify clients most likely to go elsewhere. The study is a reminder that law firms can use their business system to create a scorecard according to attrition risk and having done so can target those clients for remedial steps. The scoring part is the easy part; developing a culture willing to take action to improve retention is the harder part. As for actually producing the attrition risk scores, your business software should track the necessary indicators. To produce a scorecard you will need a custom reporting procedure. Law firms with in-house capabilities should be able to do that internally using reporting tools but, in any case, your software provider should offer custom reporting services for a reasonable fee. If not, you have the wrong software or wrong software provider.

What are the attributes you want to measure?

On the plus side Redwood found that long-term clients had the following attributes:

Provides the firm a large amount of legal work
Has a mature, established relationship with the firm
Uses the law firm for matters involving two or more practice areas
Two or more partners are significantly involved with the client’s work

Redwood also found the following:

First year clients have an attrition rate of 50% compared to 20% for clients with a four year history.
Clients with only one partner involved have the greatest attrition rate.
Too much or too little partner time on matters creates an attrition risk. Morepartnerincome believes that the danger zone is anything less than 10% or more than 60%.
Clients most at risk have an overall realization of less than 80%, i.e., discounts don’t retain clients.

You will have to play around with this but start out trying the following:

Give 10 points to a firm whose prior year fee revenue met the 1% test. (To keep it simple, divide your annual fee revenue by 100. Use the amount in your report to identify clients meeting the “large amount of legal work” test.)
Deduct 5 points if the fee revenue for the prior three months x four is less that the 1% test, i.e., fee revenue is declining.
Add10 points if the client has been with the firm for three or more years.
Add 5 points if the client has matters in at least two practice areas.
Add 10 points if the client has multiple billing (supervising) attorneys on active matters with billed amounts during the prior three months.
Add 5 points if partner hours on the prior three months’ bills were greater than 10% but did not exceed fifty percent.
Deduct 5 points if unbilled fees exceed the prior two months’ fees.
Deduct 10 points if billed but uncollected fees exceed the prior three months’ fees.
Deduct 5 points if prior year collections where less than 80% of the prior year value of billable hours at standard rates.
Deduct 5 points if the percent of partner hours on the prior three months bills were less than 10% or greater than 60%.

There is nothing magic about the above weights for the items listed. You can and should vary the weights to fit your firm’s experience. There is no perfect score. Those with the highest points are the least likely to abandon the firm within the next three years. Those with the lowest score are the most likely to leave.

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.

Protecting the Law Firm's Reputation

Admin — Thu, 15 Feb 2007 19:51:00 GMT

The Harvard Business Review’s February 2007 issue included a scholarly article dealing with protecting a business’ reputation. The authors noted that firms with a strong positive reputation attract better people, can charge a premium for their services and products, and enjoy greater client loyalty.

The Catch 22 is that the more important your reputation is, the more vulnerable it is to anything that damages that reputation. So what proactive measures can you take to protect this extraordinarily valuable firm asset? After-the-fact crisis management is not the answer. Actions taken at that point are attempts to minimize the damage already underway.

Start by assigning someone the responsibility for managing the risk. It starts by monitoring and intellectually questioning three important aspects of the risk and then mobilizing coordinated efforts through the firm leadership to head off threats that appear on the horizon.

We are always judged by others—clients, vendors, employees, peers, competitors, etc. What we are is determined through their eyes and not our own. The responsible individual should take steps to track through various means the three aspects of reputation risk listed below. Report to the leadership and recommend prophylactic measures where appropriate. The three areas are:

Reputation Gap: How are we perceived by those who judge us versus our reality? The greater this gap, the greater the risk. Action is needed to change the perception or the reality to close the gap. A failure to live up to inappropriate reputation can be as costly to the firm as a failure to live up to the reputation you previously earned. Likewise, the failure of the public to give the firm due credit and market position means it will not get the business it should have and is likely to attract the wrong prospective clients.

Changing Expectations: How are the standards of those who judge you (and enterprises like you) changing? Are tastes, ethics or values changing? Are clients changing what they look for in terms of how they relate to their providers? What about the things they value most? Is it loyalty, responsiveness, friendliness, or other things? Do they want to socialize or get right to business? Do they value gray hair or youth? Do they want to do business by phone, email, or in person? Do they expect a center city premium location? Is convenience or prestige more important? Failure to see changing preferences in our fast-paced times can erode your reputation in a few short years. How quickly did your law firm embrace e-mail or the growing expectations for law firm web sites? Do your attorneys understand the expectations of the Generation X and Generation Y clients that will replace your baby boomer clients as they leave the scene?

Organization-Wide Coordination: Once we understand the reputation we have and want, the next question has to be, are we acting in accord with that reputation? Is every department and every individual aware of our reputation goal and performing accordingly? Do our phone handling practices reinforce our image or bring it into question? How about how we receive visitors to the office? Are our communications with clients consistent with our image? Do our couriers represent us consistent with our reputation? Do we have partners, associates, or others who aren’t on board?

In most firms, risk to reputation is not currently managed. Responsibly has not been assigned. Those who enjoy a stellar reputation should take note: their most valuable asset will always be a risk. The first step in managing that risk is to put someone in charge.

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.

Cyber Insurance For Law Firms

Admin — Wed, 14 Feb 2007 19:35:17 GMT

Ed Poll wrote an informative article on the subject of cyber insurance appearing in the January 2007 Law Technology News.

He explains that if you are interested in cyber insurance, you should first review your current coverage. You are probably spending too much on traditional insurance plans, such as property, and errors and omissions. Those policies do not cover cyber damages, and most of your value resides in unprotected data.

Where do you go for specialized cyber insurance? Ed points out that American International Group, Chubb, and Lloyd’s of London have offered coverage since the late 1990s. The biggest risk involves unauthorized access to confidential information. Insurance coverage should address both direct financial loss as well as liabilities arriving due to damage to clients and other parties. Ed Poll is the principal of LawBiz Management Co. and Edward Poll & Associates Inc. He is the author of LawBiz.Blog and his email address is edpoll@lawbiz.com

Laptop theft and the resulting exposure of confidential information is an increasing risk to law firms. A separate article in Law Technology News by Julie Machal-Fulks and Robert Scott (starting on page 46) dealt with security risks associated with portable devices and is well worth a read. Having recently attended LegalTech and observing some risky behavior involving attendee laptops, it is worth passing on to you as a reminder. “When using your laptop at conferences, keep your eyes on it.” Laptop theft on Wikipedia is a valuable source of information for protecting the information on your laptop.

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.

Law Firms Ignore Their Biggest Risk

Admin — Tue, 05 Dec 2006 19:45:29 GMT

The December 4, 2006 Time Magazine includes an article dealing with the psychology of risk or "Why we worry about the things we shouldn’t and ignore the things we should."

It is well worth the read. It seems nature has left us to navigate this advanced world with a prehistoric brain. We are wired to respond to immediate threats rather than long term threats that may pose greater risk and danger. We are wired to respond to those things we dread—things that can cause pain and suffering.

The problem with this is that it leads to poor decisions. We elect to drive rather than choose the lower risk alternative of flying. We worry about mad cow disease, which has not killed one person in our country, but we continue to subject our bodies to practices that will lead to a fatal heart attack. We worry about lightning when more people die from falling out of bed. The article makes for interesting reading on a personal level, but it also has ramifications from a business risk standpoint. Misreading risks and ignoring those with higher certainty occurs in most law firms.

We worry about the gun-toting disgruntled client when a medical emergency is far more likely. We insure an important partner’s life but make no plans for the certainty of their eventual retirement. We purchase fire insurance but take inadequate steps to deal with data loss. We worry about malpractice claims and ignore the risk imposed by our aging partners.

One of the steps in strategic planning is to identify the risk faced by the business and then take steps to mitigate strategic risks—those with the biggest impact related to their likelihood of occurrence. To help our “old brains” put risk in proper perspective, planners should compute a Risk Index number for each item. A Risk Index is a computation based on likely occurrence and impact. For example, list the risk faced by the firm and assign to each a percentage of likelihood that the listed risk will occur within a given timeframe. For example purposes, let’s use 25 years.

Over the next 25 years, what is the likelihood of:

Destruction by fire

Sudden death or disability of key partner

Retirement of key partner

Server crash without recoverable backup

Major malpractice loss

Assign each a percent of likely occurrence in the next 25 years.

Destruction by fire = 05%

Sudden death or disability of key partner = 25%

Retirement of key partner = 100%

Server crash without recoverable backup= 100%

Major malpractice loss = 15%

Next, assign each an impact percentage and multiply the two to create a simple risk index.

Destruction by fire = 05% * 80% impact = 04 Index

Sudden death or disability of key partner = 25% * 60% impact = 15 Index

Retirement of key partner = 100% * 60% impact = 60 Index

Server crash without recoverable backup = 100% * 40% impact = 40 index

Major malpractice loss = 15% * 90% impact = 14 index

When one looks at risks faced by the firm in the above example using their Risk Index, the first concern of the law firm should be continuity planning. Their second concern should be taking additional steps to protect against loss of data. Yet at a strategic level, these two risks are often ignored in many firms. The two risks with the lowest Risk Index in our example are fire and a crippling malpractice loss. These are the two areas firms are most likely to have addressed at a partner level. It isn’t that those two risks shouldn’t be addressed; we just have a tendency to ignore risks of greater certainty. We do so because our brains are wired to react to some threats with fight or flight signals while ignoring other, more modern threats.

Identifying risks and viewing them from the standpoint of their risk index is one of the steps in a structured strategic planning process. Partners are not actuaries and are unlikely to precisely quantify likelihood or impact, but their collective judgment will be close enough to provide sound business insight into risks that need to be addressed from a strategic level. The law firm is a source of livelihood and wealth, and survivability should be the first objective of the business.

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.

How Secure Is Your Law Firm Suite?

Admin — Mon, 04 Dec 2006 20:59:00 GMT

Most buildings housing law firms have security systems and high-rise buildings usually have security personnel. But few law firms have taken the issue of internal or suite security seriously enough.

Without taking appropriate steps, you may be unable to prevent or deal with an unwanted person entering your office suite. Installing the firm’s own security systems to protect its suite is a sound business investment. During business hours, entrances can be controlled with electronic locks and card readers. Panic buttons should be at the reception desk and other designated areas. Your receptionist should understand his or her responsibility for security. The reception area should never be unattended. Visitors, including repairmen and deliverymen, should not pass beyond the reception area unless they and the nature of their business are known or verified by the receptionist. All suspicious persons or activity should be reported immediately to building security or the police.

In his article published in The Greater Los Angeles ALA’s November Leadership Exchange Magazine (page 20), Ted Low listed 27 security precautions we can take regarding our personal security as members of a law firm. He noted that, “Investigations reveal that a large number of crimes would not have been committed had office personnel been alert to strangers or taken a few simple precautions.”

I include proactive steps to handle medical emergencies as a part of a firm’s responsibility to provide for the security of its partners and employees. As noted in a prior post, medical and health emergencies involving visiting clients, the professional team, or office staff can happen at any time. Create a first aid station including a defibrillator and communicate its location. Have volunteers trained in CPR and operation of the office defibrillator.

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.

Protecting the Law Firm from the Flu

Admin — Mon, 06 Nov 2006 19:16:00 GMT

This week I will stop by the Juris worldwide headquarters for an annual flu shot, compliments of the company. The majority of the Juris team will also receive free flu shots on the same day. They are the people that more than one-fourth of all U.S. midsized law firms depend on for ongoing support of their enterprise business systems.

In addition to free flu shots provided in the work place, Juris equips all critical support personnel with the ability to operate from home with the same capabilities that they enjoy when in the workplace. This provides operating robustness for dealing with any possible business disruption scenario including bad weather, disasters, or medical epidemics.

What steps is your law firm taking to protect your firm and your clients from disruptions due to the flu? Don’t forget that at some point the usual flu season can become even more destructive. Most medical scientists believe it is only a matter of time before we are faced with a deadly Avian Flu epidemic.

Providing flu shots and making them available in the office is probably a wise and profitable investment. Likewise, during flu season, have boxes of tissue and alcohol-based disposable hand wipes or personal size gel sanitizers readily available as office supplies. Make sure they are strategically placed and that all members of the law firm team know they are there for the taking as needed.

This is a good time to remind everyone to stay home when sick and to take common sense measures:

Avoid contact with people who are sick
Cover your mouth and nose with a tissue when coughing or sneezing
Clean your hands often
Avoid touching your eyes, nose, or mouth
Check with a health care provider when needed
Practice other good health habits.

For more information, go to Stopping the Spread of Germs at Work on the CDC’s web site.

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.

Surviving a Malpractice Claim

Admin — Fri, 26 May 2006 17:29:00 GMT

While doing some research on survival tactics for law firms following a malpractice claim, I can across the insightful comments of Douglas Thompson, managing director of Thompson Flanagan & Company.

Mr. Thompson observed that law firms that have successfully navigated around a large loss usually have taken similar steps:

1. Internal handling of the claim was given to firm lawyers who are not involved with the client or the surrounding work.

2. Handling of the claim was contained within the “claims team” to ensure it did not become a distraction and to reduce inappropriate leaks.

3. Top-producing partners provided reassurance of their commitment to the other firm members.

Thompson notes that “it is a crushing blow when a top producer exits in a situation under such circumstances, as it destabilizes the partnership and threatens the fabric of the firm.”

Douglas Thompson should know. Protecting law firms from Goliath and stone throwers alike is the business of Thompson Flanagan & Company. His comments appeared in the March 2005 issue of Accounting and Financial Planning for Law Firms® from Law Journal Newsletters.

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.