Law Practice Management Asked and Answered Blog
Category: Accounting Controls
Jun 01, 2011
At a recent managing partner forum several of the attendees at the seminar discussed recent experiences with embezzlement by employees. What can we do to protect our firms?
During the past 25 years that I have been working with law firms I have been amazed at the number of embezzlements caused by unscrupulous attorneys, bookkeepers, office managers and other staff members. And yes – even partners. One out of five law firms in my client sample has actually lost funds due to some form of embezzlement and caught the offenders. While some of the firms have prosecuted and taken other actions against the offenders the process was very painful, time consuming, and typically the funds are never recovered in entirety. Of course, this is if you catch the offenders.
Many small firms’ internal control procedures are so lax that funds could be lost through embezzlement and the firm would not even know it.
Only through effective internal accounting and financial controls can law firms protect their offices from theft. The goal is not to catch offenders – but to have a system in place that discourages and prevents the theft from occurring in the first place.
The process involves implementing internal accounting and financial controls. In essence – segregation of duties. Here is an overview of such a system:
Internal Control is the plan of organization and all of the coordinate methods and measures adopted within a business organization to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency, and encourage adherence to prescribed managerial policies.
The four basic elements considered essential in a satisfactory system of internal control are:
- A plan of organization that provides appropriate segregation of functional responsibility and duties.
- A system of authorization and record procedures adequate to provide reasonable accounting control over assets, liabilities, revenues, and expenses.
- Sound practices to be followed in performance of duties and functions of each of the organizational areas.
- A degree of quality of personnel (competency) commensurate with responsibilities.
- Have someone other than the bookkeeper open the mail. (i.e. receptionist)
- Have the person who opens the mail prepare a list of all checks/cash received in duplicate.
- Have person responsible for mail route one copy of the check/cash list to the office manager or managing partner and the other copy along with checks/cash to person responsible for making the bank deposit.
- Assign someone responsibility for preparing the deposit and taking it to the bank. This person should verify the check/cash list against checks and cash, prepare deposit slip and make the bank deposit.
- Upon return from the bank the deposit clerk should provide the bookkeeper with the deposit slip, receipt from the bank, and the check/cash list.
- Bookkeeper enters the deposit into the computer system.
- Office manager runs and mails monthly statements – not invoice fee bills – to clients.
- Don't give bookkeeper check signing authority.
- Have someone other than bookkeeper approve vendor invoices. Require evidence of approval on all invoices.
- Require purchases to be handled by someone other than the bookkeeper and the individual who approves vendor invoices for payment.
- Obtain adequate fidelity bonding insurance coverage.
- Rotate duties when possible.
- Have bank statements mailed to managing partner's home. He/she should bank statements and transactions and then give to someone other than bookkeeper and other personnel involved in processing receipts or disbursements. Some firms have their outside accounting firm perform this function.
- Reconcile all bank accounts monthly.
- Insure that adequate record retention systems are in place.
- Formulate policies that provide for reasonable protection of assets.
- Insure that adequate personnel selection methods, training programs, supervision practices, and performance evaluation techniques conducive to control, providing assurance than an adequate number of employees are available to perform operational duties.
- Insure that vacations are mandatory and contain provisions for competent replacements to perform all of the assigned duties of the vacationing employees.
- Outline job duties in written job descriptions.
- Develop an accounting manual.
- Properly supervise, verify, and follow-up on all operations, people, and systems.
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John W. Olmstead, MBA, Ph.D, CMC