Jane Doe, attorney at law, is distressed. Her bank account balance has dropped dangerously low, and she has no idea why. She has worked so hard for so many years, but the last 2 years it seems as though none of her hard work reaps any income to speak of. How can such a successful lawyer have such difficult financial trouble? Her faithful secretary/bookkeeper/office manager has put in extra hours hoping to boost profits, but nothing seems to be helping. Finally, one week, Nancy Secretary has to be away for a funeral. Jane asks her assistant to fill in and attempt the job of paying bills and recording income. This is when the terrible discovery is made – Nancy has been stealing money every month, not just a few dollars, but several hundred has been regularly siphoned away to fake vendors. Cue the investigations, legal battles, verdicts, and hopefully some restitution.
Embezzlement is very common, and can devastate a business. Trusted employees or even partners in the firm are all possible perpetrators of this sneaky crime. Sometimes life events cause the best person in the world to be tempted to steal a little here or there, or even cook up a large-scale plan to siphon money out of the business for their gambling habits or medical bills. The only way to ensure that trusted people stay trustworthy is to make it next to impossible for this theft to take place at all.
Here are the keys to avoiding fraud in any business:
Separate the financial duties
The person who receives income for the business should not be the person who creates the financial reports. It is too easy to simply understate how much the law firm made that month, and keep a portion of the money. If you run a small firm, have the boss deposit income, allowing the secretary or bookkeeper to record the transactions only.
A great way to ensure this separation is to hire a remote bookkeeper who never handles the money, just records deposits as they take place.
This first step is crucial to preventing fraud. When the same person handles receipt of cash and recording, the temptation and opportunity are just too obvious to ignore. Most people are reliable and wouldn’t dream of doing anything dishonest, but why put them in that position? Go ahead and keep everyone safe from wrong-doing or even the appearance of wrong-doing by separating duties.
Bill payments should have a careful approval system
Yes, you are a busy lawyer who doesn’t want to take the time to pay small bills. Thankfully, we live in the age of great online systems that speed up your process, and allow you to keep an eye on the spending of your business money. Your bill-pay employee can create the checks and send them to you for approval and signature before spending any money. This does require a little of your time, but it is important for the boss to know where the money is going, and be able to protect that hard earned money from going to the wrong place. If your Accounts Payable person doesn’t work in your law office (they can work from a virtual office), use a great system such as Bill.com to follow the approval process. You can also use an electronic check writing system that allows the employee to write checks and send them to you for signature.
Do not allow your bookkeeper to spend money
Your bookkeeper is an amazing person who records your company transactions every month, discusses the spending and income with you, and can be relied upon to answer any financial questions you may have. However, she should never be the one that spends company money. Don’t give her your bank log-in, your Zelle password, or your credit card. She wants to stay trustworthy and free from any blame if money should go missing. Bookkeepers are in business to record transactions and help with advice about money, not to spend the money. The same person should never spend and record money spent.
Have many eyes on the books
Don’t ever just assume that the money is safe and thriving in your bank — take a careful look at those financial reports each month, or more often if you are able. Good business owners are always aware of approximately how much money they have in the bank.
Many cases of fraud involve employees stealing literally thousands of dollars each month, passed off as fake bills, or failure to record income. If every partner in the law firm takes a careful look at the financial statements each month, comparing them with previous months, and keeping track of their vendors, those cases of fraud will not be able to occur.
Require a backup person to learn the accounting and/or bill pay system
Fraud is very easy when only one person knows the accounting system. What happens when that person gets sick or takes a vacation? What if they die in an accident? For all of these reasons, it is wise to have a second person aware of the systems the law firm is using to record transactions, bill payments, and bank deposits. If you have an in-office bookkeeper or money manager, allow them to train a second person so that at least two people are familiar with the company books. If you are outsourcing your bookkeeping, train a second person on the bills and deposits, and ask your bookkeeper if she has a plan in place should she become unavailable to work at some point.
Fraud can hurt a company very badly, get them in trouble with vendors, creditors, and many times the IRS. Don’t let it happen to your firm. Make it a priority to get the systems in place to prevent all fraud, and to keep your honest people honest.
