Professional Services Accounting ARTICLE -
Deterring Financial Fraud

Law Firm Forensic Accountants

Target Audience: Accounting Consulting Firm News and Updates Interest, Law Firm Professionals, Lawyers, Law Firm Associates, Fraud Examiners, Forensic Accounting Services Interest, Employees, Employers, Chief Financial Officers, Control Process Participants

The Association of Certified Fraud Examiners estimates that employee fraud accounts for around $638 billion in losses each year, with most fraudulent acts being committed by trusted employees.

Employees engage in a variety of financial crimes against their employers, ranging from fraudulent billing to misappropriating assets. There are no sure-fire methods for stopping these acts, but there are precautions you can take to help protect your firm.

3 elements are usually present in each case of employee financial fraud:

opportunity,
motive, and
rationalization.

Most employees who commit fraud see a window of opportunity that they believe will allow them to get away with it. Some are driven by outside financial pressure, such as a gambling addiction or overwhelming debt. Others are motivated simply by a desire to live a more luxurious lifestyle. Perpetrators may justify their actions by convincing themselves that they’re just “borrowing” the funds. Or they may have an inflated sense of their contributions to the firm and believe they’re underpaid and deserve what they’re taking.

Case in point: A firm delegated all accounting and reporting duties to its CFO/controller with no oversight. After all, the partners fully trusted him because he’d remained loyal to the firm for more than 15 years, even staying through lean times when pay increases and bonuses were little to none.

The firm never suspected that, for the last three years, the CFO had felt that his contributions weren’t valued as much because he wasn’t an attorney and partner. So when he saw the opportunity arise, the CFO began using “creative” accounting practices to embezzle the firm’s money, believing that he was getting what he deserved.

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Recognize Signs of Danger to detecting financial fraud

There are a number of indicators that a staff member may be committing financial fraud. You just need to know what to look for. For example, after the fraud in the example above was uncovered, the firm realized other unusual behaviors from the fraudster were red flags. For example, the employee often displayed defensive, emotional or territorial behavior whenever there was a change in his work. Also, he never took vacations of more than a few days, and he started driving a much more expensive car and wearing custom-made suits.

In addition to noting unusual behavior in employees, look for financial activity, such as:

Growing accounts payable and receivable combined with dropping or stagnant revenues,
Receivables open for extended periods,
Invoices being paid late or not at all,
A large number of account write-offs, and
Bad debt.

In the case of the fraudster CFO, he increased purchases from new vendors and wrote bogus invoices to himself, among other things. Contact our forensic accounting services team to see how we can help you

Close Windows of Opportunity - stop fraud in its tracks

Focus on prevention to stop fraud in its tracks. Ensure that you understand all aspects of your firm’s accounting systems and practices and are an active participant in its control process. Other strategies you can implement include:

Separating accounting functions.

Don’t give a single employee complete control over a financial transaction. For greater accountability, consider having a two-signature sign-off for larger checks and using a payroll service. Run a journal entry report every month, and investigate and approve all new vendors. And have a partner monitor financial statements and payroll.

Partnering with your accountant.

Ask your CPA to help you prevent and uncover fraud and embezzlement by creating effective internal controls as well as monitoring bookkeeping records, invoices, bank statements, payments, journal entries, financial reports and other documents. Also, have your accountant perform scheduled and unscheduled financial audits. Surprise audits are useful in identifying potentially dangerous gaps in your controls and procedures and in letting your employees know that fraud prevention is a top priority.

Documenting a plan of action.

A good line of defense against fraud is a well-written fraud prevention policy. The policy should outline your firm’s code of ethics, spell out what constitutes fraud, and explain how you’ll treat those caught committing it — for instance, employees caught committing serious infractions will be terminated and prosecuted to the full extent of the law, as well as be required to repay stolen funds, or pay for lost or stolen property or equipment. Finally, require each staff member to sign a statement indicating that they’ve read and understand your fraud prevention policy.

Soliciting help from your staff.

Encourage staff members and attorneys to report suspected fraud or theft. Protect employees who report fraudulent acts by providing a confidential means — such as a toll-free hotline — for them to express their concerns.

Treating employees well.

An underpaid and overworked employee is much more likely to rationalize committing fraud. Compare your pay rates to other law firms in your area and ensure that they’re competitive. Just as important, help employees balance their work with their personal lives, and recognize their efforts.

Checking out prospective employees.

Perform background checks on job candidates, particularly those in financial and management positions. A thorough review can uncover any criminal convictions involving embezzlement, theft, forgery or other fraud.

Keep a Watchful Eye to stop employee fraud

Even with strong internal controls and other protections in place, it’s impossible to completely stop employee fraud. But by paying careful attention to your employees and your forensic accounting practices — and sending a message to your staff that fraud prevention is critical to the firm — you can help protect your firm from great financial damage.

3 Financial Areas of Concern

Several key financial functions particularly vulnerable to employee fraud are:

Cash management. Employees may steal cash on hand, divert cash receipts or alter bank deposits.
Accounts payable and receivable. Staff members might forge checks, grant fake credits or take fraudulent write-offs for bad debts.
Payroll. Employees may pay nonexistent employees, pad time records, falsify salaries or commit withholding fraud.