When you think about fraud and law firms, it’s easy to focus your attention on the work lawyers do to prosecute fraud cases.
But just because law firms are usually on the prosecuting side of the bench doesn’t mean that they aren’t susceptible to fraud. In fact, law firms make appealing targets for fraudsters, given the wealth of personal information collected and substantial billings they incur. This poses big risks for lawyers, both financial and reputational.
With this in mind, law firms have a lot to gain by making sure they keep fraud out of their office.
A few things to know about fraud
Fraud can happen in both your personal and professional life and it can happen to any of us. According to the FTC’s annual report, in 2019 there were 1.7 million fraud reports. 23% of cases reported a loss in the U.S. While the total fraud losses crested upward of $1.9 billion, the median individual loss was $320. While that doesn’t sound like a lot, remember that $320 goes into $1.9 billion over 5.9 million times. That’s a lot of people!
On the organizational level, fraud is just as prevalent – but more costly. As per the ACFE’s annual report, the median loss from a single case of occupational fraud was $150,000 in the U.S. More than 23% percent of these fraud cases resulted in a loss of at least $1 million.
Fraud is a pretty big umbrella, but having a clear understanding of what fraud is and how it occurs will help you better spot it.
By definition, fraud is: “dishonest acts that intentionally use deception to illegally deprive another person or entity of money, property, or rights.” Tax fraud, identity fraud, securities fraud, and computer fraud are all examples of common fraudulent activities – but there are a lot more out there, too.
Fraud can happen in lots of different ways. It can be an external event, occurring when bad actors outside of your law firm gain access to sensitive information. This might look like:
- Customers submitting falsified account information
- Vendors billing for goods or services not delivered
- Security breaches and theft of intellectual property
But there is also internal fraud. Internal fraud, also known as “occupational fraud,” is also a threat to law firms. Internal fraud happens when an employee – no matter what level they’re at – commits fraud against their employer. There are three general types of internal fraud: asset misappropriation, corruption along with asset misappropriation, and financial statement fraud. For lawyers who are dealing with trust accounts, fraud committed by an employee can, even if you’re unaware, can still land you in hot water with the potential for sanctions or to be disbarred.
Plan for fraud
It doesn’t sound pleasant to plan for fraud to occur at your firm, but it’s the easiest way to avoid it actually happening. Plans and policies and go a long way to mitigating these risks. Organizations that lack anti-fraud controls suffer twice as much financial damage as those that do.
So what can you do?
Build an anti-fraud workplace culture
Engage with your employees
Fraud doesn’t happen in a vacuum. Perpetrators spot weaknesses in systems that make fraud possible and oftentimes, we don’t know weakness is there until it’s exploited. However, engaging with your employees helps identify potential fraud risks for both internal and external actors.
For internal fraud, knowing your employees well can help you spot changes in behaviors or attitudes that might lead to fraud. Most employees work for their companies for years before engaging in fraudulent activities, so getting to know them will give you valuable insight.
And for external fraud? Having an open line of communication with your employees can bring information security issues to light.
Train for fraud and privacy awareness
Remember when we said that understanding fraud helps you spot it? Well, the same goes for your employees. Training them on fraud and privacy awareness, if done on a regular and ongoing basis, exposes them to the concepts, best practices, and consequences of fraud.
Set up an anti-fraud hotline
One of the simplest ways to avoid fraud is to set up an anti-fraud hotline. An anti-fraud hotline can give your employees a safe and easy way to report suspected fraudulent activity in the workplace. Studies back up the benefits of anti-fraud hotlines – 42% of fraud incidents in 2018 were reported via a hotline rather than an external audit.
Policies, procedures, and programs
Evaluate your code of conduct
Your workplace code of conduct should address definitions of fraud and prohibited activities for employees. And more than just putting that document together and expecting everyone to know it, think about how you can build those codes into your law firm’s culture.
Manage your finances scrupulously
When talking about fraud, an ounce of prevention is worth a pound of the cure. Put solid plans to safeguard your assets and financial records, and you’ll be better positioned to detect and prevent fraud.
So are you segregating duties? Practicing consistent and thorough documentation? Reviewing practices regularly? This is key to staying on top of discrepancies that might look small at first blush but are symptomatic of a bigger issue.
You also want to separate the responsibilities. For example, not allowing checks to be written without sign-off from a partner or requiring a review by you of the bank statement and reconciliation report each month.
Fraud detection alert
Better safe than sorry. Your firm should establish the ways you detect fraud. From pre-employment screening to external audits to the aforementioned employee hotlines, there is a range of options at your disposal.
However you choose to scan for fraud, make the methods known to your employees. When these controls are visible, they act as a strong deterrent to fraud. Like your financial planning, update regularly.
Fraud can upend your law firm if you don’t take it seriously. Financial and reputational damages can be hard to come back from. But by planning ahead and prioritizing anti-fraud strategies, you’ll be in a good position to handle fraud effectively and maintain employee and client trust.