What steps can I take to protect my firm from embezzlement?

You can protect your law firm from embezzlement by setting up internal controls, getting to know your employees, and looking for suspicious behavior.

Setting up Internal Controls

Internal controls are processes and systems businesses put in place to protect company assets, including bank accounts.^[1] It is best to prepare written fiscal policies and procedures detailing the internal controls you want your employees to follow.

One of the most important internal controls is the separation of duties. The idea is that “no one employee has control over all parts of a financial transaction,” and is illustrated by the following examples^[1][2]:

1. Have the employee who approves purchases be a different person than the employee who writes the checks paying purchases.
2. Have the employee who selects the vendors be a different person than the employee who approves the purchase or writes the check.
3. Have the person who opens the mail keep a log of the checks that come in, and be a different employee than the person who endorses the checks.
4. Have a supervisor sign off on employee timesheets before payroll is prepared.
5. Have the person who distributes paycheck be a different employee than the one who prepares payroll or paychecks.
6. Employees with check signing authority should not be permitted to prepare checks and  should not have access to the check stock.
7. Check stock should be kept locked up with the key held by an employee who doesn’t have signing authority.
8. Have the employee who keeps the locked petty cash box be a different person than the one who can issue a reimbursement from those funds.
9. Have an employee who doesn’t have check writing or bookkeeping responsibility reconcile the bank accounts.

Another important internal control is to make sure that bank deposits take place daily, that bank account reconciliations take place monthly, and that all transactions shown on the bank statement are backed up by sufficient documentation. For deposits, you should keep copies of all checks received, credit card transaction receipts, transfer confirmations, and deposit slips. For withdrawals, you should keep copies of checks written, transaction slips for cash withdrawals, and receipts, purchase orders, and invoices from vendors.^[2]

Internal controls require your firm to ensure that each vendor being paid is a real company and that the services or goods being paid for were actually provided.

Finally, you should limit the number of employees who have a company credit card, lock up all petty cash, and restrict the use of credit cards and petty cash to business expenses only.^[2] You should also require employees to submit receipts for all business credit card charges and for all reimbursement requests from petty cash.

Getting to Know Your Employees

At hiring, do a background check or check consumer reports on all prospective employees.^[4] Perform drug screenings (if permitted by state law), verify prior employment, check references, and verify education, licenses, and certifications.^[4] If an employee has been dishonest on their application, it increases the likelihood that they will commit a crime such as theft or embezzlement.

Looking for Suspicious Behavior

Know the six warning signs that an employee may be stealing from you^[5]. Keep an eye on an employee who:

1. Is living beyond their means;
2. Is having financial difficulties;
3. Has an unusually close relationship with a vendor or a customer;
4. Refuses to share duties (includes resisting going on vacation);
5. Is having personal problems or is going through a divorce; or
6. Has a “wheeler” dealer attitude.

If you do catch an employee embezzling money from your firm, involve law enforcement and prosecute them. The threat of being arrested is one of the best deterrents around.

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References

1. Six Strategies for Fraud Prevention
2. Top Ten Internal Controls to Prevent And Detect Fraud
4. Why do employees steal?
5. Why do employees embezzle