Preventing employee theft

by PAUL MCLAUGHLIN
Practice Management Advisor
The Law Society of Alberta

There is no limit to the extent to which dishonest employees will go to steal from their employers.

Item: A paralegal sends out his own bills on firm letterhead and intercepts the payments so they don’t get to the accounting department.

Item: A secretary uses an IBM Selectric typewriter to create cheques. After they are signed, she lifts the payee’s name and inserts her own. When the cheques come back from the bank, she lifts her name off the cheque and reinserts the original name.

Item: A bookkeeper who manages a lawyer’s law office, personal and farm accounts forges the lawyer’s signature so well she is able to float money between the accounts for several years.

Item: A lawyer fires a secretary for embezzling $70,000. He neglects to change the locks. She comes in at night and reformats his hard drive. He doesn’t have a backup. To add insult to injury, the secretary’s husband calls the next day demanding her final pay cheque!

Item: When a bookkeeper needs a little extra cash, she sticks a bogus cheque under the nose of a busy litigator just back from an exhausting day in court-preferably when he is on the phone. He is known not to question the cheques he is asked to sign.

Item: All the partners in a firm have credit cards from the same credit card company. The bookkeeper also has a card from that company and each month, cuts a cheque for the total amount owing, including his own.

Item: A firm does not keep good records of their hardware and software acquisitions, so an employee puts in an order for $10,000 worth of computers, peripherals and software through the firm and has it delivered to his home.

What can you do to prevent embezzlement in your office?

1. Be careful when you hire. Check references and do background checks, including a criminal background check.

2. Separate duties as much as possible (tough to do in a very small office). For example, have one person open the mail and record the cheques and another person make the bank deposit; have one person in charge of receivables and another in charge of payables; have the reconciliation done by someone who does not handle either receivables or payables.

3. Insist that all employees who are involved in processing money take vacations annually; use the time they are away to check for accounting anomalies.

4. Keep cheque books and loose cheques locked up; a cheque torn from a cheque book may not be missed until long after the money is gone.

5. Use cheque requisition forms, even in a solo office.

6. Prohibit cheques payable to “Cash” and blank or postdated cheques on both your trust and general account.

7. If you have more than one lawyer, require two signatures on cheques over a certain amount.

8. Always look at a copy of the supporting trust ledger and other supporting documents before signing a cheque (if that’s a counsel of perfection that you won’t be able to achieve, at least check frequently on a random basis so employees won’t be lulled into a sense of security).

9. Immediately stamp all incoming cheques “For Deposit Only”. Deposit incoming funds daily.

10. Discourage cash payments. When a cash payment is made, have two people count it in the client’s presence and issue a receipt. Use a numbered receipt book that provides a duplicate for the firm.

11. Limit and track the use of law firm credit cards.

12. Have the bank and credit card statements delivered to you unopened. Open them yourself and examine all the cheques, deposit slips and statements suspiciously. Look for cheques payable to employees or other unexpected payees, signatures that don’t look right, returned cheques and suspicious credit card charges. Ask questions so employees know you check these things every month.

13. Make sure you sign off on the monthly trust reconciliation. Make sure the numbers actually add up. Watch for a suspiciously large number of unrecorded deposits and outstanding cheques. Do a monthly reconciliation of your general account too.

14. If you are using a computerized accounting program, make sure it doesn’t allow entries to be changed. Instead, it should only allow offsetting or correcting entries, and should provide a report on correcting entries.

15. Use passwords to limit access to financial data and to cheque-writing authority.

16. Back up your data regularly.

17. Establish clear written policies for employee expense reimbursement. Require original receipts.

18. Purchase a fidelity bond for employees with money-handling responsibilities.

19. Limit petty cash to a minimal amount and require original receipts for all petty cash disbursements.

20. Do not use a signature stamp.

You can never be 100% sure of completely preventing theft, but if you follow these tips, you will reduce your chances of becoming a victim. 
 

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