Profile of an Internal Fraudster

Today we hear about fraud from every direction. We stay on high alert for scams concerning our work email or fraud on our personal debit or credit cards. For the second time in six months, my bank has sent me a text message alerting me to fraud on my debit card. When I check my online bank statement, I see that my bank has detected the fraudulent activity and they have already reversed the charges by the time I connect with them. The biggest inconvenience is waiting to receive a new debit card after the fact, but this is a small price to pay knowing that my bank is being vigilant about fraud on my behalf.

The Association of Certified Fraud Examiners, the world’s largest anti-fraud organization, released their 2018 Report to the Nations. Here are some of their conclusions after examining 2,690 cases of occupational fraud in 125 countries involving 23 industry categories from January 2016 – October 2017:

• Median period of time fraud occurred before being caught – 16 months
• Median amount of loss – $130,000
• 22% of cases involved losses of $1 million+
• Tips are by far the most common initial detection method at 40%, compared to 15% by internal audit and 13% by management review. Employees provide over half of the tips.
• Small businesses lost almost twice as much per scheme to fraud – $200,000 in median loss for businesses with fewer than 100 employees, compared to $104,000 median loss in businesses with 100+ employees
• Fraudsters who had been with their company longer stole twice as much – employees with more than 5 years tenure took a median of $200,000, compared to employees with less than 5 years tenure took $100,000 median
• Internal control weaknesses were responsible for nearly half of frauds
• Companies with anti-fraud controls were associated with lower fraud losses and quicker detection
• Only 4% of perpetrators had a prior fraud conviction
• Over the past 10 years, occupational fraud referrals to prosecution declined 16%. The top reason for non-referral was fear of bad publicity.
• A majority of victims recovered nothing

Unfortunately, law offices are not immune to employee theft. Consider these red flags that could apply to lawyers or staff who are taking money from the firm:

Personal

• Undergoing known financial difficulties
• Divorce or other major life changing events
• Unexpected change in behavior
• Instability in their life circumstances
• Past employment related problems
• Past legal problems
• Living beyond their means or an excessive lifestyle
• Desire for personal financial gain
• Excessive family or peer pressure for success

Professional

• Unusually close relationship with vendors or clients
• Serves as primary contact with law firm bank and payroll vendor
• Often makes tasks more difficult than necessary perhaps to obfuscate or reduce transparency
• Overly protective about their workspace
• Prefers to work unsupervised, after regular work hours or frequently takes work home
• Complains about lack of authority or a micro-managing work environment
• Complains about inadequate pay
• Complains about excessive work pressure and stress
• Reluctance to take vacations or extended time away from the office
• Reluctance to delegate or allow assistance from others

Personality Traits

• Control issues manifested in such ways as an unwillingness to share duties or asking fellow employees not to go through their mail or work product while they are out of the office
• Excessive secrecy or trust issues
• Irritability, suspiciousness or defensiveness
• Confrontational when challenged
• Tells lies, even about unimportant items
• Unreliable
• Cuts corners or bends the rules
• Tends to shift blame and offer excuses

Law firms often fail to see the red flags. Lawyers sometimes delegate tasks that are associated with finances, billing, receivables, ordering supplies and maintaining bank and payroll company relationships. As a result, there are missed opportunities to detect or prevent fraud. Also, as employers fail to respond to red flags, the fraudster often feels more emboldened to continue the fraud and often in increasing measures. First, the target is the petty cash fund, then payroll or the trust account.

Steps to Prevent Employee Fraud

• Create a positive work environment that encourages employees to follow established policies and procedures
• Implement internal controls and proper checks and balances
• Screen potential employees carefully – use pre-employment background checks, use a respected recruiting firm, check references
• Educate your employees on trust account guidelines
• Reconcile firm accounts regularly
• Have the firm’s financial statements sent directly to managing attorney
• Perform random audits
• Rotate job duties
• Require dual signatures on checks
• Do not allow signature stamps to be used
• Implement mandatory vacation policy
• Offer to assist employees who are experiencing stress or difficult times (programs may be offered through your insurance program such as Employee Assistance Programs or wellness programs)
• Obtain employee dishonesty insurance coverage (Adam Pierce at Lawyers Insurance Agency can assist)
• Trust your instincts

Recognizing red flags and being willing to act on them could save your law firm money and even more importantly, your law license.

Camille Stell is the President of Lawyers Mutual Consulting & Services. Continue the conversation by connecting with Camille at camille@lawyersmutualconsulting.com or 800.662.8843.