Every week, it seems, brings a new story of a law firm embarrassed by employee theft. Why does it happen so often, and what can lawyers do to prevent it? Experts advise lawyers how not to be victims.
The head of a successful small law practice in St. Charles received both sympathy and criticism when a newspaper article disclosed that his trusted assistant had been charged with stealing $163,000 from the firm's operating budget. One lawyer ridiculed J. Brick Van der Snick face-to-face. Others, however, approached him quietly admitting that they had been victimized by an employee at one time or another, but had never reported the theft.
Like many principals of small law firms, Van der Snick, a long-time and active ISBA member who practices criminal law, DUI defense, and family law, entrusted the day-to-day business operations of his firm to his administrative assistant. "She was like family," he said of the accused employee. Van der Snick trusted her immensely - giving the employee authority to deposit checks and balance the books - and he took pride in running a practice with a family feel.
Van der Snick is limited in what he can discuss about the criminal case since it is pending. The employee was a woman who had worked at another law firm before joining him seven-and-a-half years ago. She often had holiday meals at his and his wife's home.
If you're thinking you can't be a victim of embezzlement, think again. Law firm management experts and forensic accountants say lawyers are vulnerable to theft because they do not think of their practices as businesses and they fail to put simple controls in place that could protect them and their employees.
Van der Snick has instituted a number of controls, including copying all checks that are sent to the firm and sending a copy to a CPA who works with him. Now, he is the only one who deposits checks and he takes the time to examine his books closely - even if it's after a stressful 12-hour day of dealing with anguished clients.
He has three general pieces of advice for lawyers. He wanted his employees to feel as though they were close and that they were working in a family business. Now, he says that "you have to treat it like a business."
Second, he has segregated duties so that no one person has control over checks that arrive in the mail. "Every check, the same day it comes in, is scanned and emailed to the CPA. I see the receipt books."
And Van der Snick scrutinizes his books carefully on a weekly basis and is the only person with authority to handle deposits.
"I don't buy it that you can't be a good manager and a good trial lawyer," he said. "But when client concerns come first and you've got someone whose being beaten by a spouse, you're dealing with some tension and stress. So the management stuff comes at the end of the day or when there's a break."
When good employees go bad (and bad employees look like good people)
Those who work for lawyers are not a particularly dubious lot. Most are honest hard-working people without whom law practices could not function. But many lawyers fail to mind their stores, creating as much temptation for overworked, financially strapped employees as they would by leaving hundred-dollar bills and credit cards lying around. A certain segment of the employee pool will succumb to temptation under such circumstances, particularly if they think a theft will go unnoticed or that their bosses do not really need the money.
"Law firms want as many people [as possible] on the billing side of the organization and as few as possible on the other side," said Denise McClure, CPA, CFE, the principal of Averti Solutions, LLC in Boise, ID. They recognize that the administrative side is important, but they hire others and maintain a "hands off approach," she said.
Averti Solutions consults with law firms, doctors' offices, and other service firms to institute controls and to investigate suspected theft. Last year, McClure wrote an article for the Idaho Business Review about a study she conducted of 10 law firm embezzlement cases (see http://idahobusinessreview.com/2012/03/30/law-firms-are-at-high-risk-of-embezzlement/).
There are no hard statistics detailing the frequency with which law firms and other service businesses fall victim to embezzlement. Many firms do not report it to police, understandably fearful that their clients and colleagues might stop calling.
The bigger cases get publicity, and they come from throughout the country.
• In June, the office manager of the prestigious Brattelboro, Vt., law firm of Potter Stewart Jr., pleaded guilty to stealing $200,000 from the firm over five years. The firm is operated by the son of the late Supreme Court Justice Potter Stewart.
• A former partner at a central New Jersey law firm was sentenced to 33 months in federal prison in June for embezzling more than $800,000 from the firm's trust account between 2004 and 2007.
• A paralegal in Ft. Lauderdale was arrested in 2011 for embezzling more than $138,000 over a two-year period from a small law firm where she worked. An attorney at the firm, according to published reports, said the accused was "treated like family."
• In January, the North Carolina Department of Insurance Commissioner brought criminal charges against two employees of a Mocksville law firm. They were accused of wiring funds from the firm's trust account to their personal accounts, according to a Department press release.
• A bookkeeper in a Virginia-based personal injury firm was charged with embezzling more than $550,000 from the firm, by reportedly depositing more than 200 forged checks into her personal account.
• The officer manager of a northern New Jersey firm pleaded guilty to stealing $400,000 from the law firm where she worked and was sentenced to a prison term. Meanwhile the firm filed a civil action against the woman and her husband for stealing more than $1 million.
• A bookkeeper/office manager at the Chicago law firm, formerly known as Goldberg & Frankenstein, was charged in 2010 with embezzling $218,000 from the firm by using business checks to make payments on her personal credit card.
The list goes on. These types of cases typically have commonalities, says McClure. The embezzler is a "trusted" employee in a work environment that is intimate and family-like, attorneys make unwise hiring decisions, they lack knowledge of basic accounting principles, they are working long hours for their clients, and they do not understand the psychological component behind such crimes of opportunity.
"They are distracted by their client work and they just don't realize that there are good people who can cross the line and that there are bad people who come in looking like good people," McClure said.
The fraud triangle
Embezzlement sometimes starts as a mistake but can quickly snowball into a full-blown addiction. An office manager or bookkeeper might make a mistake in reconciling accounts, for example, and see that no one noticed. The next step might involve an employee rationalizing his or her way into taking a small amount of money to cover a necessary expense with every intention of putting the money back soon.
With time, resentment might surface. The employee might think, "I'm working harder than the lawyers and I don't make a fraction of what they make" and the stealing might become more regular. The point is that many otherwise law abiding workers without a criminal background can succumb to temptation if lawyers fail to monitor their accounts and let their employees know that someone will be looking over their shoulders.
"You don't want to trust blindly," McClure said, before invoking a phrase popularized by Ronald Reagan: "Trust, but verify."
"To think that people are always going to behave in your best interest is not realistic," McClure added.
The fraud triangle is a well-known model of the factors typically present when a person commits financial fraud. Developed by criminologist Donald Cressey, the concept outlines the three factors that must be present for someone to commit fraud. First, the person feels financial pressure that they are unable to share with someone. This could include debt related to compulsive shopping or gambling or drug use.
Second, the person sees an opportunity to solve the problem without anyone noticing. A business without internal controls would be one example. Finally, the person would engage in some kind of rationalizing about stealing, that it's just a loan or that life's unfair or that they really deserve it because they work hard.
In most cases, the only thing an employer can control is the perception of opportunity, McClure said.
Preventing theft before it happens should be the goal of law firms and other service-sector professional firms.
That starts with good hiring practices, said John M. Olmstead, president of the St. Louis, Mo., firm of Olmstead & Associates, a practice management, marketing, and technology consulting firm that works with law firms and other professional businesses.
"You'd be surprised how many law firms hire without checking references," said Olmstead, who serves on the Illinois State Bar Association Standing Committee on Law Office Management and Economics.
Hire someone who understands bookkeeping and basic accounting principles, or invest in training the firm's paralegals and administrative assistants. "You shouldn't have everyone in the house signing checks," Olmstead said. And no one person should be in charge of both recording incoming funds and depositing those funds.
When a check comes in, a receptionist should log it before it goes to a bookkeeper, Olmstead said. If a bookkeeper knows the check has been logged, he or she is unlikely to try to convert it to personal funds when preparing deposits. "You need a segregation of duties," Olmstead said. "The smaller you are, the harder it is because you don't have enough people working for you. But it can be done."
"What amazes me about some of these law firms...is that most do not invest a dime in the staff, in the front office," Olmstead said. "The main asset law firms have is people. They need to invest in them and help them improve their skill set. It doesn't have to cost a fortune to get an education. Many legal secretaries do not have accounting skills, but they're smart enough to learn them."
Use an accountant for more than tax filings, Olmstead advises. It is not that expensive to have an accountant do quarterly audits.
When ordering office supplies, be sure to have a purchase order connected with the transaction so that no one is creating fake vendors or buying personal items with the firm's funds.
Don't rely on second-rate software accounting programs not designed for law firms in general and are not designed to handle trust (IOLTA) accounts, he added.
Olmstead insists that lawyers are smart enough to understand basic accounting principles, but that they must commit to spending a small amount of time to understanding the importance of segregating duties and reconciling their accounts.
"You are smart folks," he said. "If you decided you wanted to get a job as a manager in a corporation, you'd learn what you need to know and probably do a good job. Lawyers consider their mission to be their clients."
Echoing what lawyers have been told for years, Joan Bullock, immediate past chair of the ABA Law Practice Management Section, said lawyers must understand that they are running a business. What they sell are their professional services, but it is still a business.
"The cobbler's children have no shoes," said Bullock, the Associate Dean for Teaching and Faculty Development and professor of law at Florida A&M University College of Law in Orlando, Fla. "They are the steward of clients' trust and assets. They have to treat that carefully. I don't think lawyers often think on that level.
"Lawyers are so busy practicing law that who has time to take care of the business? As long as money is coming in the door, they think they'll be fine. The business will take care of itself. And when they have free time, they'll focus on the business. But that time never comes," Bullock added. "The more business they generate, the more opportunity there is to steal. It creates an environment for fraud."
Bullock teaches her students to be mindful of the business aspects of practicing law, particularly since more and more students will be hanging a shingle when they graduate, she says. "'Sell' is a four letter word to a lawyer. But at the end of the day, our clients are consumers; they consume cars, they consume electronics and they consume legal services. Our goal is no different than others: To make money." That might sound crass, but it is the reality, she said.
The current generation of law students is of the "credit generation," Bullock noted. And they rely on banks to reconcile their bank balance. "Many do not know how to balance a check book," Bullock observes. They are savvy about retrieving information electronically, but they do not know how to build financial infrastructures, Bullock said, emphasizing that law schools must do a better job training students about business matters.
Lawyer as accused
Last June, the Hearing Board of the Illinois Attorney Registration and Disciplinary Commission filed a complaint against Lee Smolen, a former partner at Sidley & Austin, for allegedly filing false reimbursement receipts to the firm over a five-year period, pocketing nearly $120,000, according to the complaint. He was accused of filing 800 fabricated cab receipts, each for $80; purported entertainment receipts of $35,000; and dining receipts for holiday meals amounting to $2,000, according to the complaint. Smolen was the head of the firm's Chicago real estate practice group and a member of its executive committee.
He was subsequently hired by DLA Piper and heads its Chicago-based real estate practice. He is challenging the ARDC allegations.
Peter Rotskoff, chief of litigation at the IARDC, said the agency does occasionally see cases like the Smolen case, involving allegations of false expense reports. "I wouldn't say it happens often," he said. "But it does happen."
There are also occasional cases involving lawyers who get paid directly from a client and do not turn over the money to their firms, and, cases in which an attorney might be moonlighting at another firm without disclosing this to their managing partners. "Those are the major scenarios of what you'd call embezzlement."
Rotskoff reminds attorneys of their ethical obligations under Supreme Court Rules 5.2, 5.3 and 8.4. The first two rules hold lawyers accountable for the conduct of support staff if they are aware of improper conduct. Rule 8.4 requires attorneys to report the misconduct of other attorneys.
"We don't necessarily file formal disciplinary cases" in instances where lawyers are being bad managers due to carelessness or neglect, Rotskoff said. But the Commission might recommend ethics school or seminars reminding attorneys of the ethical requirements of handling trust funds and their IOLTA accounts, he said.
"We look to see whether there's harm to a client or another party. That's what we're looking for."
Janan Hanna is a Chicago freelance writer and a licensed attorney. A former staff writer for the Chicago Tribune, she writes for numerous news organizations.
· See John Olmstead's pointers at http://www.olmsteadassoc.com/resource-center/protecting-your-office.aspx.
· See IBJ Karen Erger's column from the August 2012 issue at http://www.isba.org/ibj/2012/08/lawfirmembezzlementthebutlerdidntdo.