Is Your Firm’s Accounting System Foolproof?

, by Shafiq Sobri

According to the Association of Certified Fraud Examiners Report to the Nations - 2020 Global Study on Occupational Fraud and Abuse, a typical business is estimated to lose 5% of its revenue due to misappropriation of funds and fraud-related activities each year – law firms are not spared!.[1] While the governing laws and rulings such as the Solicitors' Account Rules 1990, Accountant's Report Rules 1990, Solicitors' Accounts (Deposit Interest) Rules 1990 and Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (“AMLA”) are no stranger to lawyers, complications can arise if firms do not have strong internal controls of the accounting system and finances.

While it is common to have an office accounting software and dedicated accounting staff to manage the firm’s finances, there is no absolute mechanism to prevent human error, mismanagement or embezzlement of funds. A strong internal control is the firm’s best defense. Lawyers, especially law firm owners should also pay attention to the areas below to ensure that the firm’s accounting system is foolproof[2]:

1. Pay Attention to the Business Aspects of Running a Law Firm
It is understandable that lawyers tend to focus on the practice of law and leave the day-to-day operations of the firm, especially accounting and finances, to employees. However, this situation creates opportunities for employees to compromise the accounts due to lack of supervision and giving them control over the accounting aspects.

For instance, the separation of office and client’s account may result in a large sum of monies untouched in the client’s account for a period of time. Unscrupulous employees may be tempted to misappropriate or embezzle by shifting the monies from one account to another without being detected, if there was no supervision and oversight.

A note to ponder:
Being efficient in providing legal service to clients should not be a reason to neglect the running of your law firm. Find ways to better manage your time and improve supervision of staff.

2. Screen Potential Employees Carefully
Having trustworthy and reliable employees to manage the firm’s accounts and finances is a given. However, more often than not that the firm’s accounts and finances are usually compromised by its own employees. There have been instances where unscrupulous employees move from one firm to another committing the same wrongdoing undetected until it was too late.

Carry out a background and referral check with the potential employee’s previous employer is always a good start to safeguard and prevent firms from falling into the same pitfall. Prepare a list of questions to go through during interview with the potential employee and his/her previous employer.

A good practice:
Pay attention if the potential employee worked at places for short periods of time without a reasonable explanation. When checking with a previous employer, speak directly with the HR manager or law firm owner.

3. Reconcile and review your accounts regularly
Reconciling bank account statement regularly can detect irregularities at an early stage. Cases such as tampering with payments vouchers, issuing fraudulent payments and forging cheque signatures are among common instances where employees could compromise the accounts. Even with the most sophisticated accounting software, misappropriation and embezzlement can still be perpetrated when there is an opportunity due to lack of supervision, oversight and the giving of too much trust!

Nonetheless with electronic banking, lawyers can perform reconciliation of statements anytime without having to wait for paper statements from banks. Another way to ensure that proper accounts are maintained at all times is by having a surprise review or audit. This preemptive strategy will ensure that employees are always on their toes and eliminates the opportunity to compromise the accounts.

A good practice:
Cross check requests for payment with the file and/or payment voucher, and never approve payments when you’re in a rush.

4. Train your employees
In addition to having a written accounting procedure and a policy on misconduct, firms should conduct regular training sessions to educate employees on the significance of maintaining an ethical workplace. If your practice does not have the luxury of time or ability to conduct in-house training, enroll your staff to attend trainings on increasing productivity at work, how to better assist lawyers and others, conducted by Bar Council PII & Risk Management Department.

A note to ponder:
Every person needs a refresher and motivation to deliver their work better.

The unfortunate reality is – the risk of your accounts being compromised will never be completely eliminated and as technology evolves, people will undoubtedly find creative and more intricate ways to perpetrate misappropriation and embezzlement. It is pertinent for lawyers to take a proactive approach to protect themselves and their firms from pitfalls relating to firm’s account management (or mismanagement). Apart from adhering to the governing laws and rulings, it is also important for firms to consistently exercise and implement strong internal controls and reiterate the importance of ethical behavior.

[1] Association of Certified Fraud Examiners (2020), Report to the Nations - 2020 Global Study on Occupational Fraud and Abuse(https://acfepublic.s3-us-west-2.amazonaws.com/2020-Report-to-the-Nations.pdf)

[2]CNA Insurance (2011) The Threat From Within: Theft And Fraud Inside Law Firms (https://www.paragonbrokers.com/wp-content/uploads/2012/10/Theft-and-Fraud-Inside-Law-Firms.pdf)

Assisting Lawyers

Is Your Firm’s Accounting System Foolproof?

Search

Articles by Practice Area

Articles by Topics

Case Studies and Statistics

Practice Alerts!

Quick Link

Assisting Lawyers

Is Your Firm’s Accounting System Foolproof?

Search

Articles by Practice Area

Articles by Topics

Case Studies and Statistics

Practice Alerts!

Quick Link

REGISTER FOR UPDATES