Attribution: Chantal Pare.
♫ Everybody thinks you’re the lamest
We all know you’re a fraud
Life can be so frustrating
I’m so glad you got caught…♫
Music, Lyrics and recorded by: Hawk Nelson.
Fraud in the workplace cost Canadian businesses $3.2 billion, reported the CBC in 2011 (the last date I could find statistics). While lawyers have been aware of, and taken steps to prevent, fraud attempts by outsiders on their trust accounts for some time now, there is a largely unacknowledged vulnerability of fraud committed against law firms by employees. The sad truth about internal fraud is that people deny that there is a fraud problem in the first place or only react after a fraud is discovered.
Consider these internal fraud facts:
- “On the basis of the evidence it is likely that losses in any organisation and any area of expenditure will be at least 3%, probably near to 6% and possibly more than 10%” (PFK.com “The Financial Cost of Fraud, 2015).
- “25% of internal fraud cases result in losses of a million dollars on average” (Langlois Advocates – Lawyers, “Theft or Fraud by an Employee: Management Rights and Legal Action.”
- “Previous research suggests that fraud, like many crimes, is under-reported” (Statistics Canada, 2006; PricewaterhouseCoopers, 2005; Smith, 1999).
- “The more steps businesses take to control and uncover fraud, the greater their chances of detecting fraudulent activities and the better their ability to assess the effectiveness of their anti-fraud strat Thus, strategies for detecting and preventing fraud are key mechanisms in keeping the costs, direct and indirect, of fraud down” (PricewaterhouseCoopers, 2007).
- “The prospects of recovery of the proceeds of fraud are dim, with 65% of victim companies recovering 25% or less of the stolen funds. And many recover nothing.” (The True Cost of Fraud: Direct Costs, Tracy Coene in Insurance & Risk Management).
- ACFE in their 2018 Report to the Nations (A global study on occupational Fraud and Abuse being the largest global study on occupational fraud) looked at 2,690 real cases of occupational fraud from 125 countries over 23 major industry categories. They found:
- The mean, or average, loss due to the frauds in their study was $2.75 million, which is an enormous amount when considering how much damage such a loss represents to most organizations.
- The median loss for all cases in their study was $130,000. While 55% caused less than $200,000 in financial damage, more than one-fifth resulted in a loss of at least $1 million.
What are the steps you can take to reduce fraud?
Trust, but Verify: Trust your employees to do their jobs properly, but take steps to verify that this is in fact the case.
Establish Hiring Procedures: Check references of your final candidates. Let your candidates know that you will be doing this.
Set up Internal Controls: There are a number of well-established policies and procedures you can put into place now to reduce the opportunity for someone to commit a fraud.
Dual Signatures: While trust accounts require the signature of a practising lawyer, there is nothing that prevents you from adding a second signatory to both your general and trust accounts. Two sets of eye balls looking at a cheque is better than one.
Train Employees in Fraud Prevention: By having regular training on how to prevent and detect fraud, your law firm is sending the message on what behaviour is acceptable and what is not. Anti-fraud examiners state that employees are the “best possible fraud detectors.”
Conduct Regular Audits: “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.” (Wikipedia)
Monitor Vacation Absences (or lack thereof): “Two classic fraud prevention techniques are mandatory vacations and periodic job rotations. Mandatory vacations of one week or more (consecutively) are helpful, because the employee cannot continuously monitor a fraud scheme while away. Job rotations are also effective at disrupting these schemes especially when the employees are not given advance notice” (Essentials of Corporate Fraud).
Hire Experts: Periodically hire an expert in detecting fraud to examine your policies and procedures and assist in your antifraud steps.
Check your bank statement for unusual activity and signatures. If someone has forged your signature, you must detect this and report this to your bank quickly.
There are a number of steps that you can take to ensure that you do not become a victim of internal fraud. However, if the worst should happen, then at least you can take some solace in the fact that you have established systems and procedures that should detect the fraud and ensure that the perpetrator is eventually caught.
Internal Fraud Resources:
The Association of Canadian Anti-Fraud Examiners (ACFE) has a Fraud Prevention Check Up in PDF format in both English and French. It recommends that you perform this check up in conjunction with an Anti-Fraud Examiner but the list provides a good overview of the steps you can take now to reduce fraud.
The Law Society of BC published “The Trust Accounting Handbook” that encapsulates the procedures and rules for operating a trust account. It also publishes a list of the Fraud Alerts to the profession.
PracticePro has an excellent resource that addresses several types of fraud.
RubinBrown LLP has a list of 30 internal control considerations in an article entitled “Focus on Law Firms: Managing Law Firm Fraud Risks – An Internal Control Checklist” (June, 2016).
The Association of Certified Fraud Examiners, Inc.,in an article entitled “Designing an Effective Anti-Fraud Training Program,” sets out the topics to cover in designing employee training to counter fraud.
The Canadian BankingAssociation,in an article entitled “Protecting Yourself from Cheque Fraud,” advises “Review your monthly bank statement or regularly check your transactions through online or telephone banking. If you see transactions you didn’t do, notify your bank immediately and they will investigate.”
Dave Slovin,in an article entitled “Blowing the whistle: a well-designed, accessible whistleblower hotline can be a powerful tool in the fight against fraud,” quotes Warren E. Buffett chairman of the board of Berkshire Hathaway, a global investment firm with 180,000 employees, who said after their recently installed hotline, “Berkshire would be more valuable today if I had put in a whistleblower line decades ago.” The issues raise dare usually not of a type discoverable by audit, but relate instead to personnel and business practices.
((originally published in BarTalk, a publication of the BC Branch of the Canadian Bar Association. This article has been updated for the purposes of republishing).