Three NY lawyers were suspended for trust account violations by their Office Manager recently. These attorneys weren’t inexperienced. One had been practicing law for 33 years. This is an all too common issue with attorneys who have long-term employees they trust handling financial aspects of their firms. This isn’t a new phenomenon; we have probably all heard about something similar. In the early 80’s I worked in the department of a large bank and the admin manager was caught signing our bosses name to expense statements and taking the reimbursements.
One of the things I learned early on from some wise teacher or book is that we shouldn’t set up our systems in a way that employees can take firm funds. For instance, an employee with a sick child can’t afford the medical deductible for treatment. This employee may be trustworthy, but just takes a few hundred dollars until the next pay day and then returns it. This can lead to a slippery slope. These days, with on-line banking, a partner doesn’t even have to sign a check.
This doesn’t mean that partners must do bank reconciliation or see every bank transaction. It means that checks and balances need to be established, even in small firms. Partners can check bank and credit card statements. Even a quick scan will show strange or unauthorized transactions. Employees should never be allowed to reimburse themselves. Receipts are not only required for tax purposes but should be required as a matter of practice for the firm.
Financially speaking, best practices would include making sure that:
- the person who handles billing should not handle client payments
- the person who issues accounts payables or trust checks or cash should not reconcile bank statements
- the person who completes expense statements should not be allowed to sign their own checks
- partner approval should be required for all expenses over a certain amount – something outside of the cost for court filings is normal
- firm credit card statements should be reconciled by someone not authorized to use the card
This may sound like an impossibility in a small firm. Below are some simple tips.
Billing and Accounts Receivable
One person does the billing and a different person opens the mail and posts client payments. This second person can be a partner, an office manager, the receptionist, a senior secretary or paralegal, for example. This doesn’t take more than an extra few minutes a day and keeps a check on someone taking client payments.
If there isn’t a second person in your firm to handle on-line trust transfers, I recommend a partner handle these.
Check requests should always be used and approved by an appropriate person for your firm.
Checks should not be signed without an approved check request or invoice for the amount.
The person writing the checks may have to reconcile the bank accounts due to the size of your firm. In this case, bank and credit card statements should go to a partner for a quick review before being given to the accounting staff for reconciling. Note: This would have kept the NY partners from being suspended.
Know your vendors. This quick glance of your bank statement will alert you to any possible fraudulent checks being issued.
Petty cash should be reconciled by someone who doesn’t issue the cash. This again can be a secretary or paralegal if necessary. It shouldn’t take more than 30 to 60 minutes a month.
E-Payments and Trust Transfers
As more and more financial transactions are handled electronically, we can get lax in the approval process. Don’t. Require the check requests or invoices to be uploaded to your cloud program or emailed to you. Then check this place to confirm you have proper backup before clicking the Approve button.
You may want to create a rule to move these emails to be automatically filed into a subfolder in Outlook so they can be addressed at a specific scheduled time or day to avoid interruptions with approval emails throughout the day.
Regardless, if you aren’t comfortable that you know exactly what is being paid and why, don’t approve any payments or transfers or sign any checks.
Know where your money is going and how. You are not only dealing with your livelihood and those of your employees, but also your clients’. We all know that ignorance is not a good defense.
If you would like us to contact you to help set up proper procedures for your firm, let us know: https://dlccs.com/contact-us/ .