Protecting Your Practice: Fraud From Within

Cassandra Elgersma

By Cassandra Elgersma

When attorneys begin to practice law, they can envision their career in many different ways – an opportunity for intellectual challenges, a pathway to fighting for justice, an esteemed profession to provide a respectable living. But no matter your area of practice, a practicing attorney is also – for better or for worse – a business owner. Whether you’re a practitioner in a large partnership with well-established infrastructure or running a solo practice, every business owner needs to be aware of the risk for fraud within their walls.

Fraud’s Key Ingredients

In the world of fraud, practitioners frequently refer to the three universal ingredients necessary for fraud to occur – pressure, rationalization and opportunity. The first two are typically beyond the control of an organization. Pressure often occurs when an attorney or firm finds themselves in financial straits. For example, a hidden gambling addiction, an unexpected health issue, a spouse job loss, or poor spending habits.

Rationalization is that mental hoop that individuals, who typically view themselves as “good” people, talk themselves through to justify their actions. For instance, “I’ll pay it back,” or “they’ll never miss it.”

Both pressure and rationalization are outside the realm of a business owner to control or even perceive. But the third ingredient, opportunity, is where some strategy and planning can truly help.

What’s my game plan?

Every professional has experienced the conundrum between responding to the pressing and time-consuming needs of clients, versus attending to the needs of the business by setting aside time (nonchargeable – gasp!) to simply manage the people and issues of a practice. While taking the time to plan for what seems to be the remote possibility of fraud seems low on the list, recent statistics indicate that the median loss for professional service firms is $310,000 per incident – and it happens more often than one might think ACFE Report to the Nations. Fortunately, by enacting some key strategies, your firm can close those gaps and protect your practice.

Divide & Conquer: The foundation to strong business controls is the segregation of duties. A single employee should never have access to both the physical assets and the recording of the assets. One employee opens the mail and makes a list of the checks received for the deposit. A different employee uses that list to record the receipts and update the accounting records.

For entities where the number of employees limits the ability to separate these duties, at least have the bank statement mailed directly to someone knowledgeable who is not an active part of the accounting staff– perhaps the owner – to be reviewed for any oddities.

Give your people a voice: Contrary to popular perception, most fraud is not caught by audits or reconciliation procedures. It’s caught by observant employees. Whistleblowers sound the alarm on fraud more than twice as much as any other method or tool. Pay for access to a whistleblower hotline that provides tip information directly to your executive committees or management team, and post the contact information in visible places around the company. You may not notice that the receptionist is suddenly driving a new vehicle that she can’t afford, but her lunch buddy in the break room does.

Make the Trust Account Sacred: The client trust account must be the equivalent of a sacred lockbox, or it will quickly become lethal quicksand. Be militant about best practices in the trust account, or it can quickly unravel your practice and strip you of your entire livelihood. Many a disbarred attorney began by borrowing small amounts to cover cash flow shortages with full intent of paying the funds back. Never remove funds before they are earned. Do not comingle attorney funds and client money. Keep thorough and detailed records for each client and perform reconciliations on a regular basis. In large firms, have reconciliations done regularly by employees not directly involved in the deposit and withdrawal of the cash. And if record keeping is not your wheelhouse, please simply hire good outside help!

No one wants to believe their employees might intentionally harm their business, and even fewer imagine their practice unraveling because of a little sloppiness in record-keeping. The reality is many people have no intention of doing something dishonest or even questionable until an unexpected pressure hits. A business that is serious about stopping fraud will prevent opportunities for fraud, protect their employees from poor choices and avoid a financial loss they simply can’t afford.


Cassandra Elgersma is a manager in the forensic accounting and valuation services group at SDK. She has over 10 years of experience in audit, tax, accounting and consulting. Ms. Elgersma also assists in the preparation of prospective financial statements, business valuations and fraud investigations. She has worked with legal counsel to provide economic damage calculations and assist with forensic investigations.