Law Firm Management Is Cash Management

Money. Every firm has it. But unfortunately, some people want to take what doesn't belong to them, and they may seek out ways to target your firm's cash. Nearly 88% of asset misappropriation schemes involve cash, according to the 2006 ACFE Report to the Nation on Occupational Fraud and Abuse.

The elements of motive, opportunity and rationalization are present in nearly every scheme. Eliminating or mitigating any of these factors will make it more difficult for a fraudster to target your firm. In a tightening economy, it is more crucial than ever that you remain diligent about protecting assets. The identification, implementation and testing of internal controls over cash receipts and disbursements is a critical step, because even small dollar amounts taken over months or years can add up and entangle your firm in a costly situation.

Cash Management: Getting It Right

Getting cash management right at its inception is important, but it is never too late to institute systems that will help you deter misappropriation. Assume greater control over your cash, first and foremost, by segregating duties in the collection and disbursement areas, thus providing fewer opportunities for unchecked employees to dip into the firm's cash. This can be difficult to implement at small firms, but if you are midsized or larger, take advantage of your size. The more people you have, the more opportunity you have to segregate duties and root out any misappropriation schemes.

Regardless of how large or small your firm is, you may have given certain individuals authority and autonomy over finances and processes. These are often the members of the organization considered to be the most trustworthy and hard-working. Unfortunately, it is precisely because they work within your firm's systems every day that they understand the weaknesses or 'soft spots' inherent in the control environment and, given the right (or wrong) set of circumstances, can easily take advantage of them to perpetrate fraud. It's not a pleasant thought, but neither you nor your partners should feel bashful about exploring the possibilities for misappropriation within your firm. You are not fostering an atmosphere of suspicion. You are simply running a modern business and protecting your interest in that business. You need to institute checks and balances to make sure there is mitigation of potential wrongdoing.

Malfeasance

The risk for malfeasance is higher when any one person holds the authority to do any combination of the following: collect cash from customers or clients; deposit receipts into the bank; record the collection in the company's books and records; write off outstanding customer account balances; disburse company funds; or reconcile bank account statements. Different people should write, sign and mail checks and record disbursements in the accounting system. There should also be careful security, controls and monitoring of blank check stock, which, if it should get into the wrong hands, can be used to write unauthorized checks against the company's funds. Any signature stamps, mechanical check signers and other automated processes should be secured and their use monitored closely.

Let your clients and associates know that checks should be designated and addressed to your firm name, not to individual partners or employees. When checks arrive at the mailroom or reception area, have the person sorting the mail list all checks, including the customer and dollar amount, and provide that list to the bookkeeping and accounting staff. Many firms have also found that sending cash through a P.O. Box or lockbox controlled by a third-party manager is quite effective in limiting the amount of cash coming into the firm and creating fewer opportunities for misappropriation.

Electronic transactions such as wire transfers should be similarly monitored for procedures, controls and unauthorized or inappropriate transactions. With the increasing use of online banking, special care should be taken. Segregation of duties as to authorization and processing should be carefully instituted and monitored. The person authorizing the transfer and the person effectuating it should be different.

Of course, law firms have more than their own assets to protect, as they are often custodians for client escrow deposits. These funds are an attractive target for those wishing to perpetrate a fraud for several reasons: no one expects it; some time can elapse before their theft is discovered; and financial records for trusts, estates, and certain other transactions are not part of a law firm's profit and loss statement and thus may not be easily detected or may not immediately catch the eye. A law firm needs to assure a strict a segregation of duties and institute as tight a control environment with regards to these funds as with its own. If a trusted employee steals from you, it can hurt your profitability and morale. If they target a client or associate's funds, your relationship with that client or associate and your reputation in the business community could be jeopardized.

Taking an Oversight Rule

But because no system is perfect and because it is so difficult to fully segregate all duties within the confines of existing personnel, it is critical for management to be proactive in taking an oversight role. Setting the 'tone at the top' lets employees know that internal controls are a priority. Proactive oversight will reinforce to those handling cash that funds are being protected for and by the company and are not merely available for the taking. Cash management can be tricky when your firm maintains multiple offices. A partner working on a transaction in one state may receive funds of which partners in another office are unaware. But you must bridge these divides and make your control emphasis apparent to everyone in the firm who deals with cash.

Management should consider proactively selecting transactions throughout the year and testing them from cradle to grave to assure proper authorization, payment and posting. Be alert for the basic mathematical inaccuracies, alterations of bank statements and cancelled checks, out-of-sequence disbursements and missing blank check stock that are all red flags for fraud. Bank statements for each account should be reviewed by management prior to the clerks preparing the bank reconciliations. Such a review should include questions regarding unusual transactions, multiple voids and reversals, or multiple transactions for the same dollar amount. Each account should be reconciled at least monthly, if not more often, particularly with the advent of online banking and viewing of cleared transactions. The reconciliations should also be reviewed not only for mathematical accuracy, but to determine whether there are any unusual reconciling items.

Institute a coding system and seek out postings to wrong accounts. Examine your payroll. Look for fictitious employees and unauthorized pay increases, and ensure that payroll taxes are remitted in a timely manner. In some instances employees have diverted payroll funds owed to taxing authorities, ignored notices and covered the difference with client escrow funds. Good controls ' and good management oversight ' can help prevent such situations from occurring.

Money. Every firm has it. But unfortunately, some people want to take what doesn't belong to them, and they may seek out ways to target your firm's cash. Nearly 88% of asset misappropriation schemes involve cash, according to the 2006 ACFE Report to the Nation on Occupational Fraud and Abuse.

The elements of motive, opportunity and rationalization are present in nearly every scheme. Eliminating or mitigating any of these factors will make it more difficult for a fraudster to target your firm. In a tightening economy, it is more crucial than ever that you remain diligent about protecting assets. The identification, implementation and testing of internal controls over cash receipts and disbursements is a critical step, because even small dollar amounts taken over months or years can add up and entangle your firm in a costly situation.

Cash Management: Getting It Right

Getting cash management right at its inception is important, but it is never too late to institute systems that will help you deter misappropriation. Assume greater control over your cash, first and foremost, by segregating duties in the collection and disbursement areas, thus providing fewer opportunities for unchecked employees to dip into the firm's cash. This can be difficult to implement at small firms, but if you are midsized or larger, take advantage of your size. The more people you have, the more opportunity you have to segregate duties and root out any misappropriation schemes.

Regardless of how large or small your firm is, you may have given certain individuals authority and autonomy over finances and processes. These are often the members of the organization considered to be the most trustworthy and hard-working. Unfortunately, it is precisely because they work within your firm's systems every day that they understand the weaknesses or 'soft spots' inherent in the control environment and, given the right (or wrong) set of circumstances, can easily take advantage of them to perpetrate fraud. It's not a pleasant thought, but neither you nor your partners should feel bashful about exploring the possibilities for misappropriation within your firm. You are not fostering an atmosphere of suspicion. You are simply running a modern business and protecting your interest in that business. You need to institute checks and balances to make sure there is mitigation of potential wrongdoing.

Malfeasance

The risk for malfeasance is higher when any one person holds the authority to do any combination of the following: collect cash from customers or clients; deposit receipts into the bank; record the collection in the company's books and records; write off outstanding customer account balances; disburse company funds; or reconcile bank account statements. Different people should write, sign and mail checks and record disbursements in the accounting system. There should also be careful security, controls and monitoring of blank check stock, which, if it should get into the wrong hands, can be used to write unauthorized checks against the company's funds. Any signature stamps, mechanical check signers and other automated processes should be secured and their use monitored closely.

Let your clients and associates know that checks should be designated and addressed to your firm name, not to individual partners or employees. When checks arrive at the mailroom or reception area, have the person sorting the mail list all checks, including the customer and dollar amount, and provide that list to the bookkeeping and accounting staff. Many firms have also found that sending cash through a P.O. Box or lockbox controlled by a third-party manager is quite effective in limiting the amount of cash coming into the firm and creating fewer opportunities for misappropriation.

Electronic transactions such as wire transfers should be similarly monitored for procedures, controls and unauthorized or inappropriate transactions. With the increasing use of online banking, special care should be taken. Segregation of duties as to authorization and processing should be carefully instituted and monitored. The person authorizing the transfer and the person effectuating it should be different.

Of course, law firms have more than their own assets to protect, as they are often custodians for client escrow deposits. These funds are an attractive target for those wishing to perpetrate a fraud for several reasons: no one expects it; some time can elapse before their theft is discovered; and financial records for trusts, estates, and certain other transactions are not part of a law firm's profit and loss statement and thus may not be easily detected or may not immediately catch the eye. A law firm needs to assure a strict a segregation of duties and institute as tight a control environment with regards to these funds as with its own. If a trusted employee steals from you, it can hurt your profitability and morale. If they target a client or associate's funds, your relationship with that client or associate and your reputation in the business community could be jeopardized.

Taking an Oversight Rule

But because no system is perfect and because it is so difficult to fully segregate all duties within the confines of existing personnel, it is critical for management to be proactive in taking an oversight role. Setting the 'tone at the top' lets employees know that internal controls are a priority. Proactive oversight will reinforce to those handling cash that funds are being protected for and by the company and are not merely available for the taking. Cash management can be tricky when your firm maintains multiple offices. A partner working on a transaction in one state may receive funds of which partners in another office are unaware. But you must bridge these divides and make your control emphasis apparent to everyone in the firm who deals with cash.

Management should consider proactively selecting transactions throughout the year and testing them from cradle to grave to assure proper authorization, payment and posting. Be alert for the basic mathematical inaccuracies, alterations of bank statements and cancelled checks, out-of-sequence disbursements and missing blank check stock that are all red flags for fraud. Bank statements for each account should be reviewed by management prior to the clerks preparing the bank reconciliations. Such a review should include questions regarding unusual transactions, multiple voids and reversals, or multiple transactions for the same dollar amount. Each account should be reconciled at least monthly, if not more often, particularly with the advent of online banking and viewing of cleared transactions. The reconciliations should also be reviewed not only for mathematical accuracy, but to determine whether there are any unusual reconciling items.

Institute a coding system and seek out postings to wrong accounts. Examine your payroll. Look for fictitious employees and unauthorized pay increases, and ensure that payroll taxes are remitted in a timely manner. In some instances employees have diverted payroll funds owed to taxing authorities, ignored notices and covered the difference with client escrow funds. Good controls ' and good management oversight ' can help prevent such situations from occurring.