By Joseph S. Barbagallo
Special to the Legal
According to a 2010 Report to the Nations on Occupational Fraud and Abuse, prepared by the Association of Certified Fraud Examiners, fraud and abuse worldwide can cost upwards of $2.9 trillion per year. A typical organization loses 5 percent of its annual revenue to fraud, while the median loss caused by the occupational fraud cases was $160,000.
The report also concluded that small organizations are disproportionately victimized by occupational fraud because these organizations are typically lacking in anti-fraud controls compared to their larger counterparts.
Law firms and their clients are not exempt from financial fraud. In fact, just read the headlines. In 2009, the National Law Journal reported, "Law Firms Make Easy Pickings for Embezzlers." Just last year, a paralegal who had worked for more than 11 years at a Lackawanna County law firm was convicted for embezzling more than $75,000 from her firm. She forged a partner's signature on 130 checks while fabricating expense allocations in the general ledger.
There are, however, preventative measures that law firms can put in place in order to avoid internal fraud. They include the following:
- Employing solid anti-fraud measures, including separations of various accounting duties, and physical safeguards;
- Requiring dual signatures on all large checks;
- Conducting reconciliations of escrow accounts to subsidiary ledgers;
- Educating management and employees by implementing an anti-fraud training program;
- Implementing an anonymous and confidential fraud reporting mechanism;
- Conducting random fraud audits in addition to regularly scheduled fraud audits;
- Implementing a process for oversight of fraud risks via a governance or audit committee; and
- Implementing HR background checks (when permitted by law) that include past employment verification, criminal and civil background checks, credit checks, drug screening, education verification and reference checks.
If you or a client suspects financial fraud, a forensic accountant should review the books and financial records to identify suspicious or unusual transactions.
In my next post, I will address the process by which financial fraud is investigated and dealt with. Suffice it to say that having an expert on your side greatly increases your chances of finding criminal activity and getting embezzled funds back. Unfortunately, time is often on the embezzler's side, so remember -- haste makes waste. Most frauds last a median of 18 months before being detected.
Joseph S. Barbagallo is a partner with Citrin Cooperman, an accounting, tax and business-consulting firm in Philadelphia. With more than 35 years of experience, Barbagallo focuses his practice on business valuation and financial forensic services, expert testimony and litigation consulting services in fraud cases. He can be reached at email@example.com or 215-545-4800.