Reducing Your Exposure to Internal Fraud

  • December 01, 2016
  • By David J. Bilinsky

The devil is often hidden in the details

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:

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.

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The views expressed herein are strictly those of David Bilinsky and do not reflect the opinions of the Law Society of British Columbia, CBABC, or their respective members. 

David J. Bilinsky is the Practice Management Advisor for the Law Society of British Columbia.
Email: daveb@lsbc.org
Blog: thoughtfullaw.com