BUSINESS FOR THE PLAINTIFFS BAR

A Quarterly Column
by
William L. Speizman

[EDITOR’S NOTE: Like it or not, the success you achieve in your practice is as dependent upon your business skill as your legal skill. That presents a problem. Because if you are like most personal injury attorneys, you never received formal training in running the business-side of your law firm. These columns by William L. Speizman will help fill in the gaps. Bill is not an attorney. He is a business consultant. He is the only business consultant in the country who has worked exclusively with members of the plaintiffs bar for more than two decades. Bill received his bachelor’s degree from Northwestern University and his master’s degree from Columbia University. If you have any questions or comments, you can contact Bill at wlspeizman@gmail.com. We hope you enjoy this new feature of “The Closing Argument."]

How To AVOID Employee Embezzlement:

“The Secret Plague of the Plaintiffs Bar”

Every business owner faces the threat of employee embezzlement. The primary difference between those who fall prey and those who do not is “cash controls.” Cash controls are accounting procedures designed specifically to stop employees from stealing your money.

Tales of Three Attorneys

Two Former Partners:

For many years, two attorneys were partners in a plaintiffs practice in the Midwest. Eventually, they decided to dissolve their partnership. After the dissolution, they remained in the same office space and continued to share the services of their office administrator.
Once the partnership had ended, the administrator went into business for herself, cleverly embezzling money over a period of years. After her crime was discovered, an audit determined that one attorney had lost $3.2 million, the other a measly $23,000.00 on some unpaid invoices.

What made the difference?
The latter attorney knew enough not to allow an employee who was authorized to write and sign checks reconcile his bank statements. So he had his bank statements mailed to his home. Each month, he made sure every payee was legitimate and the amount of each check made sense.
The other attorney never implemented this basic cash control. He authorized the administrator to write and sign checks and had her reconcile his bank statements.

A Solo Practitioner:
This attorney practiced on the West Coast. He lost more than $1 million. He implemented a basic cash control. However, his implementation was slipshod and his attitude was “set it and forget it.” Those errors provided his long time administrator with an opening to pick his pocket.
He permitted Wilhemina to write and sign checks up to $2,500, but he required that checks for more than $250 have two signatures. As signers, he designated himself, his administrator and one of his associates. The associate, as the attorney well knew, would be hard pressed to find the hay stack let alone the needle.
As it turned out, whenever Wilhemina wanted to divert funds to one of her bogus accounts, she wrote a check, signed it, then walked into the associate’s office and said, “Jim said to sign this.” And the associate did, dutifully.
Jim’s is a case of a little knowledge being a dangerous thing: (a) he knew enough to require two signatures, but he didn’t mandate that one of them be his; (b) he established the two signatures procedure, but never checked to see that it was being implemented as he intended; and (c) he had his bank statements sent to his office and had Wilhemina reconcile them.

Three Examples of Cash Controls

a. Not allowing an employee authorized to sign checks reconcile your bank statements. If anyone other than you or a partner signs checks, you should have your statements sent to your home and reconcile them yourself. If that is not feasible, you should consider having a fiduciary such as your accountant reconcile them. But even if you use a fiduciary, you should not just “set it and forget it.” At irregular intervals, ask to be present when your statements are opened and reconciled.
b. Requiring two signatures on all checks, or at least all checks written for more than $250, and requiring that one of those signatures be yours or your partner’s. (Reconciling your statements at home will protect against an employee writing a large volume of small checks to bogus payees.)  
c. Never, repeat never, keep a signature stamp in your office. Better yet, never have one made.

 A Back-Up Defense Against Employee Embezzlement

Especially if you have a large staff, you should consider an Employee Fidelity Bond. It can indemnify you against employee embezzlement. Consult your agent or broker for more information and rates. 

What To Do To implement And Maintain Proper Cash Controls

In a word, discuss them with your accountant. Cash control is a sub-discipline of the accounting profession. It is something accountants study in the course of their professional education.
If you have not done so already, ask your accountant to lay out the cash controls you need to institute in your practice. To determine if modifications or enhancements to your cash controls are needed, have your accountant review them periodically. At least quarterly, check that the cash control procedures outlined by your accountant are being followed to the letter by your partner(s), your staff and you.

Four Closing Thoughts

a. Police officers say no home security system can protect against a thief who is motivated enough and sophisticated enough. But the better your defenses, the more likely they are to defeat less competent thieves and cause the pros to look elsewhere.
So, too, with cash controls. The better they are, the greater the chances they will defeat amateurs and cause pros to seek low hanging fruit somewhere else.   b. Cash controls have nothing to do with trust. Finding themselves in dire financial straits, even veteran employees may see your assets as the only way out of their predicaments. In other words, cash controls aren’t personal; they’re business.  
c. The Talmud holds, “The mouse is not the thief. The hole is the thief.”  
d. “The secret plague of the plaintiffs bar,” is what an attorney at an AAJ convention in the 1990s called employee embezzlement.

Copyright 2007 William L. Speizman

All Rights Reserved