Law Firm MANAGEMENT. Foxes in the henhouse How to combat occupational fraud

Transcription

1 Law Firm MANAGEMENT Foxes in the henhouse How to combat occupational fraud Want to get paid in full and on time? Communicate, communicate, communicate Measuring per-attorney overhead Beyond Twitter: Fine-tuning your online marketing strategy Summer Franklin Avenue Garden City, NY (516) Fifth Avenue New York, NY (212)

2 Foxes in the henhouse How to combat occupational fraud n tough economic times, it s not surprising that occupational fraud I can become more common, but it s a significant problem even in the best of times. Participants in the 2010 Report to the Nations on Occupational Fraud and Abuse, a global fraud survey administered by the Association of Certified Fraud Examiners (ACFE), estimated that the typical business worldwide loses 5% of its annual revenues to fraud, for a potential total fraud loss of over $2.9 trillion. The median loss in U.S. organizations is $105,000 but this rises to $150,000 in smaller companies (less than 100 employees). Because of those high numbers, it s critical that law firms keep an eye out for possible fraudulent schemes in their firms. By understanding how occupational fraud schemes work and recognizing the red flags, you can reduce the odds of being victimized. Occupational fraud generally occurs only when certain conditions are present. Experts call these conditions the fraud triangle. Types of occupational fraud Occupational fraud typically falls into one of the following categories: Asset misappropriation. In these schemes, the perpetrator steals or misuses the firm s resources. Common examples include false invoicing, payroll fraud and skimming. Corruption. This refers to schemes where the perpetrators use their influence in business transactions to obtain a benefit for themselves or someone else, thereby violating their duty to their employers. For example, employees might receive or offer bribes or extort funds from third parties. Financial statement fraud. This type occurs when a perpetrator arranges for the intentional misstatement or omission of material information in the firm s financial statements. It usually takes the form of fictitious revenues or concealed expenses or liabilities that make the firm seem more profitable than it really is. Fraud triangle Regardless of the type of scheme, occupational fraud generally occurs only when certain conditions 2

3 are present. Experts call these conditions the fraud triangle, and it s composed of: 1. Motive. Typically, perpetrators feel some type of pressure. It could include pressure to meet their firm s billing goals, fund an extravagant lifestyle or cover costs related to gambling or substance abuse. 2. Opportunity. This can result from inadequate internal accounting controls, poor employee oversight or ineffective audits. In law firms, partners typically have the greatest opportunity to perpetrate fraud because they usually operate with more autonomy and may be in positions to override internal controls. Their direct client contact may allow them to detect client suspicions and head them off by diverting funds and replenishing clients accounts. For example, litigators can divert settlement funds, and real estate partners might divert sale or mortgage proceeds. Of course, nonattorney staff may have opportunity, too. Associates or support staff can forge their bosses signatures or exploit other flaws in the firm s internal controls (or lack thereof) to misappropriate funds. 3. Rationalization. This condition is necessary because perpetrators must be able to mentally justify their conduct. They might tell themselves that they re only borrowing the funds, that the firm can afford the losses or that the firm owes them more for their hard work. It s worth noting that a perpetrator can be just about anyone. Globally, the ACFE has found that most fraud perpetrators are men and are college-educated, and more than half are between the ages of 31 and 45 employees who have experience and, in turn, authority and access to firm resources. However, the median loss for schemes increases with the age of the perpetrator. Interestingly, most perpetrators are first-time offenders, and in every region except Asia the greatest number of frauds occurred in the accounting department, where check tampering and billing fraud were the most common schemes. Pay attention to these red flags According to the ACFE, those who commit occupational fraud exhibit some common behaviors. In the U.S., financial difficulties and/or living beyond one s means were the most common indicators, appearing in nearly 45% of the cases. Other indicators included: n Control issues an unwillingness to share duties; n Divorce/family problems; n Wheeler-dealer attitude; n An unusually close association with a vendor; n Irritability, suspiciousness or defensiveness; n Addiction problems; and n Past employment-related problems. It can be a mistake to concentrate on only lower-level fraud. Both globally and in the United States, executives and upper management constituted only about one-sixth of the perpetrators, but the median loss they caused was more than three times that of managers and over nine times that of employees. Preventing fraud in the firm Law firms of all sizes can take several simple steps to minimize the risk of occupational fraud. Primary among them is to forbid even partners to override internal controls other than in rare and well-defined circumstances. In addition: Segregate accounting duties, especially for executing outgoing checks, Review returned checks for double endorsements or handwritten changes, Send bank statements to the managing partner s home, Require employees to take vacations of sufficient length that irregularities would become apparent during their absence, 3

4 Perform unscheduled audits of practice areas whose clients are unlikely to closely scrutinize their bills, Look for pattern changes, such as steep increases in the number of or amount of payments to a vendor or supplier (who could be fictitious or a related party), and Compare addresses of vendors and suppliers with addresses of employees. Finally, employees, clients, vendors and suppliers are often the first to suspect or witness fraud. Establish an anonymous tip line that they can easily use to report their suspicions or evidence. In fact, the ACFE reports that tips have historically been the most common means of detection, with the latest study indicating that they caught nearly three times as many frauds as any other form of detection. Train employees to recognize fraud and encourage them to report illegal or suspicious behavior confidentially. And periodically check with vendors and suppliers to ensure they re being paid. Investigate any past-due notices to determine whether the funds intended to pay them were diverted. Proceed with caution Simply having a suspicion about an employee or vendor doesn t provide enough cause to act. Before stepping out and accusing someone of misdeeds, ask a qualified fraud expert to help you investigate. When and if it s necessary, the expert can assemble evidence, interview employees and testify in court. Want to get paid in full and on time? Communicate, communicate, communicate oes your firm suffer from delinquent client payments? It can be a real D problem among professional practices. But, before you lose sleep over it, there are some strategies you can implement to help solve or mitigate the problem. First of all, accept the fact that you ll likely never receive payment on 100% of your bills. However, you can get close to that realization rate. The key is to carefully select your clients and cases, and then communicate, communicate, communicate! Spell it out The first stage of communication comes when you ask a new client to sign a fee agreement. Make sure it clearly explains all of your fees and how they re calculated, and states when payment is due. Be sure you get a retainer fee up front, and work with the client as needed. Be clear about the consequences of nonpayment, including your right to withdraw before any work begins. 4

5 To make it more convenient for your clients to pay, accept credit card payments or set up an online payment system. And remember, clients are more likely to quickly pay more frequent bills with smaller amounts than they will with one big bill for the same work. Good cop, bad cop The second stage of communication comes when accounts become delinquent. Train your staff to respond to them quickly, because the likelihood of collecting on past-due bills decreases as time goes by. If the client is reluctant or unable to pay the full outstanding amount, work out a payment arrangement. And if it comes down to having to make collection calls, have your staff do the dirty work so you aren t the one coming across as the bad guy. If you re adamant about making the calls yourself, be diplomatic. You don t want to strain an otherwise pleasant client relationship. Stick with the agreement Resist reducing your original fees, particularly if the client has signed an agreement to pay the full amount. Doing so could set a precedent for future dealings, and that s something you want to avoid. Then again, you may not have a better option. An engagement letter and detailed documentation of work performed should defuse any arguments over fee amounts. Disputes over quality are harder to resolve. If the client has a good point, communicate with him or her by offering to make appropriate amends or reduce the fee. Agreeing to a discount rather than withdrawing representation might be a better option for eliminating the issue. This can prevent your firm from paying for collection efforts and help it avoid other legal ramifications. But keep in mind that the ABA s Code of Professional Conduct states that lawyers are allowed to withdraw only if the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer s services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled. Some state bars require that you provide pro bono work to the client to fulfill your ethical obligations. Specify how to deal with unpaid accounts The final form of communication comes via your written collection policy. It should specify how to track and deal with delinquent and unpaid accounts. The policy should spell out credit terms, fee agreements, and collection guidelines and procedures including when to use a collection agency. Resist reducing your fees, particularly if the client has signed an agreement to pay the full amount. If your budget permits, consider hiring a collection staff person to help develop a firmwide policy to manage collection efforts. Otherwise, designate someone from your staff to perform these duties. Communication is key Regular communication with clients is essential for many reasons: It not only can help head off potential problems that might cause a client to become disgruntled and slow down or stop payments; it also can help you gauge a client s level of satisfaction with your firm s representation. 5

6 Measuring per-attorney overhead uccessful law firms closely monitor their revenues and profitability, both firmwide and by attorney. But the need to S allocate overhead can make it difficult to truly assess per-attorney profitability, thereby undermining compensation and related decisions. Many firms simply divide total overhead costs by the number of attorneys. But savvy firms take steps to allocate direct and indirect overhead more accurately. The basic components To properly allocate overhead, you must consider every employee who generates billable time, including paralegals. Further, you need to break down expenses into direct and indirect overhead. Direct overhead encompasses expenses that can be directly connected to a staff member. Examples include salary, payroll taxes and employee benefits and perks. Indirect overhead includes those expenses that can t obviously be assigned to specific individuals, such as rent, utilities, insurance, staff salaries and technology costs. In other words, indirect overhead covers all of the costs that remain after the direct overhead is deducted from total expenses. Weight it out So how does a firm allocate its indirect overhead? One way is to employ a weighted system that assigns individual revenue-generators a weight based on the percentage of total resources they use. A partner, for example, may have a full-time secretary, while an associate shares a secretary, and a paralegal has no access to a secretary. The partner obviously consumes more support staff resources than an associate, and an associate consumes more than a paralegal. Thus, the system might assign a weight of 1.5 for partners, 1.0 for associates and 0.5 for paralegals. The weights can be adjusted as needed, so that, for instance, a long-tenured senior partner has a greater weight than a junior partner. After the appropriate weights are established, the indirect overhead is divided by the total weight of the firm to arrive at a per-unit figure for the indirect overhead. Each individual s weight is then multiplied by the per-unit figure to calculate the indirect cost for that person. To illustrate, suppose a firm comprises two partners, three associates and one paralegal, with the weights assigned as above. The total weight for the firm, therefore, is 6.5. If the firm s indirect overhead is $130,000, the perunit overhead equals $20,000. As a result, the firm will assign indirect overhead of $30,000 to each partner, $20,000 to each associate and $10,000 to the paralegal. From here to profitability The formula for an individual attorney s profitability is typically expressed as: Billings (Indirect + Direct overhead) = Net profit But most firms use their associates to generate more revenue than their overhead; the difference creates additional income for the partners. To properly allocate overhead, you must consider every employee who generates billable time. Making it all work As a firm leader, make sure you keep the disparity described above in mind when relying on the profitability data for decision-making. In general, however, a weighted system helps law firms capture more accurate per-attorney overhead and profitability figures. Consult your CPA for analysis and guidance on assigning appropriate weights. 6

7 Beyond Twitter: Fine-tuning your online marketing strategy ocial media sites such as Twitter and Facebook are all the rage in marketing these days, but are they right for S law firms? The answer is yes, but with certain limitations. You can use them to grab attention and send visitors to your firm s Web site as well as provide value-added content that demonstrates expertise and helps convert prospects into clients. Hot off the presses It s hard to convey substantive information in Twitter s 140 characters or in a Facebook posting. Instead, use these tools to direct readers to useful information on your Web site. Although you may be tempted to cut-and-paste previously written material and leave it on your site for the duration, you must put yourself in the readers shoes. What interests them? Rather than getting into the intricacies of statutory construction and arcane procedural matters, post articles that focus on practical issues that readers are likely to confront. A firm that does estate planning, for example, might want to post an article that addresses issues related to transferring ownership of closely held businesses or other types of wealth. You can also use these articles to assemble online newsletters. Send your contacts a quarterly or monthly with descriptive blurbs and links to the articles. To attract return visitors and better results in search engines, update your site regularly with fresh content. And remember to include keywords and tags that will help visitors find you, especially if they re not already familiar with your firm. Blog on Don t limit your written material to static articles, though. More and more firms are launching legal blogs aimed at target audiences. Recruiting multiple attorneys to contribute will help ensure the blog is updated regularly with fresh material from different perspectives. Once the blog is established and has a good number of entries, publicize it. Include a conspicuous link on your Web site s home page and add it to the signature box of all outgoing s. You also could list it in various blog directories. Social studies Online marketing has become indispensable, but you need to use the vehicles that are best for you and your clients. After all, your clients may not even be on Twitter or Facebook. But it s a good bet they use the Internet for research, such as finding law firms. Don t make the mistake of neglecting your Web site to jump headfirst into the social media pool social media is simply one piece of your marketing plan. This publication is intended to provide accurate and authoritative information on the subject matter covered. It is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice on specific facts or matters and assume no liability whatsoever in connection with its use LFMsu10 7

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