Episode #25 Balancing the Scales: The Power and Pitfalls of Financial Controls in Law Firms

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Welcome back to episode number 25!  Today, we're talking about a big phrase: Segregation of Duties.  It might sound fancy and something that only big companies need to worry about, but it's something every business needs as soon as there is more than one person working in the firm. It is about making sure no single person has all the power over a law firm's money.

Think of it like this: You wouldn't let one person be the judge, jury, and lawyer in a courtroom, right? Similarly, in a law firm, you don't want just one person in charge of all the money stuff. This helps prevent mistakes and keeps everything fair and straight.

Think this can’t happen to you? I have seen it over and over again as I talk to business owners from all industries of varying sizes. I have cases that I have been personally involved in as a forensic accountant over the years, but here are a couple of examples that hit the headlines in 2023:

• Paralegal Is Charged With Embezzling $1.5 Million From Law Firm's Clients - Jennifer Elaine Roarke, 54, of Hickory, N.C., was indicted on wire fraud charges for embezzling more than $1.5 million from the clients of a law firm where she was employed. According to allegations in the indictment, from 2007 to 2021, Roarke, who is also known as Jennifer Claveria, was employed as an assistant and a paralegal for a law firm in Hickory, North Carolina. The law firm handled, among other things, the administration and management of trusts for clients, including the trusts’ bank accounts. As part of her duties, Roarke was responsible for opening mail, depositing checks into trust bank accounts, and processing invoices. As alleged in the indictment, from 2015 to 2021, Roarke misused her access and position with the law firm to embezzle more than $1.5 million from the trusts of the law firm’s clients. Roarke executed the embezzlement scheme by making hundreds of unauthorized wire transfers from bank accounts associated with the law firm’s clients’ trusts into bank accounts controlled by Roarke. Roarke allegedly used the embezzled funds to pay for personal items, make mortgage, car, and credit card payments, and to fund an extravagant lifestyle.
  
  
• San Mateo Man Charged With Embezzling More Than $1.1 Million From San Francisco Law Firm - A federal grand jury in San Francisco indicted Jairo Tomas Santos with bank fraud. According to the indictment (CR 23-00230 WHA), filed July 25, 2023, Santos, 42, formerly of San Mateo, Calif., allegedly embezzled more than $1.1 million from his employer, a San Francisco-based law firm, where Santos worked as the office manager. According to the indictment, Santos began his embezzlement scheme no later than March 2016 and continued it through February 2023. As part of the scheme, Santos obtained checks from the victim law firm, filled out the payee line of those checks, addressing them to “Jairo Santos,” and signed each check with the signature of the law firm’s senior partner even though Santos was not authorized to do so. Santos then deposited these checks into his personal checking accounts at Wells Fargo Bank. Between March 9, 2016, and February 2023, Santos allegedly deposited approximately 806 unauthorized checks from the victim law firm made payable to Santos into his personal checking accounts. The total value of these unauthorized deposits was approximately $1,191,683. Further, as part of the scheme to defraud, Santos made and deleted entries in the general ledger for the victim law firm that concealed the fact that the payments were made for Santos’s own use. The indictment further alleges that Santos deposited these checks from the victim law firm knowing that the payments were not authorized by the firm or its senior partner and knowing that they exceeded the amounts he was legitimately owed by the firm for his salary and expenses.

Both of these cases are currently in the indictment phase and pending trial, but they are out there and they can happen to you.

So, let’s talk about the benefits and some detriments of segregation of duties and what examples of how this control would look like in your firm.

Let’s start with the benefits of segregation of duties for your firm.

Prevention of Fraud

By ensuring that no single individual has control over all aspects of any critical financial transaction, it reduces the chance that mistakes or intentional fraud can occur without detection.

Accuracy and Reliability of Financial Records

Mistakes are less likely to happen when more than one person is involved in a process. This ensures that financial records are accurate and reliable, which is particularly important for law firms in terms of billing, receiving payments, and managing client trust funds.

Operational Efficiency

While it might seem counterintuitive, segregation of duties can actually streamline processes. By clearly defining roles and responsibilities, there's a reduced chance for overlapping tasks and confusion. Employees know their specific roles, making training more efficient.

Increased Accountability

Segregation of duties ensures that there's a clear trail of who did what. If there's a discrepancy, it's easier to trace back to the source. This promotes responsibility among employees, as they are aware that their actions can be audited.

Risk Management

For law firms that may handle large amounts of money or sensitive information, segregation of duties provides an extra layer of security and protection against potential lawsuits or claims of negligence.

To be fair, here are some things to consider when implementing segregation of duties.

Increased Costs

Implementing segregation of duties can require more personnel, as tasks are spread out among multiple employees. This can lead to increased salary and training costs.

Complexity in Implementation

It can be challenging to clearly define and segregate roles, especially in smaller firms where employees might wear multiple hats.

Potential Delays

Having multiple people involved in a process could lead to potential delays, especially if one person is absent or there's a miscommunication.

Resistance to Change

Employees might resist the changes, feeling that their autonomy or trustworthiness is being questioned.

Over-reliance on segregation of duties

There's a potential risk that management might over-rely on segregation of duties as the primary control mechanism, neglecting other important financial controls.

Hopefully, I have piqued your interest in this subject! So, what can you do to adopt segregation of duties in your firm? Here are 10 exmaples.

1. The person who authorizes a transaction should not be the one to process it.
2. The employee who receives payments should not be the one reconciling bank statements.
3. The individual responsible for billing clients should not be the one collecting payments.
4. The person who requests a purchase should not be the one to approve the purchase.
5. The employee maintaining client trust accounts should not be the one disbursing funds from those accounts.
6. The person responsible for physical custody of assets (e.g., cash, checks) should not be the one maintaining the related accounting records.
7. The employee entering financial transactions into the accounting system should not be the one to review or approve them.
8. The individual who prepares checks should not be the one signing them.
9. The person who approves write-offs should not be the one who posts them.
10. The employee handling petty cash should not be the one reconciling the petty cash account.

Even places that are supposed to be about fairness, like law firms, can face problems with money if they're not careful. It's really important for all businesses to have good rules about who can do what with the money. These rules are like a safety net that keeps the firm, and everyone who trusts it, safe from money troubles. So, whether it's a big company or a small one, having strong money rules is a smart way to stay out of trouble and keep everyone's trust.

Listener’s Question of the Week

Now it's time for our listeners' question of the week. 

Lindy asks “I have multiple loans and forms of debt. How do I pay it all off?”

Slow and steady wins the race here! Pay all the minimum fees out of your Operating Expenses. Then use any remaining money you have in Operating Expenses (after paying other bills) to pay off your smallest debt as fast as you can. No matter what keep doing the profit allocation of Profit First every 10th and 25th. I know this sounds crazy, since you have debt to pay...but you MUST build up that habit of always taking your profit first. Then when you do your quarterly profit distribution, take 95% to 99% of that distribution money and use it to crush one of your debts. The remainder (5% to 1%) is used for you to celebrate. This process has you constantly chipping away debt (from Operating Expenses) and then quarterly hitting that debt really hard. It is kinda like boxing...jab, jab, jab then a massive right hook.

I hope this helps, but if there are more questions or follow-ups, do not hesitate to reach out. Also, if you have a question you would like me to answer, you can email me at [email protected]. Thanks!

Inspirational Quote

This week’s inspirational quote is from anonymous, “Progress - you might now be where you want to be, but you are not where you used to be.”

Final Thoughts

Final thoughts for today: Throughout my career, I have seen so many people screwed by those they trusted in their business, both employees and contractors. Business owners are so focused on growing their business and client satisfaction that as they begin to delegate control, they do so without putting controls in place to prevent or quickly identify issues.

A little planning will reap major benefits! From the list of 10 examples I provided, picking 2 - 3 of them and implementing them immediately will work to protect you and your firm.

Before I sign off for today, for listeners of my podcast, you have an opportunity to get a copy of my newly published book for free! 

“Stop Struggling and Start Thriving: A Guide To Transform Your Law Firm”

Download the Free PDF Now 👉 CLICK FOR FREE BOOK

Also, it is available for purchase on Kindle or paperback HERE.

If you have any questions about today’s episode, feel free to comment if you are watching on YouTube or send me an email to [email protected].

If you know someone who might need to hear this information, please share this episode with them or if you are on YouTube, tag them below! 

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And before I go – remember profit is something you intentionally plan for in the beginning. It is not a potential bonus at the end of the year!

Thanks, and have an amazing day!

Today we’ll discuss the importance of segregation of duties in every business, regardless of size. I will explain how it helps prevent fraud, ensures accuracy and reliability of financial records, improves operational efficiency, increases accountability, and mitigates risk. I also highlight real-life examples of embezzlement cases in law firms to emphasize the need for proper controls. To adopt segregation of duties in your firm, I provide 10 practical examples of how to separate critical financial tasks among employees.

And, for listeners of my podcast, you have an opportunity to get a copy of my recently published book for free! 

“Stop Struggling and Start Thriving: A Guide To Transform Your Law Firm”

👇 Click the link to download your book today. Let's pave the path to profitability together!

#StopStruggling #StartThriving #LawFirmProfitability #eBook

Download the Free PDF Now 👉 CLICK FOR FREE BOOK

Or it is available for purchase on Kindle or paperback HERE.

Be sure to follow and subscribe to get notifications for future episodes!

✉️ EMAIL: [email protected]
📞CALL: (234) 207-5772
💻 VISIT: ProfitScaleThrive.com

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