Lawyers and partners are often busy with their legal practice and may be less focused on running the business. This can lead to duties, including trust accounting, being delegated to non-lawyer staff and often to one person with little or no oversight from a lawyer. This lack of oversight is frequently a product of the trust lawyers have in the staff members; however, it results in an increased risk of trust misappropriation. Many of the thefts are not sophisticated and could have been prevented by relatively simple internal controls.

There is no coverage for theft by law firm staff under the Alberta Lawyers Indemnity Association’s (ALIA) Group Policy. Without additional employee theft coverage, a Responsible Lawyer and other lawyers at their firm may face civil liability for the loss of client funds entrusted if the lawyer is unable to make restitution.

Ethical concerns may also arise if a lawyer at the firm was not properly delegating and supervising tasks. Lawyers can delegate certain tasks to firm employees, but any delegation must be made with an appropriate degree of oversight (Code of Conduct, Rule 6.1-1). It is the responsibility of the lawyer to safeguard client funds, not the bookkeeper, the paralegal, the office manager or the accountant.

The direct impact of fraud extends beyond the aforementioned losses. When lawyers and firms become victims of fraud or theft, it affects the reputation of the firm and may cause the public to lose confidence in the lawyers which in turn, may impact your firm’s ability to attract and retain clients.

Given the significant consequences that often result from staff trust misappropriation, it’s critical that lawyers proactively implement measures to reduce the risk and impact of trust fraud or theft.

Your “Ounce of Prevention”

• Secure your systems (accounting software, online banking, confidential client information, client’s credit card information, etc.) with role-based access control (RBAC). RBAC ensures employees only have access to the specific data they need for their job duties. This minimizes the risk of unauthorized access to sensitive information, such as accounting software, online banking, client details and credit card information. Regularly review and update RBAC permissions to maintain security.
• Complete monthly bank reconciliations. This is a key control that compares your book balances to your bank balance and ensures that it matches. The firm’s Responsible Lawyer should review bank statements and review and approve bank reconciliations for all bank accounts, including trust and general accounts, monthly. As part of this review, they should examine negotiated cheques for potential concerns, including tampered cheques, forged signatures and unusual vendors, to name a few.
• Monitor inactive accounts and client ledger accounts with high balances for unusual or unexpected entries. Inspect for trust transfers from those client ledger accounts to unrelated client ledger accounts, as this may be a mechanism to conceal theft.
• Minimize the risk of cheque fraud:
  • Store blank cheques, which are susceptible to forgery, in a secure area with restricted access limited to authorized personnel.
  • Lawyers should never pre-sign cheques when they are unavailable to sign.
  • Conduct thorough comparisons between the payees listed on negotiated cheques and those in client trust ledger to detect any discrepancies.
  • Destroy all unused cheques from closed accounts to prevent misuse.
  • Immediately mail printed and signed cheques after signing to prevent unauthorized use.
  • Select cheques with built-in security features to enhance fraud protection.
• Review all trust withdrawals. A lawyer of the law firm should review and authorize all trust withdrawals, including cheques, wire, e-transfer, and electronic fund transfers. The recipient, invoices and client ledger should be reviewed before authorizing any payment. A best practice would be to require at least two signatures on trust cheques for withdrawals.
• Enable interac e-transfer auto-deposit for trust accounts. This feature eliminates the need for answering security questions for each deposit, streamlining the process and reducing manual intervention.
• Separate duties or tasks. Law firm tasks must be segregated so that a single person is not able to perpetrate the fraud and then cover it up. For example, the person who handles cash receipts should not be the same person depositing the cash or reconciling the bank statements. In smaller firms, segregation of staff duties may be more challenging, but alternative controls can be implemented. For example, you should keenly review withdrawals from trust accounts to ensure they are for legitimate reasons.
• Conduct thorough background checks on all employees who will have access to client funds or sensitive information. This practice should be ongoing, including both new hires and existing staff for all levels in your firm.

Talk to your colleagues and your staff about fraud. The more comfortable everyone is with the concept, the more likely they will be able to quickly identify unusual circumstances.

Rule 119.40 of the Rules of the Law Society of Alberta requires that a law firm must immediately report to the Law Society any fraud related to money or trust property, theft of money from the law firm’s trust accounts or general accounts, or theft of trust property.

The Law Society is aware that law firms and lawyers have experienced employee thefts, and is available to provide ongoing practice management support, including advice from the Practice Management department and the Practice Advisors.