On an unusually warm and foggy Saturday evening this past December the $1.7-million home of Dany Perras was set ablaze, the third time in the space of a year an act of vandalism targeted the former Montreal lawyer. Perras, who resigned abruptly from the bar in October 2011, is under investigation by the Barreau du Québec for allegedly orchestrating a multi-million dollar Ponzi scheme through his trust account. It’s been more than 16 months since the scandal that shook the Montreal legal community erupted, and the fallout is still being felt. Successfully petitioned into bankruptcy, Perras is the subject of an ongoing criminal probe and a host of legal proceedings — many of which are under court seal — launched by more than a dozen creditors seeking more than $6 million.
The Perras case is unique, and at the same time it is not. The former Montreal lawyer is not the first nor will he be the last advocate accused of misappropriating funds from a trust account. Disciplinary notices posted by law societies are replete with hearings of lawyers unable to resist the temptation of dipping into their trust accounts. Even then, defalcation is rare. As Susan Forbes, director of insurance at British Columbia’s Lawyers Insurance Fund, says, “when you consider that there are 10,000 practising lawyers in B.C. and there are only one or two a year that get involved with theft, that is a very small percentage.” Tom Schonhoffer, the executive director of the Law Society of Saskatchewan, has another take. “If you look through the billions of dollars that go through trust accounts, defalcations would be a fraction of a fraction of one per cent.”
But it happens more frequently than the profession cares to admit, particularly thefts from a law firm’s general accounts. David Debenham, a partner with McMillan LLP in Ottawa who is a certified fraud specialist and investigator, estimates only one in 10 frauds within the profession come to light. “A lot of firms that had lawyers, or law clerks, or staff that commit fraud tend to indemnify clients and not report it — it’s sort of the [profession’s] dirty little secret,” says Debenham, who is also a certified management accountant often hired by law firms to conduct fraud probes. He says there is no doubt the number of misappropriation cases is growing exponentially.
Though he doesn’t go that far, the chief executive officer of the Professional Liability Insurance Fund of the Barreau du Québec says the insurer has had to grapple with a “significant” increase in defalcations over the past couple of years. What’s more, the amounts being misappropriated are larger than ever. “I have been here for 25 years, and we never saw situations like that 10 years ago,” says René Langlois. The figures bear him out, at least in Quebec. The Quebec liability insurer paid out nearly $20 million in claims in fiscal 2011, almost double the preceding year, according to its latest annual report. In Ontario, total claim costs may top the $100-million mark, reveals LawPro’s 2011 annual report. The number of claims reported — 2,468 — is higher than it has been at any point since 2000 and 11 per cent higher than in 2010. Similarly, claims frequency (number of claims per 1,000 lawyers — a better barometer of trends) is up to 107 from 99 a year earlier. Yet Dan Pinnington, vice president of claims prevention and stakeholders relations at LawPro, says although the insurer deals with them regularly and on “occasion we have seen some very large losses, either through lawyer fraud or staff fraud, I can’t say we have had an increase.”
Most misappropriations are committed by sole practitioners or lawyers practising in an association where they might share space with other lawyers but are running their own trust accounts. Most thefts are usually small amounts. Cases like Howard Lorne Tennenhouse, who was disbarred by the Law Society of Manitoba last year after pleading guilty to taking nearly $1 million from 54 residential school survivors, is the exception to the norm. “Usually what happens is that it starts as a one-off that they just do for an emergency, then they do it a few more times and it goes from there,” says Debenham, the author of The Law of Fraud and the Forensic Investigator. Defalcations committed by a partner working in a law firm are atypical, but when it happens the amounts taken are often sizeable. Ottawa lawyer Leslie Andre Vandor was disbarred last year by the Law Society of Upper Canada for misappropriating more than $2 million, most of which came from his father’s estate and Vandor Investments Ltd. He was also found to have misappropriated funds from Lang Michener, which in 2008 merged with McMillan LLP.
The Perras case is all the more exceptional because it is a cautionary tale that underscores the exposure and “world of trouble” law firms can be drawn into when faced with a rogue partner. Kaufman Laramée LLP, the Montreal firm where Perras briefly practised for six months in 2011, has been ensnared in the legal maelstrom and now faces five lawsuits from Perras’ former clients arising from the alleged financial fraud. Even lawyers acting on behalf of “parties that were basically conned by Perras” are sympathetic to the law firm’s plight. “The circumstances here are horrendous for a law firm,” says Neil Stein of Stein & Stein Inc. “The last thing a law firm wants is to be sued. It is not imaginable that one of your own partners would put you into a situation of that nature. They don’t deserve it.”
The plaintiffs, members of Montreal’s Jewish community, claim they were approached by Perras to participate in business opportunities that required them to make short-term loans to be held in the trust accounts operated by the firm and Perras before paying out a pre-determined rate of interest. The investors are suing Kaufman Laramée for a total of $3.1 million, alleging the firm was negligent because it failed to inform them Perras was no longer a partner when they made the deposits, says the plaintiff’s counsel Sylvain Deslauriers, president of Montreal law firm Deslauriers & Cie. The firm and Perras ended their partnership in June 2011, but Perras was allowed to maintain an office until September when he set up his own separate office. “The firm was victimized by an individual who was recommended by a large national recruiting firm who came with good credentials,” says Kaufman’s counsel George Pollack, a partner at Davies Ward Phillips & Vineberg LLP in Montreal. “We didn’t know to what extent he was abusing the hospitality that was accorded to him.”
Making matters worse, Kaufman is on its own to defend the actions. Quebec’s professional liability insurer has denied coverage and refuses to defend the firm and its partners because it felt they did not provide professional services — a position Quebec Superior Court Justice David Collier endorsed in a ruling released just days before the blaze struck Perras’ residence. “It cannot be concluded that Perras or Kaufman rendered professional services to the plaintiffs by accepting deposits, acting as escrow agent, or transferring funds from one trust account to another,” Collier wrote in one of the few decisions in case law that examined the interplay between insurance coverage and professional legal services. “A solicitor-client relationship does not arise from the mere receipt of funds for deposit. . . .Taking the pleadings at face value, it appears they provided investment services to the plaintiffs.”
That was also the conclusion the Ontario Court of Appeal came to six years ago in a case pitting Cassels Brock & Blackwell LLP against LawPro. In considering a number of transactions similar to the Kaufman case, the appeal court found a trust account transaction was not a professional service, and that it fell under the policy’s investment exclusion, because it was not “ancillary” to legal services. “A person who is a lawyer may wear more than one hat, but just because at most times that person wears the hat of a lawyer does not mean that he always acts qua lawyer,” wrote the court in a brief three-page ruling.
Those are the kinds of decisions that reassure professional liability insurers. All law societies in Canada provide professional liability insurance for negligence, but its scope varies from jurisdiction to jurisdiction. All law societies also have funds set aside to provide trust protection coverage to ensure innocent members of the public do not suffer a loss through theft by a lawyer — as long as the lawyer who received the monies and deposited it in the trust account performed legal services. Indeed, in Alberta lawyers are prohibited from depositing money into their trust account if it is not in conjunction with legal services, notes Steve Raby, the outgoing president of the Alberta Law Society.
Other compensation funds, like Manitoba’s, are discretionary. “We protect against legal service,” says Allan Fineblit, chief executive officer of the Law Society of Manitoba, echoing the way many other law society compensation funds are managed. “We never had to go to court to establish that because it is a discretionary fund. We have no contractual obligation with the party.” In Nova Scotia, the Lawyers Fund for Client Compensation takes a slightly different tack. It is a fund of first resort, and claimants are not required to exhaust other remedies, which is not necessarily the case with other compensation funds. “The approach we take is if a lawyer committed a defalcation and the victim is truly innocent, payment will be made,” says Darrel Pink, executive director of the Nova Scotia Barrister’s Society.
The liability and exposure law partners face when one of theirs misappropriates raises “interesting legal issues,” adds Pink — not just in Nova Scotia, though, but across the country. In Nova Scotia if a lawyer practising in a law firm steals money from a trust account, then the firm and its partners are jointly-and-severally liable — and it is an absolute liability. But when Halifax lawyer Srinivasen Pillay bilked $1.3 million from the trust account of the law firm McGinty McCleave between March 2000 and February 2005, the Nova Scotia legal community demonstrated an exceptional display of generosity. With the approval of its members, the law society imposed a one-time levee of $750 on each lawyer in the province to cover the bill. “In that case, although at law the partners might have been liable they would not have provided compensation to the victims because it would have bankrupted them, so we paid all those claims,” says Pink. Pillay, who was sentenced to four years in prison, was also ordered to pay $1.3 million in restitution to the Nova Scotia Barristers’ Society.
In Ontario, the legal landscape is slightly different. Minimum level so-called innocent-party coverage is required for all lawyers practising in association, partnership (including general, multi-disciplinary, and limited liability partnerships), or a law corporation with more than one lawyer. The coverage is designed to protect against the dishonest, fraudulent, criminal, or malicious acts or omissions of present or former partners, associates, employed lawyers, and firm employees. “But if an employee stole money out of a general account — as opposed to a trust account — and stole the firm’s money, not the client’s money, in that case no client was aggrieved, no professional services were involved, so certainly there wouldn’t be coverage under the LawPro policy,” notes Pinnington.
At the other end of the spectrum stands B.C. Its trust protection coverage insures all members of the Law Society of B.C. for claims arising from the theft of money or property relating to the member’s practice of law. Trust protection coverage offers an annual aggregate limit, profession-wide, of $17.5 million; each claimant may recover up to $300,000 per claim. “Where a lawyer does steal, our insurance benefits partners in the firm as well as the victim,” explains Forbes. “When we pay the claim, we don’t subrogate the innocent partners in the firm. We protect all of them through compensation so the members are fully protected.”
But at least one law society is aggressively tackling the issue of misappropriation of funds in a way no other has so far dared to. In a bid to address rising threats to the security of trust funds, in 2011 the Law Society of Alberta introduced a new regulatory structure that turns on its head the widely-held premise that lawyers are entitled to have a trust account. Instead under the new Safety of Trust Property Program, a law firm seeking to open a trust account must get approval from the law society. The firm must designate a specific lawyer who will be responsible for meeting the requirements set out by the regulator, and who will be held accountable for non-compliance. It has broad audit authority and, through an automated audit program, the LSA is now capable of auditing 100 per cent of accounting transactions of any law firm using approved law firm accounting. “We got scared in Alberta,” acknowledges Raby, who served as chairman of the Trust Safety Program committee. “The numbers had been quite small until 2004 and it jumped dramatically to $1.4 million and then the next couple of years were $864,000 and $754,000. That’s when we had a look at our trust safety program.”
Other law societies such as Manitoba and Nova Scotia are paying close attention. “We probably need to move into the 21st century in terms of our controls,” says Finebilt. “Given what the risk is, people are recognizing over time that they want to invest more because ultimately you pay for the tools or you pay for the loss — and it is way cheaper to pay for the tools.” Pink, however, says before proceeding law societies must grapple over the appropriate amount of regulation. “Trust oversight is one of those areas where it is very risky but also very easy to over regulate,” points out Pink.
Nicolas Plourde does not seem to have such reservations. The batonnier of the Barreau du Québec believes it should be examining ways to bolster regulatory oversight over trust accounts. One model he finds enticing is the French-based Caisses des Règlements Pécuniaires des Avocats, better known under its acronym CARPA. In France, lawyers are not allowed to hold clients’ money, but must pay it into the bar association’s account, under the control of the president of the bar. There are over 100 CARPAs in France, and each is under the political and ethical control of the local bar. CARPA is not itself a bank, but works with banks. “The increase in number of claims and value of the claims from the Quebec professional liability fund, one of the causes being misappropriation of funds, is worrisome — and that is why member premiums will be doubling from $600 to $1,286 this year,” says Plourde. “It has led us to question how we can do more to avoid such a situation”.
Left unsaid is that fraudulent schemes allegedly perpetrated by lawyers or former lawyers such as Perras would be snared long before they cause real damage.
Avoiding Internal Fraud
Fraud arises from a combination of motive, means, and opportunity. Internal controls can never entirely eliminate the risk of fraud, but there are simple and practical steps law firms or solo practitioners can take to minimize the “very real risk of internal fraud,” says Jim Patterson, co-leader of the fraud law practice at Bennett Jones LLP.
Review the firm’s internal controls with an auditor or accountant to ensure they are robust.
Segregate office duties, even in small offices. Make sure one employee is not responsible for accounting, bookkeeping, and banking. In small offices all-too-often the same person handles bank deposits and bank account reconciliation. “That is a recipe for disaster because that employee could be stealing from you and you would never know it because they have complete control over that process,” says Patterson.
Establish and enforce a policy of countersigning cheques. Cheques being paid out of the office should go out under two
signatures. Do not pre-sign cheques for the sake of expediency; that defeats the purpose of countersigning. “Over the years, I have seen so many frauds where that control is circumvented,” says Patterson.
Purchase fidelity insurance coverage with adequate limits. This type of insurance provides coverage for employee theft. Though often included as part of the overall insurance package, limits typically are not sufficient. Depending on the size of the practice, coverage should range between $500,000 and $1 million.
Be vigilant and on the lookout for red flags. Know your employees, and be alert to lifestyle changes, especially if an employee seems to be living beyond their means. Also watch for signs of substance abuse or depression. Be on guard for overly diligent employees who refuse to delegate, work long hours, never miss a day of work, and forgo vacations. “The reason the employee never misses a day of work is because they have to be at their desk minding the fraud,” points out Patterson.
The Perras case is unique, and at the same time it is not. The former Montreal lawyer is not the first nor will he be the last advocate accused of misappropriating funds from a trust account. Disciplinary notices posted by law societies are replete with hearings of lawyers unable to resist the temptation of dipping into their trust accounts. Even then, defalcation is rare. As Susan Forbes, director of insurance at British Columbia’s Lawyers Insurance Fund, says, “when you consider that there are 10,000 practising lawyers in B.C. and there are only one or two a year that get involved with theft, that is a very small percentage.” Tom Schonhoffer, the executive director of the Law Society of Saskatchewan, has another take. “If you look through the billions of dollars that go through trust accounts, defalcations would be a fraction of a fraction of one per cent.”
But it happens more frequently than the profession cares to admit, particularly thefts from a law firm’s general accounts. David Debenham, a partner with McMillan LLP in Ottawa who is a certified fraud specialist and investigator, estimates only one in 10 frauds within the profession come to light. “A lot of firms that had lawyers, or law clerks, or staff that commit fraud tend to indemnify clients and not report it — it’s sort of the [profession’s] dirty little secret,” says Debenham, who is also a certified management accountant often hired by law firms to conduct fraud probes. He says there is no doubt the number of misappropriation cases is growing exponentially.
Though he doesn’t go that far, the chief executive officer of the Professional Liability Insurance Fund of the Barreau du Québec says the insurer has had to grapple with a “significant” increase in defalcations over the past couple of years. What’s more, the amounts being misappropriated are larger than ever. “I have been here for 25 years, and we never saw situations like that 10 years ago,” says René Langlois. The figures bear him out, at least in Quebec. The Quebec liability insurer paid out nearly $20 million in claims in fiscal 2011, almost double the preceding year, according to its latest annual report. In Ontario, total claim costs may top the $100-million mark, reveals LawPro’s 2011 annual report. The number of claims reported — 2,468 — is higher than it has been at any point since 2000 and 11 per cent higher than in 2010. Similarly, claims frequency (number of claims per 1,000 lawyers — a better barometer of trends) is up to 107 from 99 a year earlier. Yet Dan Pinnington, vice president of claims prevention and stakeholders relations at LawPro, says although the insurer deals with them regularly and on “occasion we have seen some very large losses, either through lawyer fraud or staff fraud, I can’t say we have had an increase.”
Most misappropriations are committed by sole practitioners or lawyers practising in an association where they might share space with other lawyers but are running their own trust accounts. Most thefts are usually small amounts. Cases like Howard Lorne Tennenhouse, who was disbarred by the Law Society of Manitoba last year after pleading guilty to taking nearly $1 million from 54 residential school survivors, is the exception to the norm. “Usually what happens is that it starts as a one-off that they just do for an emergency, then they do it a few more times and it goes from there,” says Debenham, the author of The Law of Fraud and the Forensic Investigator. Defalcations committed by a partner working in a law firm are atypical, but when it happens the amounts taken are often sizeable. Ottawa lawyer Leslie Andre Vandor was disbarred last year by the Law Society of Upper Canada for misappropriating more than $2 million, most of which came from his father’s estate and Vandor Investments Ltd. He was also found to have misappropriated funds from Lang Michener, which in 2008 merged with McMillan LLP.
The Perras case is all the more exceptional because it is a cautionary tale that underscores the exposure and “world of trouble” law firms can be drawn into when faced with a rogue partner. Kaufman Laramée LLP, the Montreal firm where Perras briefly practised for six months in 2011, has been ensnared in the legal maelstrom and now faces five lawsuits from Perras’ former clients arising from the alleged financial fraud. Even lawyers acting on behalf of “parties that were basically conned by Perras” are sympathetic to the law firm’s plight. “The circumstances here are horrendous for a law firm,” says Neil Stein of Stein & Stein Inc. “The last thing a law firm wants is to be sued. It is not imaginable that one of your own partners would put you into a situation of that nature. They don’t deserve it.”
The plaintiffs, members of Montreal’s Jewish community, claim they were approached by Perras to participate in business opportunities that required them to make short-term loans to be held in the trust accounts operated by the firm and Perras before paying out a pre-determined rate of interest. The investors are suing Kaufman Laramée for a total of $3.1 million, alleging the firm was negligent because it failed to inform them Perras was no longer a partner when they made the deposits, says the plaintiff’s counsel Sylvain Deslauriers, president of Montreal law firm Deslauriers & Cie. The firm and Perras ended their partnership in June 2011, but Perras was allowed to maintain an office until September when he set up his own separate office. “The firm was victimized by an individual who was recommended by a large national recruiting firm who came with good credentials,” says Kaufman’s counsel George Pollack, a partner at Davies Ward Phillips & Vineberg LLP in Montreal. “We didn’t know to what extent he was abusing the hospitality that was accorded to him.”
Making matters worse, Kaufman is on its own to defend the actions. Quebec’s professional liability insurer has denied coverage and refuses to defend the firm and its partners because it felt they did not provide professional services — a position Quebec Superior Court Justice David Collier endorsed in a ruling released just days before the blaze struck Perras’ residence. “It cannot be concluded that Perras or Kaufman rendered professional services to the plaintiffs by accepting deposits, acting as escrow agent, or transferring funds from one trust account to another,” Collier wrote in one of the few decisions in case law that examined the interplay between insurance coverage and professional legal services. “A solicitor-client relationship does not arise from the mere receipt of funds for deposit. . . .Taking the pleadings at face value, it appears they provided investment services to the plaintiffs.”
That was also the conclusion the Ontario Court of Appeal came to six years ago in a case pitting Cassels Brock & Blackwell LLP against LawPro. In considering a number of transactions similar to the Kaufman case, the appeal court found a trust account transaction was not a professional service, and that it fell under the policy’s investment exclusion, because it was not “ancillary” to legal services. “A person who is a lawyer may wear more than one hat, but just because at most times that person wears the hat of a lawyer does not mean that he always acts qua lawyer,” wrote the court in a brief three-page ruling.
Those are the kinds of decisions that reassure professional liability insurers. All law societies in Canada provide professional liability insurance for negligence, but its scope varies from jurisdiction to jurisdiction. All law societies also have funds set aside to provide trust protection coverage to ensure innocent members of the public do not suffer a loss through theft by a lawyer — as long as the lawyer who received the monies and deposited it in the trust account performed legal services. Indeed, in Alberta lawyers are prohibited from depositing money into their trust account if it is not in conjunction with legal services, notes Steve Raby, the outgoing president of the Alberta Law Society.
Other compensation funds, like Manitoba’s, are discretionary. “We protect against legal service,” says Allan Fineblit, chief executive officer of the Law Society of Manitoba, echoing the way many other law society compensation funds are managed. “We never had to go to court to establish that because it is a discretionary fund. We have no contractual obligation with the party.” In Nova Scotia, the Lawyers Fund for Client Compensation takes a slightly different tack. It is a fund of first resort, and claimants are not required to exhaust other remedies, which is not necessarily the case with other compensation funds. “The approach we take is if a lawyer committed a defalcation and the victim is truly innocent, payment will be made,” says Darrel Pink, executive director of the Nova Scotia Barrister’s Society.
The liability and exposure law partners face when one of theirs misappropriates raises “interesting legal issues,” adds Pink — not just in Nova Scotia, though, but across the country. In Nova Scotia if a lawyer practising in a law firm steals money from a trust account, then the firm and its partners are jointly-and-severally liable — and it is an absolute liability. But when Halifax lawyer Srinivasen Pillay bilked $1.3 million from the trust account of the law firm McGinty McCleave between March 2000 and February 2005, the Nova Scotia legal community demonstrated an exceptional display of generosity. With the approval of its members, the law society imposed a one-time levee of $750 on each lawyer in the province to cover the bill. “In that case, although at law the partners might have been liable they would not have provided compensation to the victims because it would have bankrupted them, so we paid all those claims,” says Pink. Pillay, who was sentenced to four years in prison, was also ordered to pay $1.3 million in restitution to the Nova Scotia Barristers’ Society.
In Ontario, the legal landscape is slightly different. Minimum level so-called innocent-party coverage is required for all lawyers practising in association, partnership (including general, multi-disciplinary, and limited liability partnerships), or a law corporation with more than one lawyer. The coverage is designed to protect against the dishonest, fraudulent, criminal, or malicious acts or omissions of present or former partners, associates, employed lawyers, and firm employees. “But if an employee stole money out of a general account — as opposed to a trust account — and stole the firm’s money, not the client’s money, in that case no client was aggrieved, no professional services were involved, so certainly there wouldn’t be coverage under the LawPro policy,” notes Pinnington.
At the other end of the spectrum stands B.C. Its trust protection coverage insures all members of the Law Society of B.C. for claims arising from the theft of money or property relating to the member’s practice of law. Trust protection coverage offers an annual aggregate limit, profession-wide, of $17.5 million; each claimant may recover up to $300,000 per claim. “Where a lawyer does steal, our insurance benefits partners in the firm as well as the victim,” explains Forbes. “When we pay the claim, we don’t subrogate the innocent partners in the firm. We protect all of them through compensation so the members are fully protected.”
But at least one law society is aggressively tackling the issue of misappropriation of funds in a way no other has so far dared to. In a bid to address rising threats to the security of trust funds, in 2011 the Law Society of Alberta introduced a new regulatory structure that turns on its head the widely-held premise that lawyers are entitled to have a trust account. Instead under the new Safety of Trust Property Program, a law firm seeking to open a trust account must get approval from the law society. The firm must designate a specific lawyer who will be responsible for meeting the requirements set out by the regulator, and who will be held accountable for non-compliance. It has broad audit authority and, through an automated audit program, the LSA is now capable of auditing 100 per cent of accounting transactions of any law firm using approved law firm accounting. “We got scared in Alberta,” acknowledges Raby, who served as chairman of the Trust Safety Program committee. “The numbers had been quite small until 2004 and it jumped dramatically to $1.4 million and then the next couple of years were $864,000 and $754,000. That’s when we had a look at our trust safety program.”
Other law societies such as Manitoba and Nova Scotia are paying close attention. “We probably need to move into the 21st century in terms of our controls,” says Finebilt. “Given what the risk is, people are recognizing over time that they want to invest more because ultimately you pay for the tools or you pay for the loss — and it is way cheaper to pay for the tools.” Pink, however, says before proceeding law societies must grapple over the appropriate amount of regulation. “Trust oversight is one of those areas where it is very risky but also very easy to over regulate,” points out Pink.
Nicolas Plourde does not seem to have such reservations. The batonnier of the Barreau du Québec believes it should be examining ways to bolster regulatory oversight over trust accounts. One model he finds enticing is the French-based Caisses des Règlements Pécuniaires des Avocats, better known under its acronym CARPA. In France, lawyers are not allowed to hold clients’ money, but must pay it into the bar association’s account, under the control of the president of the bar. There are over 100 CARPAs in France, and each is under the political and ethical control of the local bar. CARPA is not itself a bank, but works with banks. “The increase in number of claims and value of the claims from the Quebec professional liability fund, one of the causes being misappropriation of funds, is worrisome — and that is why member premiums will be doubling from $600 to $1,286 this year,” says Plourde. “It has led us to question how we can do more to avoid such a situation”.
Left unsaid is that fraudulent schemes allegedly perpetrated by lawyers or former lawyers such as Perras would be snared long before they cause real damage.
Avoiding Internal Fraud
Fraud arises from a combination of motive, means, and opportunity. Internal controls can never entirely eliminate the risk of fraud, but there are simple and practical steps law firms or solo practitioners can take to minimize the “very real risk of internal fraud,” says Jim Patterson, co-leader of the fraud law practice at Bennett Jones LLP.
Review the firm’s internal controls with an auditor or accountant to ensure they are robust.
Segregate office duties, even in small offices. Make sure one employee is not responsible for accounting, bookkeeping, and banking. In small offices all-too-often the same person handles bank deposits and bank account reconciliation. “That is a recipe for disaster because that employee could be stealing from you and you would never know it because they have complete control over that process,” says Patterson.
Establish and enforce a policy of countersigning cheques. Cheques being paid out of the office should go out under two
signatures. Do not pre-sign cheques for the sake of expediency; that defeats the purpose of countersigning. “Over the years, I have seen so many frauds where that control is circumvented,” says Patterson.
Purchase fidelity insurance coverage with adequate limits. This type of insurance provides coverage for employee theft. Though often included as part of the overall insurance package, limits typically are not sufficient. Depending on the size of the practice, coverage should range between $500,000 and $1 million.
Be vigilant and on the lookout for red flags. Know your employees, and be alert to lifestyle changes, especially if an employee seems to be living beyond their means. Also watch for signs of substance abuse or depression. Be on guard for overly diligent employees who refuse to delegate, work long hours, never miss a day of work, and forgo vacations. “The reason the employee never misses a day of work is because they have to be at their desk minding the fraud,” points out Patterson.
