Simple Procedure Would Have Prevented this Loss

A small personal injury law firm had an $80,000 embezzlement by their in house bookkeeper. The bookkeeper was a friend of the family and a trusted employee.  The firm was using QuickBooks.  The firm had an outside accountant that reviewed the books monthly, reconciled the bank accounts and printed reports for the owner.  A few things went wrong.  No one looked at the check images or the signatures on the checks.  Also, while the client cost advances were recorded in QuickBooks, no one looked at the balances or had any idea of what the totals should be.  Client cost advanced is a key metric for any personal injury law firm.  The real bad news is that I was the outside accountant.

This is what happened.  The bookkeeper was writing checks to in QuickBooks to herself and depositing them in her personal bank account over a twelve month period.  She would then after the check had been printed, change the payee in QuickBooks to one of the firm’s normal recurring vendors.  She covered her track in two ways.  She was the one who always worked up the client settlement charges.  She would pull out the fraudulent amounts.  In addition she would email me a copy of the bank statement to reconcile without the images.  When I did the reconciliation or the owner looked at a report nothing really looked out of line.

The only way we caught the theft was the bookkeeper had a sick day.  The owner’s assistant called me and she needed to know the amount of client cost on a file they were about to settle and it could not wait until the next day.  I logged into QuickBooks, printed the client cost report and emailed it to the owner.   He looked at the report and immediately knew something was wrong.  The cost were too high and he knew there were not three MRI payments on that file.  I told him everything was reconciled.  We pulled the check images and identified the problem.  Nobody was happy.  How could this have happened.

This is one of the stories that prompted me to create the “Trust Your Books” system.

This is what went wrong:

  1. The audit feature in QuickBooks was turned off, so there was no record of transactions being changed.
  2. Nobody looked at the check images.  A key procedure in our system is the owner looking at the check images.  This would have caught the problem
  3. No one regularly reviewed the client cost advanced.  The numbers would have looked out of line with just a glance.
  4. A simple transaction report by vendor may have uncovered the theft early on.

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Everybody outsources the accounting function either to your bookkeeper or an outside accountant.  Before you do, you need a system and a framework.
Personal Injury Lawyer Loses $80,000 in Embezzlement