The fraud factor
There are many things about 2011 that we won't want to see a repeat of in 2012 – from the chaos in the Eurozone to the England squad's ridiculous performance at the Rugby World Cup, there was a lot not to write home about. And something else to add to that mix was serious fraud in major law firms. It's in everyone's interests – and within everyone's power – to make sure this is something that is consigned to the dustbin of history
Three high profile cases dominated the headlines earlier in the year. Hogan Lovells, Ince & Co and Addleshaw Goddard – excellent firms all – fell victim to major frauds perpetrated by people on the payroll. At least three more top city firms are also currently being investigated by the Solicitors Regulation Authority.
“There are others out there who must be thinking 'There but for the grace of God...'”, comments Kaley Crossthwaite, head of the Forensic Accounting team in BDO's London office. “You may think fraud is something that just happens in the provinces and that all the big firms will have robust anti-fraud procedures in place, but the simple fact is that not all of them do. It's not enough to put a policy in place, tick the box and move on. Procedures need to be constantly reviewed, and ongoing efforts need to be made to embed an anti-fraud culture that goes all the way up the firm.
It's no use introducing a system that can be circumvented by senior people. “Partners have to lead by example,” Crossthwaite says. “The tone must be set at the top, and everyone must be trained so they are all in a position to challenge and question – indeed they should be positively encouraged to do so. Partners should be willing, for example, to ask another partner to see a follow-up client email after a dinner to confirm that they didn't just take their wife out. There's nothing wrong with this kind of approach as long as it runs through the whole firm.”
Prevention is of course better than cure, but here too firms could do better. “The reputational issues can be massive,” Crossthwaite states. “The fallout in the big cases this year wasn't just confined to the loss of a senior individual – there was huge media and public interest. Some of this was very badly managed, with firms trying to limit the scrutiny they were under by withholding information about what had happened. But at the first hint of a cover-up, the public won't stand for it – thousands of bloggers criticised the firms and questioned why they hadn't reported the frauds to the police, which just made things worse.”
In the event of a fraud coming to light, it's critical to be as open as possible in dealing with it. “Obviously firms would rather keep things private,” continues Crossthwaite, “but this just isn't an option. You should expect media interest, and be ready for it. Have a detailed statement ready.
“There are things you can do to mitigate the damage with your clients. All clients need to be contacted, whether they've been affected or not: the fraud may have occurred in area A, but you still need to reassure the people in areas B and C that these have also been very carefully investigated. If anyone needs reimbursing, you should conside reimbursing them 100%, even if only 5% is needed.”
And then there's common business sense. Crossthwaite advises: “Lawyers should check what their professional indemnity insurance covers them for, since not all policies cover fraud.
“The cost of fraud also needs to be built into business planning. It needs to be high on the agenda in new business and merger discussions, and properly prepared for. Solicitors need to be self-aware enough to recognise when they're not good at something, and get qualified assistance when this is the case. You can be the best lawyer in the world – but what's the point in billing £10 million if you then lose £2 million on an expenses fraud?”
Maybe 2012 will be the year more firms wake up to the risks they face, and take positive steps to address them. BDO are currently very busy helping firms do just that – no one wants to see a repeat of what happened in 2011, so maybe a corner of sorts is being turned. Time will tell.
