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Safeguarding Your Professional Services Firm from Fraud and Embezzlement

by | Aug 15, 2024

professional services

In a striking case that underscores the vulnerabilities many businesses face, a former legal secretary at a Roanoke, Va., law firm was recently sentenced to 30 years in prison for embezzlement, credit card fraud, and forgery. 

The conviction followed a financial investigation by police and the Virginia Bar Association and highlights the importance of stringent financial controls and vigilance within professional services firms. According to law enforcement, Amy Padgett stole more than a quarter-million dollars from the Shapiro Law Firm, including from client funds, a fact that led the state bar to suspend the veteran lawyer who owned the firm.

In this post, we explore how the Padgett case unfolded and provide actionable steps that the owners of professional services firms can take to prevent similar incidents from happening to them.

 A Cautionary Tale

In 2019, Gordon Shapiro, a 76-year-old lawyer who had recently opened a solo practice, hired Padgett to be his paralegal and office administrator. Padgett came to the role with multiple personal references, according to state bar records, and from the time Shapiro began his solo practice in 2019 until March 2023, she was the only employee of his law office. 

Shapiro delegated responsibility for maintaining all of his firm’s bank accounts to Padgett, bar records said. This included the firm’s operating accounts, credit cards, and the law firm trust account, which handled funds that were the property of clients, such as retainers, settlement proceeds, and court-awarded damages. Padgett was given complete control over the trust account, including performing reconciliations and maintaining all books and records, the state bar said.

Placing so much trust in Padgett would prove to be a catastrophic error. Prosecutors said that starting in 2020 Padgett began embezzling in a variety of ways. According to media and state bar reports, Padgett paid herself more than five times her annual $36,000-a-year salary. She racked up more than $30,000 in unauthorized expenses on the firm’s credit card, using it to fund personal expenses like rent and treatments at a beauty and Botox spa. And she raided client funds, even siphoning money to a business entity known as KMG, or “Kiss My Grass,” which was owned by her husband.

In the end, Padgett stole more than $275,000. The embezzlement was so brazen that checks drawn on the firm’s operating and trust fund accounts began bouncing, which triggered the financial investigation by the bar and police. Investigators would later discover that while Shapiro was the sole signatory on the firm’s accounts, Padgett had learned how to forge his signature. According to news reports, police and state bar investigators found pieces of paper in the office showing someone had been practicing Shapiro’s handwriting.

Padgett was sentenced in July to 30 years in prison, with 25 years and six months suspended, and an active sentence of four and a half years. She was also ordered to pay $260,000 in restitution. For Shapiro and his firm, Padgett’s crimes were a financial and professional disaster. After a 56-year career, which included no prior disciplinary record, Shapiro was suspended by the state bar for five years for failing to provide proper oversight of Padgett and his client’s money. He is now retired. 

How to Protect Your Firm from Similar Risks

As the Padgett case demonstrates, embezzlement and fraud can devastate a professional services firm. Firm owners can significantly reduce the risk of such incidents by implementing robust internal controls and fostering a culture of accountability. Here are some essential steps to protect your business:

  1. Segregation of Duties: Ensure that no single employee has control over all aspects of any significant financial transaction. For example, separate the responsibilities for authorizing transactions, recording them, and handling the related assets. This division can prevent fraudulent activities by requiring collusion between multiple employees. If you are a solo, like Shapiro, be sure to monitor your accounts and consider hiring an external accountant to assist you.
  2. Conduct Regular Audits: Conduct regular internal and external audits. These audits should be thorough and include reviewing financial records, reconciliations, and compliance with internal policies. Audits can detect irregularities early and deter employees from committing fraud due to the increased likelihood of discovery.
  3. Implement Robust Controls: Use technology to your advantage. Implement accounting software with built-in fraud detection features. These tools can monitor for unusual transactions and flag potential issues automatically. Additionally, ensure that access to sensitive financial data is restricted and monitored. 
  4. Review Financial Reports: Regularly reviewing interim financial reports is crucial. Many small to mid-sized firms overlook this practice, but frequent reviews can expose irregularities and serve as a strong fraud deterrent. By consistently scrutinizing financial statements, you can identify discrepancies early and reinforce a culture of accountability within your firm.
  5. Encourage Whistleblowing: Create a safe and anonymous way for employees to report suspicious activities. A whistleblower policy can be a powerful tool in uncovering fraud. Ensure that employees are aware of this policy and feel protected against retaliation.
  6. Conduct Background Checks: Perform thorough background checks on all potential hires, especially those who will have access to financial information. Verify their previous employment, references, and criminal history to mitigate the risk of hiring individuals with a propensity for dishonest behavior.
  7. Educate and Train Employees: Regularly train employees on the importance of ethical behavior and the firm’s policies regarding fraud. An informed workforce is your first line of defense. Ensure that employees understand the signs of fraud and how to report suspicious activities.
  8. Monitor Lifestyle Changes: Be vigilant about sudden or unexplained changes in an employee’s lifestyle. While it’s essential to respect privacy, significant changes in spending patterns or living standards can be red flags for fraudulent activities.

What to Do If You Suspect Fraud

Despite your best efforts, fraud can still occur. If you suspect that your firm has been a victim of embezzlement or fraud, take immediate action:

  1. Act Quickly: Time is of the essence. The longer fraudulent activity goes unchecked, the greater the potential loss. Act swiftly to investigate and address any suspicions.
  2. Secure Financial Records and Potential Evidence: Protect and secure all financial records and relevant data to prevent further tampering. This includes bank statements, invoices, checks, and electronic records.
  3. Hire Trained Professionals: Hiring forensic accountants and legal counsel will help you uncover the fraud, minimize legal fallout, and ensure evidence is properly collected to maintain its integrity.
  4. Keep Your Suspects Close: Your initial instinct might be to immediately fire employees suspected of fraud, but it’s crucial to resist this urge. Terminating employees can significantly impede a fraud investigation. While they remain employed, they are obligated to cooperate with the investigation. However, this obligation disappears once they are terminated, making it much more challenging to gather necessary information from them.
  5. Contact Your Insurer: If your firm has fraud insurance, file a claim as soon as possible. Review your policy to understand the coverage and required documentation.

Stay Informed—and Vigilant

The case of Amy Padgett serves as a stark reminder of the potential for internal fraud within professional services firms. By implementing robust financial controls, fostering a culture of accountability, and remaining vigilant, firm owners can protect their businesses from similar threats. Taking proactive measures not only safeguards your firm’s assets but also upholds its reputation and integrity.

If you suspect that your firm has fallen victim to fraud, acting swiftly and decisively is critical. By following the steps outlined above, you can mitigate the damage, pursue justice, and restore trust in your organization. Stay informed and vigilant, and ensure that your firm is well-protected against the risks of embezzlement and fraud. Your commitment to these practices will serve as a foundation for a secure and trustworthy business environment.

For more information about financial fraud investigations, visit our practice page or contact us for a consultation.

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