How to Avoid Law License “Shrinkage”

How well do you know your law partner?

What about your paralegal?

The better you know them – and the closer you keep an eye on them – the safer you and your clients will be.

Does that sound harsh? It shouldn’t. Actually, it’s Risk Management 101.

As lawyers we are entrusted with all manner of valuables – money, information, lurid photos, trade secrets, deeds, contracts, you name it. We have an ethical duty not only to safeguard the property that comes into our possession but also to supervise those in our office who have access to it.

And guess where the greatest threat lies? Directly under our noses.

Charity begins at home – and so does theft and embezzlement. In this respect, the law is like any other business.

According to the 2011 National Retail Security Survey, almost half of the inventory lost by retail stores in 2010 came from employee theft. In fact, dishonest workers were a much bigger headache than shoplifters, as shown by the breakdown of inventory shrinkage:

• 44 percent - employee theft
• 33 percent - shoplifting
• 13 percent - administrative error
• 5 percent - vendor error
• 5 percent – unknown error

Two troubling trends surfaced in the 2011 survey, both of which apply to lawyers in private practice. First, in a down economy the risk of theft increases. Employees become strapped and desperate. A trust account with a multi-million dollar balance within arm’s reach might pose a tempting target.

Second, collusion between internal and external bad actors is on the rise. Employees sometimes fall prey to unsavory outside influences. The vigilant attorney not only runs a tight ship but also occasionally climbs up into the crow’s nest to scout for looming perils.

What retailers euphemistically term “shrinkage” might for lawyers be more accurately called disbarment. The State Bar takes the position that stealing is stealing, whether it is from your client or your partners. Some lawyers have been disciplined even when they took nothing themselves but failed to keep adequate reins on office operations.

This laxity is borne out by the testimony of none other than State Bar auditor Bruno DeMolli, who reports that a whopping 60 percent of the law firms he visited during a recent audit sweep were not in compliance with the trust accounting requirements.

To avoid any such unpleasantness, construct a sturdy three-legged stool from the Rules of Professional Conduct:

• Safekeeping property (Rule 1.15)
• Trust accounting (Rule 1.15-3)
• Duty of supervisions (Rules 5.1-3)

Make sure your staff is familiar with these rules. Discuss them at your next office meeting. Post hard copies on the bulletin board.

Proactive professionals preach and practice three p’s: prudence, prevention and precaution. Those who don’t, run the risk of law license shrinkage.

Ernest (Jay) Reeves Jr. is an attorney licensed in North Carolina and South Carolina. He has practiced in both states and was Legal Editor at Lawyers Weekly and Risk Manager at Lawyers Mutual. He writes the Risk Man column of practice pointers and risk management tips. Contact jay.reeves@ymail.com, phone 919-619-2441, www.riskmanlawsolutions.com.