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Good Trust Account Practices : The Cost of Prevention v Trust is Well-Worth Spending

Updated: Apr 13


A number of law firms in New Zealand may be at risk of potential fraud being committed from within the organisation. Why?

A common statement offered by Trust Account Supervisors, declaring an unquestionable trust in the trust account administrator / accountant, may often be the first warning sign that their firm is potentially vulnerable to fraud.


This unquestioning trust is usually synonymous with providing unfettered access for the trust account administrator / accountant to transact bank accounts, with little to no restriction or checks and balances in place. In almost all such cases, the banking password protection protocols and the NZLS recommendations of segregation of duties are commonly ignored. This has resulted in a bitter history of fraud committed by both employees and partners within law firms, irrespective of the size or location of these firms.

A recent report published by the University of Portsmouth in the United Kingdom, data from around the world was utilised to determine the cost of global fraud. According to the report, in 2018, losses due to fraud rose by 56.5% since 2009, with an organisational average of between 3% to 6% and even as high as 10%, with a cost of US$5.127 trillion, being 80% larger than the UK’s entire GDP.


In a summary report in 2018 by PwC, states that 51% of New Zealand businesses have experienced economic crime of some description in the prior 24 months, with 36% being from within organisations. A draft report by the SFO in 2014 on New Zealand’s economic crime figures in 2014, suggests the cost to be between $6.1 and $9.4 billion.


It is therefore evident, that on a global scale, fraud continues to escalate and New Zealand is not immune to this.


It is apparent that many law firms still continue to operate on a trust basis. While the romantic notion of trust is a wonderful one, the cost of this has been a painful experience for many firms. This includes the increased contributions to the Fidelity Fund to finance fraud, smaller firms not able to weather the cost are forced to close their doors and not to mention the mar on the profession in the eyes of the public. Larger firms, with more liquidity, may choose not to disclose the fraud to protect their reputation, leaving other law firms unaware of the true extent of the problem.


The mistaken belief that a firm is immune to such activities, leaves the firm vulnerable and in the majority of cases, the lack of internal controls, may preclude a firm from claiming losses due to fraud, from their PI Insurance.


The first step to address the potential of fraud is to understand what the drivers are to commit fraud and then to put in place systems and processes to prevent the opportunity for fraud. To understand the drivers, Donald Cressey developed the following self-explanatory hypothesis:


“Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.”



Figure 1 : Acknowledgement to PwC, Fraud out of the Shadows

Preventing the opportunity for fraud, has multiple facets, including, implementing good practices, internal controls and conducting regular trust account “health checks” by utilising an independent and potentially non-biased consultant, as an advisable option, irrespective of the size of the firm.


The implicit and explicit cost to a firm of potential fraud and that of prevention is incomparable.


To ascertain the potential fraud risk of your firm, we recommend you engage our services to provide a comprehensive report based on the testing of the current risk factors, with recommendations on how to address these.


Please contact us for a confidential discussion.


1 Renshaw Edwards, 1993

2 https://www.crowe.com/uk/croweuk/-/media/Crowe/Firms/Europe/uk/CroweUK/PDF-publications/The-Financial-Cost-of-Fraud-2019.pdf?la=en-GB&modified=20190711123330&hash=AF17B852C4ACFB31258C39F0703D60A8400CCB92 3 https://www.pwc.co.nz/pdfs/2018pdfs/pwc-gecs-2018-nz.pdf

4 https://s3.amazonaws.com/s3.documentcloud.org/documents/1336568/img-x14110421-0001.pdf 5Donald R. Cressey, Other People's Money (Montclair: Patterson Smith, 1973) p. 30

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