Cliff's Notes

Employee Theft, Embezzlement & Fraud

Protecting Yourself from Employee Theft, Embezzlement, and Fraud

As a practice owner (also known as a “business owner”), a dentist will face a multitude of business related tasks, issues and challenges. However, the rewards far exceed the drawbacks to business ownership. But there will be challenges.

One of these potential challenges a dental practice owner faces is possible employee theft. Depending on the source checked, estimates for the number of dentists who will experience theft at least once during their dental career range from thirty-five to fifty percent (35-50%). Estimates of dollar loss range from $100 to $500,000+. This loss due to employee dishonesty may take the form of out-right theft, fraud, or embezzlement.

The good news: with certain minimal protective measures, the majority of this theft is preventable. The key is to understand where the potential exists for theft to occur and implementing the necessary strategies to prevent this loss.

Meet the Thieves
First on our list is “Jane the Eraser” (her name has been changed to protect the guilty). Jane simply withheld any cash payments that were made for services and then erased the patient’s account information after posting the payment (and giving the patient a receipt), thereby removing any record of the payment from the system.

How was she caught? She Quit! During the first couple weeks after her departure, the doctor noticed that although there was no significant increase in production, there was a definite increase in receipts. Upon further investigation, the doctor discovered that the computer records for several patients seen during Jane’s last week of employment no longer existed.

Estimated loss- $50,000+ over a three year period. The doctor recovered $25,000 from his office insurance plan. Jane got three years probation and was ordered to pay $10,000 restitution.

Recently we were contacted by a dentist who reported an even better technique. To cover her tracks his employee, who had worked with the office’s software system for four years, simply ignored the five warnings given by the computer before erasing the entire software system. The back-ups were also mysteriously “corrupted”.

Meet “Doris the Duplicator”. When hired, Doris had successfully lobbied against computerization, convincing the doctor that it was not as efficient as the old manual pegboard system. In turn, Doris kept a duplicate set of patient ledgers. Payments and receipts were recorded on the duplicate ledgers while charges were posted on the real ledgers.

Over a period of eighteen months Doris stole an estimated $40,000. She was caught when the doctor became suspicious and carefully personally tracked daily financial activity for a couple of days. Doris was not prosecuted and accepted a job with a different local dental office.

Mary the Master
Mary was one of the best we have ever seen. She was involved in 1)skimming, taking cash and not posting it, 2)layering, a technique involving the taking checks and withholding for posting later, and 3)had an excessive need for petty cash, going through about $100 per week. Mary also set up a second business checking account in the dentists’ name (she was the only authorized signer) and subsequently diverted the office credit card deposits to that account.
Mary paid all office bills, using erasable ink and thereby allowing for the checks to be made out to her personally and then changing them back to legitimate venders after they cleared the bank. The deposit slips never matched the bank deposits actually made and subsequently the checking account could never be balanced with the ledger.

But Mary’s most effective technique was to turn off the statement generator for most patient’s accounts. And this eventually led to her getting caught. The two doctors noted that while each year their taxable income had increased over the prior year, according to the computer, their accounts receivable had spiraled out of control and was showing a balance of $500,000+.

Feeling there may have been an error in how information was being entered into the computer, they called in a software specialist who discovered the statement generator problem. After resetting the statement generator, the computer promptly spit out 3000+ statements. These statements were mailed and the phone lines to the office began to melt as patient after patient called in to complain that this balance had been paid. Who handled all the calls and comforted the patients? Mary the Office Manager, of course, who promised to post credits to clear up the balances.

How was she caught? At one of the many extravagant parties thrown by Mary, another employee, while retrieving her coat from a closet, saw shoeboxes full of checks made out to the doctors. But not before, over a five-year period, Mary had embezzled $400,000. Apparently Mary had some “dirt” on one of the partners, so Mary was never prosecuted and nothing was recovered. Subsequently, the partnership was dissolved.

Definitions
Before going any further, we need to define the different terms used to describe loss by “staff dishonesty.” Theft is simple defined as “the taking of another’s property.” This is also referred to as “the five fingered discount.”

Embezzlement is the theft of an employer’s property while in the embezzler’s trust. It is also defined as a misappropriation or conversion of entrusted money, property, etc. to the personal use of the employee.

Fraud is the intentional deception that causes another to give up his/her money, property, etc. The easiest to understand method of fraud is to submit a claim to an insurance company for work that was never completed. There have been multiple instances wherein the employee submitted these fraudulent claims, unknown to the employer. This provided funds that in combination with other methods of embezzlement allowed the employee to divert the payments to the employee’s personal use.

Understanding the Thief
Why do dental staff steal? There are different reasons for different individuals. For some it is the need for money. For others, feeling they have not been treated fairly, it is revenge. For many, feeling they are not compensated enough in light of how much the doctor “earns”, jealousy plays a major role. And for some, just like gamblers who continue to “lose” but continue to bet, it is the “excitement.”

Many staff that steal share certain characteristics. Many have life-styles beyond their means. Excessive debt and constant money problems accompany many. Many are also the victims of excessive family problems. These problems come from children, spouses or significant others, and “ex” spouses/significant others. Many have excessive habits including alcohol, drugs, and gambling.

What does an employee who is likely to steal from you look like? They are intelligent and knowledgeable in office procedures. They are personable and friendly. They are tireless, willing to put uncompensated over-time and rarely take their allotted vacation time. Basically, the perfect employee, except for a tiny character flaw-they are dishonest!

Signs Theft May be Occurring
The most common sign that theft by embezzlement may be occurring is patient complaints regarding their accounts. The problem with relying on this sign to deter theft is that most of time the person who handles the complaint is also the person doing the stealing. However, patient complaints that come to the attention of another staff person or the doctor must be carefully and fully investigated.

Petty cash should be used only for emergencies. Subsequently, constant requests for petty cash reimbursements should be closely monitored. Even outright theft of the petty cash in a multiple staff office is difficult to track.

Review of end-of-day reports may also show signs of a problem. Excess patient account write-offs or adjustments are a warning sign. So are “inactivated” patient accounts.
Increases in accounts receivables with no off-setting increase in overall office production is reason for concern. While this may indicate financial policies are not being followed, the problem may also be due to employee theft.

Missing documents-invoices, insurance claim forms, explanation-of-benefits (EOB) forms, patient checks, practice checks, checking account records, patient clinical records, patient account records, etc. are definite signs of a problem. So is sloppy filing and record keeping on the part of a staff person.

The practice checking account also holds potential signs of a problem. Unusual deposit patterns and deposits that frequently do not add up to the total posted by the bank are one sign. The inability to balance the checking account is another. Missing sequential checks are a third. Unfortunately, because of the quality of today’s copy machines, counterfeit or duplicate checks can also be an issue, which will lead to an inability to balance the checking account.

Methods of Theft
One of the best methods of avoiding theft is to understand how employees steal. Taking petty cash for the petty cash drawer and taking and not depositing patient cash payments are easy to understand. But today’s thieves and embezzlers are much more sophisticated.

We have all seen movies regarding what happens to individuals who are caught skimming from the “mob” or other unscrupulous individuals. The usual outcome is cement overshoes. Skimming is taking cash or checks before they are entered into the company books.
A sophisticated method of skimming includes a concept called “layering”. It is one of the most difficult methods to track and discover. In this theft, the first payment of the day is not recorded. As additional payments come in, the next payment is posted to the account that was skipped. This means the account that payment was supposed to be posted to has now been skipped. During the course of the day, this process continues including skipping a couple more patient’s payments. At the end of the day, the remaining skipped patients are simply deleted or adjusted.

If any payments were made in cash, these are easy to steal. If payments were personal checks or even insurance checks, they are frequently deposited either directly into the employees account (most banks do not pay any attention to the payee on the check, as long as cash is not requested) or, in some instances, the employee opens a second “Employer Named” checking account with only themselves as authorized signers of the checks. We have even seen instances wherein credit card payments are routed to this “personal account”.

Games with the practice’s checking account are endless. If a trusted employee is given control of a checking account, it is an invitation to disaster. Even if only the doctor can sign the check, use of erasable ink that can be changed after the check is signed and changed back when the bank statement arrives has frequently been used.

Duplicate payments wherein the original check has supposedly voided is one method. Some employees, authorized to actually sign checks (another invitation for a problem), have actually stolen checks, written them out for seemingly legitimate purposes, deposited them into their own account, and subsequently acquired the employer’s money.
Thefts involving the purchase of supplies provides another category of theft. Over-payments and double payments result in refunds. The refund subsequently disappears. A similar method involves the legitimate purchase, paid for by office funds, and then subsequently returned for a cash refund.

With today’s desktop publishing capabilities, developing a fictitious supply company is easy. Fictitious invoices are generated and the payments are deposited into the fictious company’s checking account. Guess who the account signer is?

Payroll theft is another means of stealing from the employer. Misrepresentation of the hours worked by an hourly employee is easy to understand. But this is just the start. Office managers have been caught miscalculating staff bonuses, with themselves the beneficiary of the error. Office managers have also been caught falsifying their own compensation rate. One doctor who used a payroll service discovered that his office manager had given herself a $2,000 a month salary increase. This had gone on for the prior eighteen months.

At the time she gave herself the raise, she also designated that all monies were to be split between federal and state income taxes withheld. The net payroll amount did not change, so nothing alerted the doctor at the time. And the doctor did not notice the change in the withholding deposits because the doctor himself took different amounts each month and was used to significant fluctuations in the tax deposits. The doctor never checked the accountant prepared W-2’s, so he did not catch it here either. And the employee, while she had to be patient, got huge income tax refunds.

Finally, there are the games played relative to patient accounts. Hiding patient payments that have not been recorded is easy if the patient’s statement generator has been turned off. Account adjustments are another way of hiding payments made but not recorded.

Some employees have hidden their theft by posting treatment for fees that were less than the doctor requested and the patient subsequently paid. In some instances, treatment was recorded with no fee at all. The patient paid in full, but the charges and payment was never posted (the treatment was posted, just no fee). Giving patients credits instead of posting charges is another means of hiding payments made but not posted.

Preventing Theft
Whether theft takes the form of fraud, embezzlement, or outright theft, theft by an employee shares three steps. For theft to occur, all three components of the theft triangle must be intact. The first is “Motive”. The employee needs a reason to steal. The reasons are as varied as there are individuals.

Next, they need the “Opportunity”. In a dental office, they need unimpeded access to the funds they are attempting to steal with minimal or no restraints, checks or accountability.

Finally, they need to be able to “Rationalize” their behavior. They need to justify in their mind that what they are doing is acceptable. They need to quiet their conscience.

The key to preventing theft is to break the triangle by attacking the only area under the control of the dentist. Steps must be taken to remove the “Opportunity”. Controlling access to those areas providing the “Oppor-tunity” to steal must be done to avoid theft.

Theft control begins by controlling how money is handled. Ever notice how when you go to the grocery store and pay by check, the cash register cannot be opened or a receipt given until the check has been inserted into the register where it is stamped for “Deposit Only”. All checks must be immediately stamped “Deposit Only” upon receipt. This means when the patient hands it to the staff person, or an envelope is opened containing a check.

Over-the-counter cash must be posted with receipt given before patient leaves. If a receipt cannot be issued for some mechanical reason, the doctor must be immediately notified (before the patient leaves, to ascertain how to handle the situation). Bank deposits must be made daily, even if only one payment has been made and recorded all day.

Splitting Money Handling Duties
Who handles money is as important as how it is handled. Preferably, two individuals should handle different aspects of the day’s receipts. The first clerical assistant should open mail-in payments, make a copy of any checks and/or EOBs, and make the deposit.

The second administrative assistant should post payments and prepare and audit the computer generated deposit slip. Any discrepancies must be immediately reported to the doctor. This individual, who has minimal money handling responsibilities should post adjustments/credits.

What happens if only one person is available. Someone other than this person must count and do the deposit. Deposit slips must be compared to computer generated deposit slip by doctor daily. Other possible people to do the deposit: the list includes the doctor, the doctor’s spouse, or a chairside. Some offices have required all monies put in a bank bag and had the bank do the counting and make out the deposit slip. This amount is then compared with the computer generated deposit slip.

Doctor/Accountant Responsibilities
The doctor must also do some of the money handling duties. He/she must authorize any account adjustments and check the adjustment report daily. They must authorize and check refund requests. They must sign and mail all checks if a staff person makes out the checks for vendors. Once the check has been signed, it should not be put back into the control of a staff person.

The doctor or his/her accountant must open and balance the bank statement. This means bank statements should be mailed to the doctor’s residence or directly to the accountant.

Either the accountant or a Payroll Service should prepare payroll. If a payroll service is used, it is the doctor or accountant’s responsibility to call the information into the payroll service.

Other Preventative Areas
Each office should use a time-clock and any manual entries must be initialed by the doctor. If the staff knows the doctor is monitoring the hours worked, they will be hard pressed to abuse/report extra hours.

Petty cash should be counted and balanced daily. The amount of receipts plus cash on hand should equal the same balance every day. The outside of the envelope containing the petty cash should be used to monitor the daily balance. Each day, the date, the receipt total, the cash total, and the sum of receipts and cash should be listed along with the initials of the person reconciling the petty cash.

When the age of computerization came to dentistry, one of the selling points was that computers would make it more difficult to embezzle. Nothing could be further from the truth. Whether computer related, computer enabled, or computer camouflaged, the use of computers has made embezzlement easier than ever unless the proper safeguards are instituted.
First on the list of preventing theft by computer is a thorough understanding by the doctor of the security features built into the office’s software. This information must be carefully reviewed with the software vendor’s support team to ascertain that access to various features of the system is correctly restricted.

No system should allow the “Deletion” or “Erasing” of accounts or charges by staff. More importantly, no system should allow deletion/disabling of the entire system (I have received two calls in the past two weeks reporting this office disabling event by a staff person suspected of theft).

The statement generator should never be turned off. Any patient having an outstanding balance must receive a statement. Patients who have paid their bill, think they have no balance, and do not receive a bill, are the easiest to have their payments “mis-appropriated”. Any patient complaints relative to payments and balances must be carefully investigated.

Computer reports are designed to assist in avoiding theft problems. But to work, someone (i.e., the doctor) must review them. These will only take a few minutes to review, but this must be done.

Adjustment, refund, and write-off reports should be read by the Doctor daily. Posting reports should be scanned by the Doctor daily. The doctor can quickly spot incorrect charges posted for procedures they have just performed.

The accounts receivable (A/R) aging report should be checked monthly. In addition, this A/R report should be discussed monthly with the financial coordinator. The financial coordinator should be prepared to respond to each account over 90 days old with why, what has been done, and when payment is expected. In addition to demonstrating that the doctor is monitoring things, which in and of itself will deter theft, this also greatly assists in making certain collection procedures are being followed, thereby keeping accounts receivable under control.

Dealing with Embezzlement
Dealing with embezzlement, fraud, and theft involves four steps. “Discovery” is the first step. The longer the period, the greater the loss and the bolder the thief becomes. It is the doctor’s responsibility to diligently observe what is going on in his/her office relative to the handling of money.

If theft is suspected or discovered, the next step is “Investigation”. Before making any accusations, the doctor must make certain that the evidence supports the alleged crime. This means reviewing entries, reports, patient account records, etc. to gather the hard evidence necessary to confront the thief.

“Prosecution” is the next step. This is sometimes harder for the doctor than the realization that their trust has been betrayed. But it is a necessary step. If not, the theft will continue, either from you or another doctor. This means calling the police.

Reasons Doctors Do Not Prosecute
Why do some doctors elect to forgo “Prosecution?” There are several reasons. Topping the list is the fear of a “slander suit.” Avoiding this allegation is the purpose of the “Investigation” stage. If you have the evidence, you are not guilty of, nor can you be accused of, “slander”. Involving the police once you are certain you have become a victim will aid in protection against these false allegations.

Many doctors fear to prosecute because of fear of the IRS. After all, they have unreported income. Herein lies a “Catch 22”. If one fails to report and prosecute the theft, the IRS takes the position that income has been fraudulently under-reported and they get very ugly about it. If one reports the loss to the authorities, the IRS views this as proof that a loss by theft has occurred and therefore the under-reported income is offset by the theft loss and no charges by the IRS will be levied.

Last on the list of reasons theft is not reported is the “Fear of Blackmail.” Some of the doctors suffering losses from theft are themselves involved in insurance fraud, unreported income, and/or income tax evasion. They know the offending staff member is aware of this and out of fear of retaliation, they elect to terminate the employee but not prosecute.

Recovery
The last of the four steps of dealing with employee theft is “Recovery.” Total recovery is usually not possible. Even if successfully prosecuted involving a judgment requiring repayment, most staff members involved in theft no longer have the money nor do they possess the ability to repay, even if spread over a life-time. Actual judgments issued such as $50 per month until the amount embezzled has been repaid would require one hundred years of monthly payments to recover a $60,000 loss (that does not even include interest).
The best chance of partial recovery comes from the office insurance policy. Many policies contain a provision allowing for a flat repayment in the event of employee theft. Limits of $10,000 to $25,000 are common. The policy will pay the actual amount of loss or the policy limit, whichever is less. However, most policies require the reporting of the loss to police and prosecution if advised by the local district attorney (a guilty verdict is not required, just an attempt at prosecution).

Conclusion
Most theft, fraud, and embezzlement is avoidable if minimal safeguards are instituted. However, the doctor must take an active role. Those doctors who blindly trust their employees are the easiest targets and suffer the greatest losses.

Many new dentists who acquire their dental practice by purchasing an existing practice face the same problem relative to implementing safeguards that older dentists in practice for many years face. How to implement new procedures without creating the impression that the dentist does not trust the staff?

This one is the easiest answer. Blame it on your accountant. Tell your staff that your accountant has recommended certain changes be made in how things are done because the recommended changes represent better compliance with GAAP (Generally Accepted Accounting Principles). In this manner, these changes will barely be questioned, except perhaps for a staff person who is guilty of theft.

January 17, 2010 - Posted by Cliff's Notes Blog | 1