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Protecting Yourself from Employee Theft,Fraud,and Embezzlement

Issue: Fall 2009

One of the challenges may be employee theft. Estimates of the number of dentists who will experience theft at least once during their dental career range from 35–50%. Estimates in dollar loss range from $100 to $500,000+. Loss due to employee dishonesty may take the form of theft, fraud, or embezzlement.

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 strategies to prevent the loss.

Meet the Thieves (All names are fictitious)
J
ane the Eraser–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. Estimated loss—$50,000+ over a three-year period. The doctor recovered $25,000 from his office insurance plan. Jane was ordered to pay $10,000 restitution.

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 18 months, Doris stole an estimated $40,000.

Mary the Master–Mary was involved in skimming, taking cash and not posting it; layering, a technique involving the taking of checks and withholding them for posting later; and 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 vendors 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.

The 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+. Over a five-year period, Mary had embezzled $400,000.

Definitions
Different terms can be used to describe loss by “staff dishonesty.” Theft is simply defined as “the taking of another’s property.” 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.

Understanding the Thief
There are different reasons for individuals to steal. It may be the need for money; for others, it is revenge or the feeling they are not compensated properly for their work; and for some, just like gamblers who continue to lose but continue to bet, it is the “excitement.”

Staff members who steal do share certain characteristics. Many have lifestyles beyond their means; excessive debt from children, spouses/significant others, and “ex” spouses/significant others; or excessive habits including alcohol, drugs, and gambling.

Employees who are likely to steal are intelligent, knowledgeable in office procedures, personable and friendly. They may be tireless workers who are willing to put uncompensated overtime—rarely taking allotted vacation time. Basically, the perfect employee, except for one 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. Also note that constant requests for petty cash reimbursements should be closely monitored. Outright theft of petty cash in a multiple-staff office is difficult to track. Excess patient account write-offs or adjustments and inactivated accounts are also warning signs, as are increases in accounts receivables with no off-setting increase in overall office production.

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 as are sloppy filing and record keeping.

The practice checking account also holds potential signs of a problem. Unusual deposit patterns and deposits; inability to balance the checking account; and missing sequential checks are all red flags that should be investigated.

Preventing Theft
Whether theft takes the form of fraud or embezzlement, 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. Next is “Opportunity.” In a dental office, unimpeded access to the funds with minimal or no restraints, checks, or accountability provide an easy route to employee theft. And, the need to “Rationalize” behavior creates justification that what they are doing is acceptable.

The key to preventing theft is to remove the “Opportunity.” Controlling access to “Opportunity” must be done to avoid theft:
1) Control how money is handled. 2) Split money-handling duties; discrepancies can be more easily noticed in this way. 3) The doctor must also do some of the money handling duties by authorizing account adjustments; checking the adjustment report daily; authorizing check refund requests; signing and mailing all checks if a staff person makes out the checks for vendors. The signed check should not be put back into the control of a staff person. 4) 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. 5) Either the accountant or a payroll service should prepare payroll. If a payroll service is used, it is the doctor’s or accountant’s responsibility to call the information into the payroll service.

Other Preventative Areas
Each office should use a time clock, and manual entries must be initialed by the doctor. 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.

Preventing theft by computer requires 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 or allow deletion/disabling of the entire system. The statement generator should never be turned off. 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 and 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, this also greatly assists in making certain that 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. 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? 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. If one fails to report and prosecute the theft, the IRS takes the position that income has been fraudulently under-reported. 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.

Non-reporting of employee theft can also be 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 lifetime. 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. 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.

Conclusion
Most theft, fraud, and embezzlement is avoidable if minimal safeguards are instituted. However, the doctor must take an active role. Doctors who blindly trust their employees are the easiest targets and may 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 as older dentists in practice for many years face. How? Blame it on your accountant. Tell your staff that your accountant has recommended certain changes be made in how things are done because this represents better compliance with GAAP (Generally Accepted Accounting Principles). In this manner, these changes will barely be questioned, except perhaps by a staff person who is guilty of theft.