Keeping them out of the cookie jar

June 1, 2002
Embezzlement in the dental office is a growing concern. But there are ways you can protect your office.

Embezzlement in the dental office is a growing concern. But there are ways you can protect your office.

by Donald P. Lewis Jr., DDS, CFE

Embezzlement has become the nation's favorite financial crime. The cost of white-collar crime in the United States is staggering and increasing every year. Recent reports show losses from embezzlement and fraud as high as $500 billion annually.

Dental practices are not immune to this type of crime; some have been financially ruined from this silent enemy. The perpetrators not only cost jobs but also important health-care delivery. There's no question about it; they need to be identified as enemies of our practices and stopped in their tracks.

Exactly what is embezzlement?

Embezzle ment, or defalcation, is defined as the intentional misuse or misappropriation of funds or property entrusted to an employee who has the power, control, trust, knowledge, and authority over those entrusted funds. Usually, embezzlement is committed by an employee who holds a position of trust. Losses can involve anything from a small amount of cash taken from a deposit to an elaborate scheme of "lapping" accounts to computer fraud.

Newspaper articles chronicle various types of fraud and embezzlement schemes that happen everyday. Employee theft is rising, but the reason why is still being debated by security experts. They disagree as to whether the economic downturn is making the problem worse by increasing tension between employers and employees. The bottom line: While the link between the economy and workplace theft is difficult to prove, there is little question that on-the-job stealing is widespread and on the rise.

Individuals who steal do so in a variety of ways. They will steal time, money, and supplies, or just about anything of value. The problem is compounded by the fact that the practitioner may lose a great deal of hard-earned income before - if ever - suspecting that embezzlement has occurred.

Simple controls built into your practice and its accounting system often help to forestall embezzlement and fraud. The proper internal controls may help document incriminating evidence, which, in turn, will help estimate your losses for recovery purposes or even prove that a crime was actually committed.

Your office needs to have a system of internal controls to safeguard its money and other assets which are subject to embezzlement. Of course, no practitioner wants to run the office like a military camp; but if you have a built-in system of controls, administer it fairly and consistently, and audit it frequently, you may prevent embezzlement attempts.

Profile of an embezzler

Let's examine more closely what type of employee might fit the embezzler's profile. These criminals look, talk, and act like any "normal" employee, but deviousness separates them from the pack. Embezzlers usually think that they are more clever than anyone else. They believe that they can truly beat the system.

Before we can outwit them, we must become familiar with some of their methods. Part of the embezzler's profile is that of a trusted employee who is taking advantage of your trust. In many cases, embezzlers have been given more authority than is necessary for their position.

Embezzlement schemes

The methods of embezzlement are limited only by the individual's imagination. Here are just a few:

Skimming: In one of the simplest embezzlement schemes, cash received from a patient's payment is simply "skimmed" or removed from the practice and remains in possession of the thief. This can be done by not making any record of the transaction. Cash is received but not recorded; therefore, the transaction does not appear on the accounts receivable records. A scam of this nature is extremely difficult to prevent or even detect. To reduce the likelihood of - or even the temptation to commit - this type of fraud, use prenumbered invoices or cash receipts at all times when receiving cash in your practice. Use these receipts regardless of the amount of cash being paid. Spot-checks also can help assure that any cash received is actually being recorded.

Lapping: In a somewhat more complicated embezzlement scheme - commonly known as lapping - the computer is used as a tool for the crime. Lapping involves the temporary withholding of receipts, such as payment on accounts receivable. These payments can be in the form of cash, check, or credit card. The scheme usually starts with small amounts of missing funds, but as the deception continues, amounts will increase until the embezzler is finally caught.

Lapping also frequently occurs when an employee has control of many different aspects of your practice. For example, an employee involved in the lapping scheme may open the mail, receive the cash or checks, and be responsible for payments on the open accounts.

How does the scheme work? Consider this scenario: Patient A makes a payment of $100. The embezzler steals the money and does not record it. The embezzler then takes $100 from Patient B's $200 payment and credits Patient A's account for $100. Now Patient B's account is off by the $100 that the embezzler stole.

A fraud like this can run for years. It requires detailed recordkeeping by the embezzler to keep track of the shortage and transfer it from one account to another to avoid suspicion. Any indication that an employee is keeping personal records of business transactions outside of your regular book of accounts should be a red flag. The embezzler looks at this newfound income as only borrowing. The intent may or may not be to repay this debt, but he or she will continue to steal increasingly larger amounts of money involving more and more accounts. In this scheme, the embezzler either purges accounts in an attempt to remove the trail or is finally caught in his or her own web of distraction.

Usually an embezzler who is carrying on a lapping scheme also will have access to accounts receivable records and patient statements. He or she may alter the statements sent to patients. Thus, the fraud can continue for a long period of time until something unusual happens. A patient complaint may bring the scheme to light, or the crime may surface through a simple audit of patients' statements compared with total accounts receivable.

If the employee responsible for the payment entry, accounts receivable, billing, and collection is the same employee responsible for patient complaints, then he or she may be able to avoid detection for many years.

These corrupt employees appear diligent and loyal. Their fellow workers will probably wonder how the embezzler can obtain such a high standard of living while apparently being frugal.

The complexity of the scheme can reach such levels that the employee will not dare take a vacation for risk of detection. Your practice should have a policy of requiring regular vacation time to keep the "indispensable employee" from dispensing with your practice assets.

Payroll fraud: Payroll fraud is yet another source of lost income to your practice. Occasionally, enterprising embezzlers have added the name of a relative or fictitious individual to the office payroll and collected several paychecks instead of one. They may even increase their gross pay but keep the net pay the same, all the while waiting for their income check to arrive to "collect their bonus."

Other schemes: Dishonest employees can always figure out ways to defraud an unsuspecting employer:

  • They can accept kickbacks from suppliers by over-ordering supplies. When the check arrives, they forge the payee's name and cash the check.
  • Personal items can be bought and charged to the practice.
  • The embezzler may undercharge friends and relatives for services performed.
  • False vouchers and bogus receipts can be used to conceal theft from petty cash accounts.
  • Overtime can be falsely recorded.
  • Substantial amounts of money can be lost from the cumulative effect of such seemingly minor abuses as personal use of office postage, supplies, equipment, and magazine subscriptions, and charging personal, long-distance phone calls to the office.
  • Embezzlers can set up dummy companies and falsify documentation of fictitious purchase transactions to collect payment from the office.

What are the symptoms?

In embezzlement, as in dentistry, there are signs and symptoms of the disease. An increase in patient refunds might represent a concealment of accounts receivable payment. Unusual bad-debt write-offs, or an unusual amount of accounts turned over to a collection agency, also may signal a coverup. Declines in practice gross income or profits may be a sign that cash is being stolen. Examine each of these symptoms closely.

How can you make your office fraud-proof?

Here are several different ways to protect your practice:

  • Set a good example as the employer. Your employees observe what you do and are prone to imitate both your good and bad habits. An employer who frequently dips into petty cash without proper documentation sets an example of loose business behavior. A dishonest employee will rationalize that "what's good for the goose is good for the gander!"
  • Establish a policy of accountability in your office. This will discourage embezzlement. Accountability sends the message that employees are expected to know their jobs and feel trusted, but they are also accountable for their position.
  • Make sure you are concerned with the financial-related aspects of your office. Employer indifference to the practice's financial well-being can be an invitation for employees to steal. They will be of the mindset that they are doing more to produce income for the practice than you are; therefore, they believe they are entitled to more than their paycheck. It is difficult to know exactly what motivates employees to steal, but there is hard evidence to suggest that frustration with their employers and the practice is a contributing factor. Employees can become frustrated when their employer is indifferent toward finances.
  • Design a system to help document evidence and identify losses in the event that someone does try to embezzle from your office. One problem fidelity loss claims have is proving the amount of funds that were lost or stolen. The practice must support a loss claim with evidence from your records' facts and figures.
  • Develop appropriate internal controls and an adequate accounting system. Prevention and detection of embezzlement depends upon these two issues. Recordkeeping should be set up by your accountant and tested for reliability and accuracy by independent, periodic audits. You will be taking a proactive approach to your practice's financial well-being, and potential embezzlers will take notice.
  • Employ separation of duties for all employees. This is one of the most basic internal controls of any business. For example, the employee who receives payments from patients, either in person or through the mail, should not be the same employee who is responsible for maintaining accounts receivable or making bank deposits. Basically, no one employee should handle any transaction from beginning to end. This includes transactions in both accounts receivable and accounts payable.
  • Insist that your accounting system provide you with reports on a regular basis. You should receive a printed audit trail every day. This will reveal all financial transactions transpiring since the last audit report. These audit trails need to be dated and numbered for accuracy. Don't accept an audit trail that is not numbered. Discuss any unusual or inexplicable variations with the employee involved or your accountant.
  • Require that employees take regular vacations. Embezzlers often need to be on the job to cover their crime. Forcing them to take vacations may possibly bring their crimes to light.

If you suspect you are a victim

First, don't jump to any hasty conclusions. What at first may appear to be a clear-cut case of fraud or embezzlement may be nothing more than weak internal controls with a perfectly valid explanation.

If you have good reason to suspect embezzlement and/or fraud, contact your attorney immediately. Your attorney should be able to guide you through the proper steps. Involvement with local law-enforcement authorities is of the utmost importance. Failure to prosecute could help conceal the commission of a crime.

There are three principal ways in which you can minimize the possibility of your practice falling victim to this white-collar crime. Each is dependent on the other to be effective. Internal controls are perhaps the most effective safeguards you can institute. Independent audits will discourage criminals or may uncover a crime. Fidelity coverage can help recover lost funds. All three of these areas are vital, but none is completely foolproof. Even the best precautions can't make the crime of embezzlement absolutely impossible.

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