Embezzlement:It’s Easy To Do & Even Easier To Prevent!by Larry M. Guzzardo

Part 1

No one ever thinks it will happen to them. Believe me, it happens more often than you think, and often from the person you trusted the most. That’s right – embezzlement! Too often, doctors are shocked because they trusted their teams and did not feel it was necessary to have specific checks and balances in place.

It might be argued that dental practices are more susceptible to embezzlement than large businesses. Unlike large business, they do not have the resources to establish sophisticated internal controls. For example, in a dental practice a bookkeeper’s routine duties might require him/her to issue invoices to patients, record the receipt of the patient’s payment and then deposit the amounts in the doctor’s bank account. The lack of other individuals involved in the process provides opportunities for the embezzler. For instance, the bookkeeper/embezzler, without the

knowledge of the doctor, could simply establish a separate bank account, deposit a patient’s check in the account and then cover up the misappropriation by crediting the patient’s account using one or more bogus transactions. If the bookkeeper has access to incoming mail along with the general ledger, it would be easy to perpetuate the fraud with little risk of detection.

Given the lack of resources to develop and maintain sophisticated internal controls, how might a dental practice prevent embezzlement? Well, to be honest, it’s virtually impossible to prevent embezzlement. As they say, if there’s a will, there’s a way. On the other hand, every doctor could make it more difficult for the would-be embezzler by the implementation of policies and procedures designed to reduce the opportunities to steal.

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How You & Your Team Can Help Protect Your Practice.

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Are you at Risk for Embezzlement? Answer Yes or No to these simple questions to find out.

#1. Do you have 4 or more employees who handle business related issues for your practice?

#2. Do you have 3 or more employees who handle or review your accounting functions?

#3. Are these employees (from #2 above) required to take at least one week of vacation a year?

#4. Does more then one employee handle all bank deposits?

#5. Do you review the conciliation of the bank statement each month?

#6. Do you periodically review the work of each business employee?

#7. Do you check references and criminal background of perspective employees?

#8. Do you sign blank checks before going on vacation or business trips?

#9. Does an independent accountant review or audit your books annually?

#10. Do you meet with employees monthly to review patient balances, oustanding insurance

claims, and adjustments?

Feeling uneasy? You should if you answered “No” to 4 or more of these questions because

it signifies that you are vulnerable to a significant loss from employee theft.

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“Given the lack of resources to develop and maintain sophisticated internal controls, how might a dental practice prevent embezzlement?”.

The answer to overcoming fraud can be simply stated. First, be aware of behavior trends of embezzlers. Second, exercise prevention through daily attention, controlled authority, and systematic access.

Patterns of behaviors of fraudulent employees are a challenge to detect as they often disguise themselves as a dedicated, hard-working, ideal employee. They tend to spend time alone in the practice ---- arriving early in the morning, working lunch hours alone, and staying late. They rarely if ever take vacations as they are afraid something will come up while they are away that may raise red flags. They tend to be extremely territorial about their roles in the finances of the practice and offer to take on as many aspects as allowed.

They are unreasonably resistant to change when it comes to updating or replacing the practice

management software, involving an outside consultant, or in other ways that allow other team members to deal with the finances.

The proper preparation begins by giving time, commitment, and attention to the interviewing and hiring process and involves several steps to avoid hiring a desperate or dishonest person.

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Red Flags

Employees who may be:• Deteriorating in financial condition.

• Not taking vacation, working after hours & bringing work home.

• Excessive spending, large sums of cash or the reverse, chronic borrowing of money.

• Openly resenting the doctor’s income or lifestyle, and/or the fees of the practice. The causes• One employee handles all financial transactions meaning no or few checks and balances in place; or the same employee makes the deposits, posts the insurance, pays the bills & balances the checking account.

• The doctor isn’t the first one to open and review the bank statement or doesn’t check the account online.

• New employees are hired without reference checks.

• The doctor has little understanding about the business side of the practice; he or she doesn’t read the front desk reports and doesn’t check the day sheets routinely. How they do it:• Taking cash payments without posting charges or taking the cash payment and deleting the payment while posting some of the treatment.

• Changing the deposit slip on the way to the bank and pocketing the cash.

• Writing off the account as non-collectable.

• The employee doesn’t bill the patient whose payment hasn’t been posted.

• Making out refund checks to a fictitious patient.

• Giving the doctor a stack of checks to sign & including an extra one or giving the employee the ability to sign checks.

• Billing insurance fraudulently—the check is intercepted and deposited in a private account & the doctor’s signature is forged.

Most common signs to be on the lookout for to keep you from being embezzled.

Unusual BehaviorThe perpetrator will often display unusual behavior that when taken as a whole is a strong indicator of fraud. The fraudster may never take a vacation or call in sick for fear of being caught. He or she may not assign out work even when overloaded. The employee may become very defensive, unusually irritable and suspicious.

ComplaintsFrequently, tips or complaints will be received which indicate that a fraudulent action is going on. Complaints have been known to be some of the best sources of fraud and should be taken seriously. Although all too often the motives of the complainant may be suspect, the allegations usually have merit that warrant further investigation.

Stale Items in ReconciliationsThis is a big indicator in dental practices! In bank reconciliations, deposits or checks not included in the reconciliation could be indicative of theft. Missing deposits could mean the perpetrator absconded with the funds; missing checks could indicate one made out to a bogus payee. Bounced checks could indicate that funds are being siphoned out of your bank account.

Excessive VoidsVoided patient receipts could mean that the patient paid, the payment diverted to the use of the perpetrator, and the internal copies of the receipt subsequently voided to cover the theft.

Missing DocumentsDocuments that cannot be located can be a red flag of fraud. Although it is expected that some documents will be misplaced, your CPA should look for explanations as to why the documents are missing, and what steps were taken to locate the requested items.

Excessive CreditsSimilar to excessive voids, this technique can be used to cover the theft of cash. A credit to a phony customer is processed, and the cash is taken to make total cash balance.

Common Names and Addresses for RefundsInsurance refunds are received in error and the perpetrator will make the refund out to a bogus name and the address shown for the refund is then made to the employee’s address, post office box the perpetrator maintains, or to the address of a friend, relative or co-worker.

Increasing Reconciling ItemsStolen deposits, or bogus checks written, are frequently not removed, or covered from the reconciliation. Hence, over a period of time, the reconciling items tend to increase.

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General Ledger Out-of-BalanceWhen funds, inventory, or assets are stolen and not covered by a fictitious entry, the general ledger will be out of balance. An accounting of the inventory or cash is needed to confirm the existence of the missing assets.

Adjustment to Receivables or PayablesIn cases where patient payments are misappropriated, adjustments to receivables can be made to cover the shortages. Where payables are adjusted, the perpetrator can use a phony billing scheme to convert cash to his or her own use.

Write-off of ReceivablesComparing the write-off of receivables by patients or insurance companies may lead to information indicating that the employee has absconded with payments. Only the doctor should have the authority to write off an account.

Slow CollectionsPay close attention to your receivables. If a patient or insurance company that has always paid within guidelines has a balance/claim that is starting to age, you should inquire.

Excess PurchasesExcess purchases can be used to cover fraud in two ways: A. Fictitious payees are used to convert funds and B. Excessive purchases may indicate a possible payoff to the perpetrator.

Phantom VendorsPerpetrator establishes one or more phantom vendors to pay for goods or services never ordered. The payment goes to an address controlled by the employee.

Ghost EmployeesGhost employee schemes are frequently uncovered when an individual other than the perpetrator distributes the paychecks. Missing or otherwise unaccounted for employees could indicate the existence of a ghost employee scheme.

Duplicate PaymentsDuplicate payments are sometimes converted to the use of an employee. The employee may notice the duplicate payment; then he or she may prepare a phony endorsement of the check or turn it into cash at the bank.

Large Payments to IndividualsExcessive large payments to individuals may indicate instances of fraudulent disbursements.

Employee OvertimeEmployees being paid for overtime hours not worked by altering time sheets before or after your approval, if required.

Inventory and Supplies ShortagesNormal shrinkage over a period of time can be computed through historical analysis. Excessive shrinkage could explain a host of fraudulent activity, from embezzlement to theft of inventory or phantom inventory.

Charge Accounts and Credit CardsThe perpetrator makes charges for his or her own benefit to charge accounts and credit cards. When the bill comes in, it is paid in the normal course and the merchandise is used by the employee.

“There’s a 75% chance that your practice will be embezzled during your dental career… don’t ever think it can’t happen to you!”

Larry M. Guzzardo who has co-authored two books, “Powerful Practice” and “Getting Things Done” conducts in-office practice management consultations exclusively for dentists to enhance trust, create organization, increase profits, and the development of patient relationships that last. Larry has presented numerous workshops including, “Winning Patient Acceptance,” “Business Communication Systems,” and “The Leadership Challenge.” For more information call 800-782-5770.

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