Embezzlement Prevention—To Catch a Thief!

Dentistry Today


10 Steps to Prevent Embezzlement

  1. Proper employee hiring procedures.
  2. Why bonding employees is important.
  3. Be aware of “red flags” that may indicate potential fraud.
  4. Set up rigid protocols for handling office finances.
  5. Install software that creates an audit trail.
  6. Check your financial records every day.
  7. Monitor charges and payments.
  8. Control practice cash flow.
  9. Petty cash control.
  10. Bank account reconciliation.

Incidents of fraud and embezzlement are on the rise, and dentists are often a choice target. A busy dental practice is the perfect environment for financial fraud. The definition of embezzlement: “is theft of money or property from a business by an individual in whose custody it has been placed,” Donald P. Lewis, Jr, DDS, wrote a book entitled Employee Embezzlement and Fraud in Dental Office to help dentists avoid the devastating experience he had with an embezzlement that destroyed him emotionally and financially. It has been estimated that one out of 3 doctors will experience embezzlement at some time during their practice years. A busy doctor is an easy target for embezzlement, even with insurance reimbursement.
In this comprehensive article, the learning objective is to equip you with strong preventive measures. I will share my personal experiences, the characteristics of embezzlers, the warning signs, common fraud schemes and internal controls designed to reduce the likelihood of occurrence or success. Unfortunately, when you went to dental school they didn’t teach you much at all about the business side of your practice. A new dentist entering practice, as well as dentists already in practice, should be able to benefit from this article. What I am advising here is how to prevent fraud in your practice, which is only a part of the total survival business methods that are necessary to operate your practice profitably and productively.

There are both financial and psychological reasons why people embezzle. Some of the most common reasons are:

  • to support personal finances
  • a feeling of lack of appreciation from the doctor
  • anger at their boss doctor, office manager or a co-worker
  • jealousy of the doctor’s earning capacity
  • greed
  • the sheer challenge.

Many people assume that individuals embezzle simply because they need the money. The reasons listed above are far more complex. You should pay attention to employees who complain constantly about financial problems. It may seem minor, but it could be indicative of a more significant issue. We strongly recommend that doctors do not discuss their personal finances in front of their staff. This can cause jealousy of the doctors’ earning capacity. It is also a poor idea to allow a team member to do personal banking for the doctor.

The doctor who wants to operate his or her practice like a business successfully must be able to perform and have total comprehension of the following business tasks. You must know how to:

  • analyze your current financial picture
  • establish a percentage practice budget
  • interpret financial reports that monitor the health of your practice
  • produce and maintain a positive cash flow
  • be a leader in charge of the office
  • implement practice management (front desk) systems
  • be thoroughly knowledgeable how your computer operates
  • initiate practice building techniques which improve your profits
  • communicate prevention and confront fraud.

When doctors get together to discuss practice problems, sooner or later someone will tell a horror story about a trusted employee who stole money. One trusting dentist hired an experienced receptionist he met through an exercise class at a health spa. Dr. “Trustworthy” hired her on the spot, without any check of her background or references. Because she had worked previously in a few other dental offices, the doctor took it for granted that she would be able to handle the front desk position effectively and efficiently. As time went by, Dr. Trustworthy assigned the office checkbook and banking duties to Susan, his new employee.
Within a span of 6 months, Susan stole a large sum of dollars from the practice, and the practice began to falter financially. What was causing this to happen was a mystery to Dr. Trustworthy. Unknown to him, Susan was pocketing copays, and then deep-sixing the patient encounter form altogether. That means the insurance claims never got processed. In addition, she filed fraudulent insurance claims. The practice hit by these devious tactics lost approximately $87,000, not only cash in copays, but “mucho dollars” in fraudulent claims and those that were never submitted. Susan made excuses daily for leaving the office. The time and stolen cash were used to purchase drugs. Unfortunately, an investigation of Susan’s present and past activities discovered that stealing was nothing new for her. It was discovered that Susan had a $300-a-day drug habit and she had been arrested several times for stealing since she was 18 years old.
Ask yourself this question, “Could that happen in my practice?” Impulsively you might say, “I am not worried. I have heard the horror stories about embezzling employees, but I don’t have to worry about a thief on my team. After all, I am a good judge of character; if there were a shady member of the crew I would spot ‘em in an instant, and they’d be gone! Besides, these people have been with me a long time, and I’m proud of that.”
Before insisting it couldn’t happen to you, think hard and ask yourself if you really know as much as think about the backgrounds of those who handle your office payments, payroll, and finances. How carefully did you investigate their credit and criminal records, and their employment and personal references?

Certainly, I don’t mean to disparage hardworking and dedicated employees in the process of this discussion. However, remember that the common refrain I have heard again and again in embezzlement cases is that the “most trusted” employee is the one pilfering the practice. My observation is that dentists seem to “trust” too much. Trust in a long-term employee should not be a substitute for sound internal financial controls. The description “long-term and trusted employee” generally conjures up warm and fuzzy feelings. Fellow employees all trust, admire, and respect “long-term employees.” While the overwhelming majority of those described in this way deserve the high regard in which they are held, some do not.
I have been witness to embezzlement situations that not only involve “trusted” employees, but cases in which family relationships have been destroyed; when a sister stole from her brother, or a son who stole from his father. The typical reaction to the discovery of embezzlement is emotional shock and overwhelming dismay on the part of the doctor, other team members, and family. In many cases, I was amazed that the embezzlement had gone on for so much time without detection.

For employees who will be handling cash, checks, credit card information, drugs, or confidential patient information, a thorough background investigation is a neccesity in evaluating a new potential member. With the increase of embezzlement in dental offices, I am convinced that criminal background and credit checks are essential in these times, more than ever before. Unfortunately, this is the biggest factor of neglect that doctors make in the process of hiring a new team member for handling their business matters. They take shortcuts and don’t go the full extra mile in checking references, background checks, etc. Often, they simply “trust their instincts” when hiring.
For those team members who do not handle the financial matters, an extensive background and criminal check may not be needed, but it is worth checking employment references and educational background to make sure those applicants are really as qualified as they may claim to be. While that may take some effort and expense, it’s a reasonable investment considering the time and cost of recruiting, hiring, and training a replacement for someone you may have to fire later. While the thoroughness for the background check depends on the specific job being filled and on relevant state laws, the following basic steps should be part of the process:

The Application Form

Along with basic data like name, current and former addresses, education, and Social Security number, the form should ask the applicant for a complete employment history, including dates for each job, and whether he/she has ever worked under a different name. To avoid claims of discrimination, you cannot ask about height, weight, marital status, religion, race, birthplace, or personal finances.


Avoid Legal Minefields
You cannot ask an applicant’s age, about physical or mental disabilities, but you can ask if there’s any reason he/she might have difficulty meeting the job’s specific requirements. If the applicant is a citizen of the United States, you cannot ask if the applicant has ever been arrested. However, you can ask if the applicant has ever been convicted of a crime, or if there are any present pending felony charges against them.

Get The Applicant’s Consent
Tell applicants that your standard operating procedures involve doing a thorough background check. This may help scare away any potential embezzler. To avoid the risk of a subsequent claim for invasion of privacy, the federal Fair Credit Reporting Act (FCRA) (and some states) requires an applicant’s written consent before you do a background and credit history check. Ask the applicant to sign a waiver that authorizes you to seek relevant background information, and that also gives potential references permission to discuss the applicant’s background with you. While that waiver can be part of the job application form, it makes more sense to have it on a separate document so that you can send copies to courts, credit agencies, schools, and former employers who may demand them before cooperating with your request.
Finally, follow through on the standard procedures for employment and contact as many previous employers and personal references as possible. If you feel it will be necessary to perform effectively on the job, you should confirm all educational claims.

Check Credit History
A credit report should be done only on team members who will be involved in handling cash or checks. It is not necessary to do a credit check on members of your clinical team. Furthermore, you could get in trouble if there’s no good business reason for doing so. There is obviously a good reason for the credit check on a potential business office employee. You want to be certain that the applicant has not gotten into trouble with her own finances, or worse, is deeply in debt, because that person may not be the best choice to be handling the finances. Before ordering a credit report, be aware of the legal restrictions set forth in the FCRA. That law does not apply if you gather that information on your own. However, it does apply if you request it from a commercial credit bureau. In fact, that law, and some state laws, require such agencies to get the applicant’s written permission before conducting such a search. Under the FCRA, if you decide not to hire the applicant based on a negative credit report, you must provide a copy of the report, plus a copy of “A Summary of Your Rights Under the Fair Credit Reporting Act,” available from the Federal Trade Commission.
Make sure that the applicant knows you will be checking the information and references provided and that no job offer will be made until your investigation is completed. Finally, have the applicant sign a statement confirming the accuracy of the data supplied on the application form, with the understanding that if the applicant has provided false information, it will be grounds for immediate discharge. Revise your employee manual to make clear that embezzlement will be grounds for immediate termination and prosecution. In this way, your team will be informed that there are safeguards in place.

Bonding Employees
One way to protect your practice against employee theft is to buy an umbrella fidelity bonds (which covers all employees who will be handling cash, checks, credit card information) through your insurance broker. Get umbrella coverage rather than individual or position coverage. The insurance company does background checks on those covered. Once again this will cover everyone with access to cash or responsibility for practice finances. If a covered employee does steal from your practice, the insurance company will repay your verifiable losses up to the amount of the bond. I recommend that you tell the applicant that it is necessary to apply for a fidelity bond. This also serves to discourage an applicant who may have a “shady past.”

Get Help With Background Investigations
Given the potential for privacy violations, the legal restrictions on such searches, and the time involved in conducting them; it usually makes more sense to hire a professional firm to do a search for criminal, credit, and education records. Depending on the complexity of the search, the cost could run from $50 to several hundred dollars. One example of a firm that has worked well with the dental profession conducting background and reference checks is Bent Ericksen and Associates (bentericksen.com). Also, you can search Google for “pre-employment screening services,” or check your local yellow pages for “investigation services.” You will find many companies offering such services, from small local firms to large national companies.
A helpful hiring tool is the Employee Reliability Inventory from Wonderlic. It is a risk management tool that helps you identify candidates who are most likely to become reliable, productive, valued employees rather than a practice liability. It is administered as a pre-employment assessment during the hiring process which can be taken by the candidate and easily scored in the privacy of your own office. This testing would be performed in addition to the DISC profile, not in lieu of it.

Be Aware of “Red Flags” That May Indicate Potential Fraud
Doctors should be aware of the following “red flags” that point to a possible embezzler in their office:

  • always the first to arrive at work, the last to leave
  • never takes vacation or will only take a couple of days
  • rarely if ever takes sick days or personal days
  • very controlling of his/her work space
  • refuses to teach other employees his/her job
  • adamantly opposes any changes to the accounting system
  • has an unusually high standard of living considering his/her salary
  • provides unreasonable explanations in response to questions regarding checks and cash
  • is highly critical of others
  • stirs up dissension in the office
  • constantly works overtime without sufficient reason.

So far, in part 1 of this 2-part article, the importance of the proper procedures that are needed to be performed in order to hire the best business/financial team members for your practice has been discussed. Utilizing these techniques will give you a fighting chance to eliminate the potential for embezzlement from your business. Also provided were some specific guidelines of embezzlement prevention that you must be alert for, along with the detection of a potential embezzler in the office, by listing the “red flags.”
Next, in part 2, I will complete the list of specific guidelines that are necessary to prevent embezzlement with the implementation of strong business systems designed to safeguard and control your practice financial system successfully.

Dr. Doherty is a certified financial planner, investment advisor, and a member the Association of Certified Fraud Examiners. He is a former dentist who has spent years of research and study at Harvard University Graduate School of Business and the College of Financial Planning, making him uniquely qualified to educate in all aspects of the business and financial world. In recent years, his focus has shifted to a well-received unique educational process entitled “Financial Boot Camp for Dentists.” Dr. Doherty lectures internationally and has served as a special lecturer and consultant to the ADA. He can be reached at (772) 225-3021, at hughdohertydds@comcast.net, or via e-mail at hughdoherty.com

Disclosure: Dr. Doherty is CEO of Doctor’s Financial Network.