Preventing and Recognizing Embezzlement

How did an office manager embezzle more than $250,000 over a five-year period? The doctor had given her complete access to online banking, lines of credit, and the checking account, and he never reviewed the bank statements, profit–loss reports, or credit card statements. The embezzlement was discovered by this consultant to the practice who was comparing profit–loss reports and noticed that office expenses were very high in the previous year compared to the current year—a fact that was highly suspicious. The manager was asked to pull up the general ledger of the office expense chart of accounts to review checks written to office expense. There were eight checks for high amounts with no vendor listed or check number, which was a red flag. When questioned, the answer was, “I don’t know the details; it is in storage, and I will need to request it.” We set a deadline for the details to be on the physician’s desk—in one week. The afternoon of that deadline, the manager called in to say she had been in an auto accident, with symptoms that didn’t make sense to the doctor. We knew then she was embezzling and that we would have to review everything, including bank records. We sat with a banker and discovered the manager had been paying a credit card in her name from the physician’s account.

It is estimated that approximately one in six physicians will be the victim of embezzlement at least once. This may be due to any of a number of reasons: the trusting nature of the physician, a lack of business training about separating duties in transactions involving money, or an employee’s feeling that he or she is overworked, underpaid, and/or underappreciated. The U.S. Chamber of Commerce estimates that 30% of business failures are directly related to employee theft.(1)

Embezzlement may be the hardest challenge any business owner can face. Being stolen from by someone you’ve trusted leaves you feeling betrayed and gullible. Victims of embezzlement often say things such as, “I feel like the newest member of the deceived club,” “But we trusted him completely,” or “She was like a family member. I feel like I have been kicked in the gut.”

The Best Protection Against Embezzlement Is Prevention

The best protection against embezzlement is to value your employees and make sure they know it. Here are some basic guidelines:

• Be sure your employees are paid at competitive wage levels for your area. To get an idea of what the current pay standards are, survey local offices yearly or know your specialty wage to collection benchmarks.

• Provide usual and customary benefits for your locale. Employees who have pay and perks comparable to area norms may be less likely to feel they deserve more than they’re getting and, therefore, less likely to “help themselves.”

• Be familiar with your state’s labor laws regarding exempt versus nonexempt employees, and pay overtime in accordance with your state law.

• Show appreciation with sincere compliments, surprise treats such as lattes or ice cream, or parties or team-building events that include both physicians and staff. These types of efforts help create a sense of belonging and loyalty to the practice and thus deter company theft.

Have Policies and Procedures in Place

It’s also important to develop written personnel procedures and policies. Clearly written policies and codes of conduct help imprint behavior requirements in the minds of employees. These rules should clearly state that stealing from the company is grounds for termination. Employees should sign a form that they have read and received these policies. This form must be retained in the employee file.

Screen Employees Carefully

The U.S. Department of Justice reports that 1 in every 32 adults has a criminal record.(1) A recent report from ADP Screening and Selection Services found that 44% of applicants lied about their work histories, 41% lied about their education, and 23% falsified credentials or licenses.(2) Likewise, ResumeDoctor.com found that 42.7% of resumés have significant inaccuracies.(3) Perform a background check on all potential employees, and be sure the following are part of your screening and hiring process:

• Ask references if the employee was ever convicted of embezzlement.

• Include the same question on your application form; that way, you have clear grounds for dismissal if the employee lied.

• In interviews, ask if the applicant is bondable, and clearly state that you will perform a background check.

• Perform a credit check and a criminal record check on all employees who will handle money.

Be Discreet About Your Personal Wealth

Don’t flaunt a high standard of living. Staff may come to feel jealous and think that they deserve what you have—and are entitled to take it.

Be Upfront About Expenses

Discuss your practice’s overhead expenses in general terms and how they continue to increase. Staff who only see revenue coming in may have no concept of the cost of doing business and thus have an inflated idea of how much a physician actually takes home.

Red Flags

Pay attention to the following signs—they may signal a potential embezzlement issue:

• Employee does not take vacations, or does but insists that no one else handle billing or bookkeeping while he or she is away.

• Employee takes billing or bookkeeping home.

• Employee works long hours without complaint.

• Employee works odd hours, such as very early mornings or late evenings.

• Employee’s lifestyle changes, with an expensive car, jewelry, clothes, or vacations.

• Employee talks about stress, family pressures, and financial problems.

• Employee behaves defensively when bookkeeping or billing is discussed.

• Employee suddenly volunteers to take on bookkeeping or billing.

• Employee quits suddenly, particularly when a CPA or consultant comes into the practice.

• Office morale suddenly changes.

• Patients or vendors complain about billing or bookkeeping errors.

• Vendors send past-due bills.

• Revenues drop or remain flat when an increase is expected.

• Expenses in one category increase, or total overhead goes up.

• The checkbook is not current or does not balance.

• Accounts receivable is not balanced, or days in accounts receivable are rising.

• Credit refunds increase.

• Petty cash checks are cut more frequently, indicating that funds are being spent more rapidly and need to be replaced.

Accounting Control

Many physicians do not learn the basic principles of accounting control. As a result, it is too easy for staff to take money. Do not expect your CPA to catch embezzlement unless you have specifically requested that office systems be set up to prevent it. It is the owner’s responsibility, since it’s the owner who will suffer.

The same staff person should not open the mail, record the checks, and reconcile the bank statement.

Most embezzlement in medical practices is carried out by someone working alone, so the two key principles are:

• No one person should have control over the entire cash transaction process.

• Duties involving money should be distributed to two or more people. That way, collusion would be required for embezzlement to occur, which is less likely.

For example, the same staff person should not open the mail, record the checks, balance out at the end of the day, post the payment, make the bank deposit, and reconcile the bank statement. Even in a small office, these tasks can be given to two or more staff members. As a further safeguard, rotate the job of opening the mail.

Other precautions you can take include these:

• Have the bank statement sent to your home address, or, if it comes to the practice, require it to be placed on your desk unopened.

• Have an outside bookkeeper, CPA, or someone else reconcile the bank statement.

• Review electronic transfers carefully, and do not let anyone have access to online banking except a physician partner so that staff cannot transfer funds to a personal account.

• Think carefully about allowing anyone except a physician partner to have the authority to sign checks. Most groups also require two signatures on any check over a given amount, even when all signers are partners.

• Perform unannounced random spot checks by matching the daily scheduled patients against posting and deposit slips. Many computer programs have a “missing encounter” feature that will perform this function. It is advisable to look this functionality when choosing new software.

• Monitor the level of cash copayments. If it drops dramatically, this may be a warning sign. Receipts for cash should be sequentially numbered and have carbon copies.

• All checks from patients should be stamped “For deposit only.” You may want to have a physician make deposits, have the bank pick them up, or use a lock box for checks that goes directly to the bank. Explanation of benefits forms and check copies can be either be scanned and available via the Internet or sent to the practice or its billing service.

• Accounts payable is another area of risk. The manager or bookkeeper should present all checks for payment along with the corresponding vendor invoice, and the physician should verify that the vendor is authentic. Review canceled checks and credit card statements the same way.

• Do not allow staff to charge to items to the company credit card. Always review credit card statements.

• Don’t allow practice checks to be written for personal items or allow employees to use your practice as a bank and write checks for cash.

• Have an outside person double-check the payroll. Managers are sometimes able to give themselves a “bonus” or increase their own pay without the physician knowing because the bank statement only shows the total payroll amount debited, not the individual payroll amounts. You must double-check payroll reports.

Too Late For Prevention? Consider Prosecuting

Too many embezzlers hop from practice to practice because no one prosecutes. Don’t let the crime go unpunished. If you do, to add insult to injury, the practice may have to report the stolen money as “phantom income” and pay taxes on it (consult with your CPA about this). If you prove embezzlement and convict the embezzler, you can report this to the IRS, and the embezzler will have to pay tax on the “income” he or she embezzled.

Don’t hesitate to send an embezzler to jail if it comes to that.

Contact an attorney who, after determining that there is concrete evidence, will assist you in confronting the embezzler and will prepare a confession and a restitution agreement. If the thief is remorseful, a repayment plan can be worked out or you may be able to repossess assets or garnish wages. But don’t hesitate to send an embezzler to jail if it comes to that.

However, the adage “An ounce of prevention is worth a pound of cure” is probably the best advice. Take steps to stop embezzlement before it starts.

Conclusion

Don’t be one of the estimated one in six physicians to be a victim of embezzlement:

• Prevent embezzlement by showing appreciation to staff.

• Perform background checks on staff who handle money.

• Implement accounting control. Divide transaction of cash duties among several employees; and never let just one person handle all aspects of opening the mail, posting transactions, balancing the account, making deposits, and reconciling the bank statement.

• Do not allow managers to sign checks or have access to online banking and lines of credit.

• Be aware of “red flags” that may indicate embezzlement.

• Prosecute embezzlers and try to obtain restitution.

References

1. Pre-Employment Screening. JHRI, Inc. www.jhripi.com/pre-employment/ .

2. Seshan B. Five biggest lies in resume exposed. International Business Times. March 13, 2011; www.ibtimes.com/five-biggest-lies-resume-exposed-551404 .

3. Struass R. When the résumé is not to be believed. New York Times. September 12, 2006. www.nytimes.com/2006/09/12/business/smallbusiness/12check.html?n=Top%2FReference%2FTimes%20Topics%2FSubjects%2FS%2FSmall%20Business&_r=0.