Trust, But Verify: Employee Embezzlement Can Ruin You

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Practice Management Feature - November 2009  

Tex Med. 2009;105(11):33-36.  

By  Crystal Conde
Associate Editor  

When one Texas physician's office manager suddenly began working Saturdays and staying late, the physician thought nothing of it. He trusted the woman who'd run his office for 10 years. But when she began complaining that the solo practice was short on cash, it concerned him. He'd been working hard and seeing more patients. It didn't make sense that he'd have cash-flow problems.

It wasn't until his patients complained about the office manager demanding cash payments that the physician truly became suspicious of his trustworthy staff member. Once he started digging, he realized his practice was in deep financial trouble. The office manager had been working overtime not to get ahead, but to have some time alone to embezzle from the physician. It turned out she'd stolen hundreds of thousands of dollars from the practice by operating a number of schemes from 2003 to 2005.

If only he'd known what to look for - something the Texas Medical Association can help teach its members.

The physician, who requested anonymity, estimates he was out $750,000 at the hands of a deceptive office manager he trusted to manage all of his practice's financial matters. She'd been stealing cash, making personal charges on the practice's credit card, writing fraudulent checks to herself and her family, and forging the physician's signature on checks and government documents.

In addition to her embezzlement schemes, the office manager failed to pay income taxes for the practice or make office lease payments. Her position gave her the opportunity to field all calls and intercept all written communications from the Internal Revenue Service and the bank. She made occasional payments for good measure but never let the physician know how far in the red the practice was.

Once the office manager's plot had been unearthed, the physician realized he faced financial ruin. By then, he couldn't afford to hire a lawyer and file a civil lawsuit, so he pursued criminal action against his former employee.

A detective found evidence the office manager had committed a felony. She was arrested and spent one week in jail. At the conclusion of the trial, she was placed on probation.

Based on evidence such as forged checks and questionable credit card charges, the district attorney was able to prove she stole $80,000, which she paid back. The physician says it can be difficult to nail down exactly how much money he lost because oftentimes the theft involved cash.

Despite getting back a small fraction of the money he estimates was stolen, the physician is glad he reported the activities to law enforcement. He says her crime was too serious to ignore.

Now there is a lien on the physician's house, his credit report is abysmal, and he has exhausted his retirement savings to pay back the debts accumulated by the convicted office manager.

Unfortunately, this physician's experience isn't that uncommon. According to the Association of Certified Fraud Examiners' (ACFE's) 2008 Report to the Nation on Occupational Fraud and Abuse  [ PDF ], small businesses with fewer than 100 employees are hardest hit by fraud. Many physician practices fall into this group, which suffered a fraud rate of 38 percent and a median loss of $200,000 last year. Their larger counterparts with 100 to 999 employees had a median loss of $176,000 due to fraud at a rate of only 20 percent. The report blames the higher frequency of fraud in small businesses on their limited resources for antifraud efforts.

The ACFE report projects that U.S.-based companies lose 7 percent of their annual revenue due to fraud, including embezzlement.

Worse yet, the association projects that the current economic recession will give rise to greater opportunity for fraudulent employee activity, such as embezzlement. (See " Fraud Expected to Worsen as Recession Deepens .")

With not a lot of money to pour into theft prevention and an economic climate that has the potential to invite employee embezzlement, solo and small physician practices face some challenges ahead. Luckily, physicians can take simple steps to help avoid becoming victims of employee embezzlement. (See " 10 Steps for Fraud Prevention .")

TMA Practice Consulting  offers an  embezzlement risk review  and an  internal controls and embezzlement continuing medical education  (CME) course for physician practices. (See " TMA Helps Physicians Avoid Embezzlement .")


Knowing What to Look For  

TMA Practice Consulting encourages physicians to pay attention to increased refunds or write-offs, checks that lack supporting documentation, payments to unusual vendors, and questionable credit card charges as just a few of the indicators that something may be amiss in a practice's finances. Consultants stress that physicians should trust their employees, but they also should be aware of some of the common embezzlement schemes and understand the red flags that may indicate they're victims of theft.

According to the ACFE, the most costly embezzlement schemes are theft of cash, skimming, and fraudulent disbursements. ACFE says the median loss from skimming, which involves stealing cash from an organization before it is recorded on the books, was $80,000 in 2008.

An employee committing cash larceny steals cash receipts from an organization after they've been recorded. The median loss for cash larceny in 2008 was $75,000.

Schemes involving fraudulent disbursements of cash include check tampering, billing and payroll schemes, fictitious expense reimbursements, and fraudulent cash register disbursements. The median loss to a business runs anywhere from $25,000 for fictitious expense reimbursements to $138,000 for check tampering.

Coalter Baker, CPA, an Austin accountant who advises small physician practices, says another well-known scheme occurs when employees make personal purchases with the office credit card.

"If a doctor buys a lot of supplies from OfficeMax, for example, an employee with the practice card can add on personal items. Those purchases may seem small, but they add up over time," Mr. Baker said.

He says some embezzlers create fake vendors and have physicians sign invoices for them. In one example, a physician approved payments to a vendor named S.W. Bell. S.W. Bell was an employee, not the phone company.

"They [embezzlers] can find ways to steal drugs, money, and other property. Physicians would be wise to pay attention to all accounts receivable and make sure the payments have in fact been written off," he said.

In addition, employees often display certain behaviors or characteristics that signal that they may be engaged in some fraudulent activity. The office manager embezzling from the physician in this article claimed she worked weekends and overtime to catch up on work, but she actually used the opportunity to steal.

The top five red flag behaviors from the ACFE report are:

  1. Living beyond means (38.6 percent);
  2. Financial difficulties (34 percent);
  3. Wheeler-dealer attitude (20 percent);
  4. Control issues, including an unwillingness to share duties (18.7 percent), and
  5. Divorce or family problems (17 percent).

Other common indicators that an employee may be embezzling include refusal to take vacations so someone filling in will not discover his or her misdeeds; irritability, suspiciousness, or defensiveness; past employment-related problems; and complaints about inadequate pay and lack of authority. While these warning signs of fraudulent conduct don't necessarily mean an employee is guilty of embezzlement, physicians and office managers should understand and recognize them.

Initial detection of occupational fraud, according to ACFE's report, most often comes from tips or complaints by employees, customers, vendors, or another source. Forty-six percent of the occupational fraud cases in the report came to light this way, while 20 percent were discovered by accident. An internal audit caught fraudulent activity in 19 percent of cases, and internal controls, such as segregating job duties or monitoring refunds and payables, detected 23 percent of cases.


Taking Control  

The physician in this story did something common among many small business owners: granting one employee sole authority over all things financial. He now has more than one employee handle administrative duties involving money and conducts a periodic audit.

Physicians have enough to worry about from day to day, making it difficult to pay attention to the business side of the practice. The focus should be on taking care of patients, and it's easy to put someone else in charge of all financial matters.

Mr. Baker warns against giving one employee complete control of practice finances. He suggests physicians sign all checks and regularly review bank and credit card statements. TMA Practice Consulting advises physicians to separate job duties, ensuring not just one person is in charge of opening the mail, posting cash and check receipts, approving adjustments, preparing and making deposits, and preparing refund checks.

Another internal control to prevent embezzlement that physicians can implement is purchasing employee dishonesty insurance. The coverage insures a practice against financial loss from employee theft and allows it to recoup the loss. The coverage can be added to a general liability policy and protects against employee theft of money, property, or securities.

North American Professional Liability Insurance Agency (NAPLIA) reports that employee dishonesty coverage limits vary based on the exposure and the needs of the insured. To get an idea of the limits your practice might need to cover employees, NAPLIA suggests businesses that handle cash estimate the annual volume and multiply by 20 percent. The agency reports that typical coverage limits range from a minimum of $100,000 up to $500,000. Many insurance companies offer separate coverage for depositor's forgery, and computer and funds transfers, which can be purchased with additional limits.

Fidelity bonds, which provide the same type of coverage as employee dishonesty insurance, also offer protection. They safeguard a practice not only from employee theft, but also from theft by a third party, such as a vendor or independent contractor. Coverage limits are similar to those of employee dishonesty insurance.

Physician's News Digest recommends physicians receive unopened bank and credit card statements for review and be involved in reconciling them. This is a good deterrent because it allows physicians to scan statements for unusual transactions and review canceled checks, paying special attention to the endorsing party.

Once physicians detect an embezzlement scheme, Mr. Baker says, they should prosecute the offender.

"It's important that physicians prosecute embezzlers to keep them from getting hired elsewhere and stealing again," he said.

While not every case of embezzlement is reported and some fraudsters go unprosecuted, the U.S. Sentencing Commission does have Texas-specific embezzlement figures. Data released last year by the commission indicate that of the 15,849 cases reported, 1.8 percent of Texas defendants were sentenced for non-fraud, white collar offenses such as embezzlement, forgery/counterfeiting, bribery, money laundering, and tax schemes.

Nearly 65 percent of those prosecuted for embezzlement in the state received a prison sentence, and 21 percent received probation. The average prison term in Texas for embezzlement was 18 months.

TMA Practice Consulting encourages physicians to notify the authorities when employees have stolen. Physicians should begin collecting supporting documentation that shows evidence of embezzlement and then contact their attorney, accountant, and the local police to prosecute the thief.

The physician in this article says he hopes his colleagues never experience what happened to him. He recommends physicians become educated about employee embezzlement by attending one of the programs offered by TMA Practice Consulting and taking steps to prevent theft in the office.

Crystal Conde can be reached by telephone at (800) 880-1300, ext. 1385, or (512) 370-1385; by fax at (512) 370-1629; or by e-mail at  Crystal Conde .  



Nov 09 Pract Mgmnt Chart  

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10 Steps for Fraud Prevention

  1. Segregate employee duties.
  2. Pre-number charge tickets.
  3. Monitor refunds and payables.
  4. Perform regular audits.
  5. Sign checks personally.
  6. Write receipts for cash payments.
  7. Check potential employees' background.
  8. Bond employees.
  9. Audit payroll records.
  10. Trust your instincts.

Source: TMA Practice Consulting  

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TMA Helps Physicians Avoid Embezzlement

To help identify internal control policies that may expose a medical practice to risk of embezzlement,  TMA Practice Consulting can conduct an embezzlement risk review for a fee. The review consists of a comprehensive assessment of the practice's cash handling procedures and inventory control processes and a comparison of profit and loss statements with practice management reports. The review also includes an evaluation of staffing assignments and internal control systems the practice has in place.

In addition, TMA Practice Consulting can conduct an internal controls and embezzlement continuing medical education course for your practice or physician organization. The program includes signs of embezzlement, steps to prevent fraud, and information on prosecution for embezzlement.

Call TMA Practice Consulting at (800) 523-8776, or e-mail[at]texmed[dot]org .

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