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Recognizing and Reacting to Employee Embezzlement

October 30, 2019 6262

Introduction

Insurance companies frequently refer to embezzlement as employee dishonesty; however, embezzlement is a criminal act, as stealing money from an employer constitutes theft. Three key motivators for an embezzler include:

  1. Opportunity: Embezzlement occurs in dental practices because the dentist may:
    • Entrust a single staff person with sole financial responsibility and authority.
    • Lack working knowledge of accounts payable and receivable functions.
    • Fail to implement checks and balances over accounting processes.
    • Refuse to take legal action against an employee who embezzles.
  1. Rationalization: Embezzlers do not view what they are doing as a crime. He or she believes, “I will pay it back,” or “I deserve this,” or “I will take only what I need.”
  2. Financial need: Employees who are falling behind on mortgages, suffer the loss of a second income or have unexpected health bills may view a gap in the practice’s administrative controls as an irresistible opportunity to embezzle. Employees may suffer from an addiction to drugs, alcohol or gambling that creates a need for money, particularly money that is not traceable by a spouse. Sometimes this money is partially used to pay restitution to previous employers whom the employee embezzled from.

Recognizing red flags can help you take action to stop or keep embezzlement from occurring. Watch for:

An ‘ever-present’ employee:

One who comes in early or stays to close up after everyone has left; regularly refuses to take vacation; insists upon taking “work” home such as account ledgers, bills or shipments that come to the office; or requests to work on days the office is closed.

A financially frustrated employee:

One who receives frequent calls from creditors or collectors at work; continually requests cash advances on paychecks; asks for a raise or a personal loan from coworkers or appears to be living beyond his or her means and is always low on funds. Staff often become aware of these issues before you do.

An employee who is territorial or overly neat:

One who is resistant to cross-training another coworker to handle his or her job functions; locks documents away or places them in odd locations where other staff would not be inclined to look; and maintains a spotless work environment. This employee would be resistant to external financial audits. He or she could insist on having access to administrative and security codes on software the resists sharing these codes with others citing IT security.

Increases in patient complaints about billing:

You start receiving consistent calls from patients regarding incorrect bills such as payments that have not been applied or the charges are not current. If you do not routinely monitor patient account activity, you may not find this out until after the employee is gone.

One red flag does not identify an embezzler. Opportunity, rationalization, financial need, and red flags combined warrant further investigation.

Embezzlement Methods

Case examples are from TDIC claims and Risk Management Advice Line calls. Do not terminate an employee based upon suspicion of employee dishonesty. Remove the employee’s access to all office records including personal files and patient data. Call the TDIC Advice Line at 800.733.0633.

Dishonest employees may:

Delete appointment and ledger entries

TDIC Case 1: A bank representative contacted the dentist to report suspicious activity on his practice’s account. One employee handled all financial concerns for two years. Upon investigation, the dentist learned the employee endorsed patient checks over to herself and cashed them at the bank. The bank turned the matter over to their fraud division. The employee embezzled a total of $12,000. She covered her tracks by deleting information on the books so that it appeared as if the patient never had an appointment and therefore the dentist would not anticipate receiving payment for the visit. The dentist pressed charges resulting in the employee’s arrest, criminal trial, probation and restitution payments to the practice.

Pocket a patient’s cash payment

TDIC Case 2: The dentist employed an office manager for over ten years. A patient lost her retainer. Because this had happened before, her parents made the patient pay for half the replacement cost. The dentist was at the front desk when the patient’s mom wrote a check for her half and her daughter paid her portion in cash. Later, the dentist reviewed the week’s activity and noticed the employee credited only the check payment to the patient’s account. Concerned, the dentist researched further and determined the cash payment was missing. He went back through records and found his office manager routinely altered deposit slips and took the cash. The dentist terminated the employee and opted not to file charges.

Forge payroll checks

TDIC Case 3: A dentist hired a front office employee. Approximately a year and a half after she hired the staff member, the hygienist approached the dentist regarding a bank statement for the practice that she found in the woman’s restroom. This prompted the dentist to contact her accountant to review the books. The accountant confirmed there were large discrepancies and that only the front office person had access to the information. At the end of that week, the dentist confronted the employee, telling her the accountant discovered the employee forged ten payroll checks to herself in December. She admitted to the forgeries, then confessed to additional embezzlement. The dentist terminated her; however, the employee told the dentist she would pay it back. They agreed to discuss it further on Monday. Because the employee seemed relieved to confess her crime, the dentist did not request she turn in her office keys. On Monday, the dentist came into the office and saw the receptionist’s keys on the desk. She turned on the computer and discovered the employee deleted all of her family and friends’ dental records. Upon further investigation, the dentist discovered the employee wrote checks to herself and did not pay bills on vendor accounts. She took system backup tapes and deleted other critical data from the computer. She also stole the practice’s appointment book. The dentist terminated the employee, filed a police report and hired a forensic accountant to review all financial transactions. Based on that report, the employee was found guilty and was ordered to serve a year in jail, two years of probation and restitution to the dentist.

Modified payroll

TDIC Case 4: An office manager, employed over nine years, had exclusive authorization for electronic fund transfers and payroll disbursements. She modified the practice payroll by creating fictitious employees. The bank recognized inconsistencies and prepared reports highlighting the illegal activity. However, the bank sent the reports directly to the practice where the office manager intercepted them and destroyed the documents to cover her activities. Eventually a bank representative contacted the dentist directly to discuss concerns related to the financial activity. The dentist confronted the office manager, who initially denied any responsibility, but was unable to refute the bank’s documentation. The employee resigned and the dentist filed criminal charges. He is working with a forensic accountant to determine how much the office manager embezzled.

Misappropriate a credit card or insurance payment

TDIC Case 5: A dentist received a call from her bank advising her that her patient accounts manager signed over checks from Delta Dental and MetLife, then deposited them through the ATM into her personal checking account. The dentist terminated the employee, who was arrested and found guilty. She was ordered to pay restitution to the dentist as part of her sentencing agreement to avoid jail time.

Advise patients to leave the “Pay to the order of” field on checks blank

TDIC Case 6: A dentist discovered embezzlement when a patient phoned to inquire about a check. When the patient paid with a check, the employee told her not to bother filling it out because she had a stamp with the practice’s name on it. The employee then wrote her own name in and deposited it into her account. The dentist received additional calls from concerned patients. He spent the weekend reviewing patient accounts and found many more incidents. The employee had adjusted off balances as if the dentist contracted with the patient’s insurance even though he had not. In addition, the employee told another patient who paid by credit card check that she had a stamp and so the patient did not need to write the dentist’s name on the check. The patient brought in her credit card statement showing that the employee charged her account for more than the balance due. When the dentist confronted the employee about the check, she confessed and admitted that she embezzled on more than one occasion. The dentist terminated her immediately and filed a police report. During the hearing, she pleaded no contest. The judge gave her probation for five years and a 90- day sentence.

Unauthorized use of the signature stamp

TDIC Case 7: A dentist discovered that her office manager of eight years used her signature stamp and MasterCard to purchase 500 Vicodin a week through the dentist’s Henry Schein account. The office manager confessed to both using and selling Vicodin. The total amount of the employee’s misappropriation was over $25,000. The court ordered the office manager pay restitution as part of his sentencing agreement.

Recovery

If you suspect embezzlement, act quickly and decisively. Do not give an employee a chance to conceal his or her activities. Objectively investigate and compile proof. You may need the assistance of your billing software representative, IT person and accountant. If the embezzlement involved credit cards, you will need to cancel those cards, fill out fraud affidavits and have new cards issued. Run a credit report on yourself and your business to see if the embezzler has opened other accounts in your name or otherwise stolen your identity. Immediately inventory all drugs on the premises. Turn your findings over to local law enforcement.

Whatever documents you provide to the police are the same documents TDIC needs to establish the amount of covered loss. TDIC does not cover costs to investigate illicit financial activities. This includes seeking advice from or retaining the services of a forensic accountant.

Once caught or confronted, embezzlers will often break down then offer to repay the money along with justification for what they have done. They will attempt to broker a repayment in exchange for a favorable or neutral letter from you. This is how an embezzler is able to move from practice to practice. Do not provide this type of letter to someone who embezzled from you.

Dishonest employees expect you to fire them once you discover misappropriation, but they may not expect you to prosecute. Prosecution ensures the crime becomes public record and the employee’s transgression will be discoverable by future employers performing background checks. A practice owner was able to recover approximately $6,000 when she informed the employee that she would report her transgressions to local law enforcement. The staff member assumed partial restitution would prevent the dentist from prosecuting her. She was wrong. The message to her and other staff was clear. By pursuing legal action, the dentist demonstrated she did not tolerate employee dishonesty.

Proceeds from embezzlement may be included in taxable income. Issue a 1099 to the embezzler. Communicate this to the employee who embezzled funds. If he or she makes remuneration in the same year, then the amount does not need to be included in taxable income. This could motivate the staff member to make restitution.

Preventing Embezzlement

The following list provides recommendations for practice owners to consider to avoid becoming an easy target for a dishonest employee:

  • Perform background checks. Entrusting your financial assets to an employee constitutes a reason for background check, including the receptionist who opens the mail and processes payments and checks. Have applicants complete an authorization to conduct criminal or background checks. Merely asking for permission may deter a prospective embezzler from joining your team.
  • Avoid autonomy. Autonomy over account functions provides opportunities to misappropriate funds. Limit (or do not allow) employee access to security codes for billing or accounting software. Learn about and oversee the financial processes of your business. Perform random financial audits. A practice owner’s role should be that of an active supervisor. Well-supervised employees are less likely to steal. Do not enable embezzlement to occur by allowing one person to control all of the practice’s financial dealings.
  • If you offer vacation, all employees must take it. Embezzlers work hard to cover up their trails. Illicit actions will likely surface when you require employees to be away from the practice for a week or two.
  • Require supporting documentation for every check you sign. Review supporting documentation to ensure the expenditure is justified.
  • Run an accounts payable history to review invoice numbers and amounts. Uncover trends by running an accounts payable history for vendors like dental product suppliers, equipment warranties and consultants. If the history shows a sequential order of invoice numbers, it indicates the practice is the only customer of a specific vendor, which is highly unusual and unlikely. This invoice pattern may reveal the establishment of a fictitious vendor by an employee.
  • Provide specific instructions or guidelines to your bank. Provide the bank with a list of your approved vendors. Moreover, advise your bank not to honor any checks without your approval. Provide the bank with a list of your employees. Request the bank mail statements to your home. Review each statement for appropriate account payable names.
  • Watch for an increase in patient refunds, adjustments, bad-debt write-offs, an unusual amount of accounts turned over to a collection agency and declines in the gross income or profitability of the practice. Discrepancies between accounts receivable records and patient statements should also be suspect. An increase in patient complaints may indicate fraudulent activity or a need to develop a policy clarifying account procedures with patients and staff. Review and respond to patients’ concerns personally.
  • Be proactive. Contact the TDIC Risk Management Advice Line at 800.733.0633. TDIC’s risk management analysts give advice relative to all areas of the dental practice, including employment matters. TDIC risk management analysts are not attorneys and cannot give legal advice; however, they may be able to refer you to an attorney.

This resource is a practical guide to help you reduce the risk of, recognize and recover from embezzlement affecting your practice. In developing this guide, TDIC researched and talked to experts in the field of dentistry, law and insurance claims. However, the ideas and suggestions contained in this guide represent experience and opinions of TDIC. There are no guarantees that any particular idea or suggestion will work in every situation. The ideas and suggestions contained in this guide are not legal opinion and should not be relied on as a substitute for legal advice. For legal advice specific to your practice, you must consult an attorney.

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