• Dave

Embezzlement & A Proactive Defense

Updated: Jan 11

You’ve likely heard the statistics before. On average, 4 in 10 dentists will be embezzled from at some point in their career. The average loss is $104,500, and on average it goes on for over two years before being discovered. Discovery of embezzlement is often quite difficult, especially as it can be initiated by trusted employees, financial advisors, and even family members!

The Fraud Triangle

It can be helpful to consider the “Fraud Triangle”, which consists of 3 points that can explain how trusted individuals end up committing embezzlement. The triangle’s points are (1) Pressure, (2) Opportunity, and (3) Rationalization.

An individual may have pressure in the form of a known or unknown financial hardship at home. Perhaps the individual is going through a costly divorce, has growing medical bills, is subject to wage garnishment, or has a spouse who recently lost their job.

The next step is step is when the same individual has the opportunity to commit embezzlement. This typically happens when someone has the ability to use their position to steal, knowing that they have a low risk of discovery.

Lastly, an individual commits the fraud when there’s rationalization about what they’re doing. Most individuals who embezzle don’t see themselves as criminals. Perhaps they’re just skimming a little to compensate for what they view as a low pay rate.

Signs of Potential Embezzlement

Some owners suspect embezzlement when there are noticeable changes to the financial statements. Often times there may be an unexpected drop in practice income. Other times overhead expense ratios are significantly higher than professional averages.

Sometimes the embezzlement happens in the disconnect between your practice management software (e.g. Dentrix) and your company’s actual books (e.g. QuickBooks). There are many tricks that can be implemented by someone with full access to your Accounts Receivable database. When reviewing your production adjustments (a.k.a. “write-offs”) on patient accounts, have you noticed an excessive amount beyond what you’d expect? Have patients complained about billing errors--either double-billing or failure to properly apply the payments they’ve made?

The signs may also come from the behavior of the individual committing the fraud. You may observe a sudden change in an employee’s lifestyle, one that doesn’t accurately match their household income level. Is an employee driving a super expensive car, or constantly buying pricey clothing, jewelry, or accessories? It could be embezzlement, or it might just be someone living off of credit cards.

Another sign is an employee who is extremely controlling of their workspace, or someone who fights to protect their job responsibilities, especially with respect to financial records. You might experience an employee who refuses to cross-train another employee on their bookkeeping or billing activities, or an employee who adamantly resists changes to your computer or accounting systems. Sometimes an employee constantly works overtime without sufficient reason. You may not complain because they don’t request pay for the extra time, but perhaps their motivation might be just to be in the office alone.

One other potential avenue for embezzlement is relating to your vendors. An individual who has access to your Accounts Payable database might be able to delay or re-route payments to your vendors. Have your supply vendors complained about slow payments? You might also observe an unusually-friendly relationship between your vendors and the employee who handles the ordering. It’s possible that there may be a “kickback” arrangement that indirectly steals from you.

Proactive Measures & Best Practices

The first thing you can always do is background check your employees before beginning employment. Similarly, you should do the same beginning a relationship with any financial advisor that will have access to your assets. At a minimum, check with past employers when hiring a new employee, and ask for client referrals when hiring a new financial advisor.

Segregation of Duties

An important defense in combating embezzlement is segregation of duties, which is the concept that a single individual should not be entrusted with more than one of the financial areas that include authorization, custody, and record keeping. Authorization is the ability to sign checks or otherwise issue payments. Custody is access to and control of bank accounts, physical access to checks, and edit access to the office financial management system. Record keeping is the ability to make entries into an accounting system.

The concept of segregating duties is that an individual might be able to do something (e.g. sign a check), but they shouldn’t have physical access (e.g. to blank checks) or the ability to make entries in the accounting software (e.g. to cover their tracks if they wrote a check to themselves).

Segregation of duties is much easier to implement in a larger office environment, and can rarely be fully implemented in a smaller dental office. Additionally, segregation of duties fails whenever there is collusion with other individuals.