The Doctor’s Guide to Employee Embezzlement

Employee embezzlement is a pervasive problem in private practice healthcare. Fraud occurs in more than 50% of medical and dental practices.

The problem persists because of a lack of internal controls and managerial oversight.

Why do employees steal from your practice? What are some examples of fraud schemes? How much does the average perpetrator get away with? What are some steps I can take to prevent becoming a victim of embezzlement?

We’ll answer these questions and more in this comprehensive guide.

• What is employee embezzlement?
• Should I be concerned about employees stealing from my practice?
• The costs of embezzlement
• Why do employees steal from your practice?
• What are some examples of embezzlement?
• Recognize the warning signs of employee theft
• How to handle employee embezzlement
• Detecting employee embezzlement
• Preventing employee embezzlement
• The 5-Minute Fraud Buster
• Conclusion

What is employee embezzlement?

The United States Department of Justice defines embezzlement as:

“The fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come.”

In other words, embezzlement is employee theft. It’s when someone you have entrusted to handle your practice’s finances deliberately steal or misuse funds to benefit themselves.

Should I be concerned about employees stealing from my practice?

If you don’t believe this topic is relevant to you, think again. Fraud occurs in >50% of medical and dental practices.

That’s actually a conservative estimate. By one study conducted by the MGMA, 83% of practice managers were affiliated with a practice where employee theft had occurred. 

Unfortunately, many doctors are highly susceptible to employee embezzlement. Most privately owned practices operate with a small staff, deal with many cash transactions, and often lack proper internal checks-and-balances that would help prevent theft. It’s a recipe that’s ripe for easy embezzlement.

The Association of Certified Fraud Examiners (ACFE) explained the impact of fraud on small businesses this way in their Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse:

“Fraud can be especially devastating to small businesses. These organizations typically have fewer resources to both prevent and recover from a fraud, and they often require an increased level of trust in employees due to a lower ability to implement robust anti-fraud controls.”

Are you taking precautions to avoid the costs of employee embezzlement?

The costs of staff embezzlement

The financial cost of employee embezzlement can be extremely high. But it’s rarely due to a one time heist.

The median duration of a fraud scheme is 16 months. Some of the most damaging perpetrators skim relatively small amounts during that time; just enough to fly below the radar.

To fully grasp the magnitude of many employee embezzlement schemes, consider these statistics from the ACFE:

As these statistics suggest, small, private businesses take a heavy financial toll from fraud. And the news gets even worse when you look at the healthcare sector separately.

According to The 2017 HISCOX Embezzlement Study: A report on white collar crime in America, the median annual loss for healthcare organizations due to employee embezzlement was $437,016 in 2016.

Surely the financial costs of embezzlement can potentially deliver a fatal blow to many practices. But if that weren’t enough, don’t forget to consider the emotional wounds inflicted. 

By definition, embezzlement is a crime committed by someone you trust. Imagine the longtime front desk employee who has been with you since the beginning. She started by answering phones and scheduling appointments, but over time she took over additional responsibilities, such as paying the bills and making bank deposits. 

When it becomes known that this employee you trusted all these years has been secretly misappropriating funds from your practice for months, your initial reaction may be anger, hurt, and a want to prosecute for revenge. But then that emotion fades to embarrassment, shame, and a reluctance to admit publicly that you’ve allowed embezzlement to occur. 

Stories of employee embezzlement always come with a trail of emotional hurt, both for the doctor and the affected staff members.

Why do employees steal from your practice?

Employees embezzle from your practice because they can – it’s a crime of opportunity.

It might start as an innocuous $20 theft from the petty cash drawer. Left unnoticed, that behavior continues and grows more sophisticated. Pretty soon the employee has evolved a full-fledged embezzlement scheme.

According to the 2018 Hiscox Embezzlement Study: An Insider’s View of Employee Theft, employee embezzlement occurs when greed meets opportunity. The average embezzler will have worked with the practice for 8 years, and their journey from innocent to criminal often looks something like this:

What are some examples of embezzlement?

The door to employee embezzlement is left wide open when doctors don’t take the issue seriously. Fraudulent schemes vary in complexity, but all can be equally damaging.

Here are the 7 most common techniques embezzlers use according to Hiscox:

Healthcare embezzlement cases happen far too often. If you are curious about how these schemes are carried out, it’s not hard to find a few cases online.

Here are just a handful of headlines from the past year that I dug up in a quick 15-minute Google search…

This case happened in our own backyard. Rhonda Lee Wilson was an office manager for a father-daughter practice in Holland, Michigan. She embezzled approximately $100,000 over a time period of 7 years.

“Out of the woodwork, people are calling, saying, ‘This happened to us as well,’” Dr. George said. “The reason we prosecuted is because we had friends, they didn’t prosecute, and (perpetrators) went on and embezzled elsewhere.”

Ellen Chidester worked as a dental office manager for 25 years. She had complete access to company credit cards, finances, and payroll. With complete trust from the doctor, she stole more than $65,000.

“I trusted this lady so much that I never looked at the credit card statements,” Dr. Pilgrim said. “She took care of me like, basically like a mother.”

Robin Bernazzani wrote checks to herself by using a signature stamp or forging the doctor’s signature. She also used the company credit card to pay for personal bills or online shopping. She lied for years to the tune of half a million dollars. 

“In her remarks, Bernazzani fought through tears to express remorse and admit responsibility for stealing from the dentist office. She recognized the damage done to the people she once worked for, both financially and emotionally.”

For seven years, Ciera Garvin skimmed cash co-payments from patients and altered her hours on her way to embezzle $153,000. 

“Fraud detectives said they believe it’s a growing problem and have arrested at least five office managers from doctors’ offices for embezzlement over the past few years.”

Case study from the American Dental Association

Finally, here’s a case study that was taken from the ADA’s report on Protecting Your Dental Office from Fraud & Embezzlement. 

If you’re interested in even more information regarding employee embezzlement, I highly suggest you check out this resource. It is filled with great examples of how practices become victims of theft and how to prevent it from happening to you.

Reading employee embezzlement stories in the news, or case studies like the one provided above by the ADA, can be a sobering education. 

Would you be able to recognize the signs of potential theft in your practice?

Recognize the warning signs of employee theft

How do you detect if an employee is engaged in fraudulent activity? You’ll need a paper trail of hard evidence to prosecute, but there is some behavior that could be an early warning sign.

Here are the ACFE’s top 6 red-flag behaviors and characteristics for identifying employees who are at risk for engaging in fraudulent activity.

1. Living beyond means: An employee suddenly exhibits or flaunts unusual signs of wealth.
2. Financial distress: Overdue bills and late loan payments can become a strong motive to steal.
3. Unusually close association with vendor/customer: For a healthcare practice, this could be someone who has access to patient records and ability to make changes in the practice management system.
4. Unwilling to share duties: An embezzler can only get away with it if they’re in control.
5. Divorce/family problems: Additional stress outside of work can sometimes instigate dishonest behavior.
6. “Wheeler-dealer” attitude: Someone who is an egotistical risk-taker and is comfortable breaking the rules.

Below is the complete list of red-flag behaviors with the frequency in which the perpetrator exhibited them.

To be clear, just because an employee demonstrates any of these behaviors, does not indicate that they are engaged in an embezzlement scheme. They are simply early warning signs to be aware of. 

So what are you supposed to do if you notice one or more of the aforementioned behaviors and grow suspicious of an employee?

How to handle employee embezzlement

First off, you should NOT confront them with bold accusations. This should be an obvious point, but your employees are innocent until proven guilty. None of the above behaviors are proof of embezzlement. Do nothing immediately that would jeopardize the daily operations of your practice or the trust you share with your staff. 

You might think to call the police. But that’s actually one of the last calls you make. With only suspicion and lacking hard evidence, law enforcement is unlikely to take much action.

The best thing to do is start by backing up relevant electronic data and make photocopies of key paperwork. Gather evidence in a safe place to prevent it from vanishing before an investigation can be completed.

Next, I would suggest contacting your Certified Healthcare Business Consultant. Don’t try to gather evidence or conduct interviews on your own. Your best course of action is to remove yourself emotionally from the situation and lean on professional help.

Your healthcare business consultant will advise you through the process of seeking the help of an attorney or Certified Fraud Examiner. Professionals who are specialists in this area will collect paper and electronic records, audit financial statements, interview your employees, and do everything necessary to either prove or disprove fraudulent activity.

Detecting employee embezzlement

Conclusions from case studies provided by the ADA list the following ways theft was discovered:

• The doctor was alone in the office and received a phone call about in irregularity – an extremely common scenario.
• The embezzler was out of the office (or away from the desk). Another employee dealt with a patient complaint or irregularity. 
• The accountant or auditor noticed irregularities.
• After termination, the embezzlement became obvious as soon as someone else handled the accounts.
• The doctor was turned down for a credit card because of unpaid debt (accounts had been opened without the doctor’s knowledge). 
• The practice was sold and the new doctor noticed irregularities. 

As you can see from the examples above, many instances of employee embezzlement are discovered when someone else, either the doctor or another employee, get involved in the work that the fraudster normally handles alone.

This speaks to the importance of cross-training employees, segregating duties,  and having checks and balances in your practice. When one employee has too much control over the finances with no oversight, they have the opportunity that is needed and the door to embezzlement is left wide open.

Now let’s talk about ways you can limit the risk of embezzlement at your practice.

Preventing employee embezzlement

As the common adage goes, “An ounce of prevention is worth a pound of cure.” This is certainly true in the context of employee embezzlement.

Let’s explore some internal controls you can implement to reduce the opportunities of theft in your practice.

Hiring Best Practices

When you hire a new employee, do you get references? How about a background check?

Utilizing hiring best-practices is your first line of defense against dishonest employees.

While it is not the only and all-inclusive resource, every healthcare practice should be checking new hires to see if they are on the OIG Exclusion List. 

The U.S. Department of Health & Human Services maintains this list of healthcare providers and staff who are excluded from participating in Medicare, Medicaid, and all other federal healthcare programs.  

An employee can end up on the OIG Exclusion List for numerous reasons, including:

• Misdemeanor convictions related to fraud or obstruction of an investigation or audit.
• Conviction of Medicare or Medicaid fraud.
• Felony convictions for other healthcare-related fraud, theft, or other financial misconduct.

Segregate Duties

No single individual should be responsible for receiving, depositing, recording, and reconciling the practice receipts. 

Similarly, no one person should be responsible for authorizing payments, writing checks, and reconciling the bank statement.

As we’ve already seen, employee embezzlement is most common when a single employee has a lot of responsibility with little managerial oversight. You can introduce a simple, yet effective, system of checks-and-balances by simply redistributing financial duties among multiple staff members.

Credit Cards

Company credit cards can be convenient, but they are an extremely popular tool for embezzlement. The two most common forms of credit card fraud are:

1. Personal charges not related to business expenses, such as gas, meals, groceries, clothing, and everything else you can imagine.
2. Double dipping by using the company credit card to make a purchase and then submitting the expense for cash reimbursement.

Credit card theft often goes undetected. For this reason, make sure employees have a legitimate and real business need before they receive access to a company credit card.  

It is much safer to have employees use their own personal card and then submit receipts for reimbursement from the practice. 

But if you must issue a company credit card, consider implementing the following controls:

• Limit the number of credit cards available and make sure all authorized users have their own unique card. 
• Collect and cancel employee cards when they leave your practice.
• Review the electronic copy of the credit card statements yourself, or have them delivered unopened to the person responsible for reconciling the charges made to the account.
• Insist on original receipts for all transactions and compare these to the credit card statement.
• Compare expense reimbursement claims to credit card charges.
• Ask questions and let your employees know that you are watching credit card purchases.
• Require that the account be reconciled and that all transactions are recorded in detail into your accounting records.

Lastly, it may be prudent to keep an approved vendor list for your supply purchases. It will be easier to quickly review statements if you don’t allow payments to vendors that are not on the list.

Cash and Checks

Fraudulently endorsing checks and posting adjustments to the patient’s account is a common scheme. To prevent this type of illegal behavior, and other schemes like it, consider these internal controls for handling checks coming into and going out of the practice.

For patient payments coming into the practice:

1. Have your receptionist stamp the checks “For Deposit Only” and either make a copy of the check or create a ledger that details the name of the patient, check number, amount paid and date.
2. Reconcile daily deposits with your Practice Management Reports.
3. Checks should be posted into your practice management system on a timely basis in order to reconcile efficiently.

For disbursements and payables:

1. No signature stamps should be allowed – no debate! All checks written for accounts payable must be presented to the doctor for signature with the invoice attached to the check. This includes the requirement to attach a computer account printout in the case of refund checks.
2. Keep a running total of checks signed and compare it to the bank statement in the reconciliation process.
3. Do not cash checks for employees out of cash from the daily deposit. Allowing such practice invites abuse.

You can discourage employees from mishandling payments and skimming bank deposits with some of the following internal controls:

• A “day sheet” should be produced from your practice management system and verified to the deposit at the end of each business day.
• A whole day deposit should be made into your business account each business day. This deposit should be made immediately after balancing the daily totals. 
• Use a night deposit box, if necessary. If you are able to deposit the money on the same day it is received, consider changing your “day” to run from the afternoon through the next morning and close your “day” at noon.
• A change fund should be maintained to make change for patients and a separate petty cash fund to pay for postage due and other incidental expenses. Require original receipts for the petty cash fund to be replenished. And, reconcile the Petty Cash!
• All employees with access to cash should be bonded and informed of the coverage. Insurance companies usually prosecute dishonest employees.

Work With Your Accountant

You need to understand that the scope of a typical accounting engagement does not include specific services relating to the discovery and disclosure of employee fraud.  However, your accountant should help you in your quest to reduce the opportunities for fraud in your practice.   

It is incumbent upon the doctor to work alongside their accountant to implement the necessary internal controls to prevent and detect employee embezzlement.

Accounting software programs, like Quickbooks, can be easily manipulated. Involve your accountant on a monthly basis to implement locks within the system to reduce the ability to make changes to the data. 

Also, never allow your manager or bookkeeper to export financial reports and data into Excel as a substitute for software generated financial statements from your accountant. Doing so invites the opportunity to manipulate the numbers.

Furthermore, you should review the monthly financial statements produced by your accountant and look for irregular expenses. Compare spending from prior periods, or develop a budget that quickly flags expenses that are abnormal. 

And finally, do not allow accounting or financial records (including insurance claim forms) to be taken home by any of your employees for any reason. 

Fraudsters often utilize confidential company financial information to further their fraud scheme when “working” from home. For this reason, financial records should be kept in the office to prevent the unauthorized use of practice data.

Vacation Policy

Fraud perpetrators need to stay in control in order to maintain their cover-up. That’s why a common behavior is to work long hours and never take an extended vacation. 

I once heard of an employee who would schedule their vacations during the same week as one of their other colleagues. When the date approached, and the doctor worried about how they would manage the office with two key employees on vacation, the fraudster would volunteer to cancel her trip.

This seemingly noble, “self-sacrificing” behavior was just a clever way for the fraudster to stay at the office and continue orchestrating their scheme. 

For this reason, you should mandate a one-week consecutive vacation policy. Forcing each employee to leave the office for a week can deter attempts and often exposes any suspicious activity.

Fraud Hotline

Tips are the #1 fraud detection method, accounting for 40% of cases being discovered. Over half of those tips came from a fellow employee of the perpetrator.

Fraud hotlines work. If embezzlement is occurring in your practice, chances are good that one of your other employees know about it. 

A simple fraud hotline is an extremely effective way to deter and detect employee embezzlement in your practice. 

When the ACFE studied hotline and reporting mechanisms, they found that fraud losses were 50% smaller at organizations with hotlines than those without.

Fraud hotlines are simple to implement, even for small physician and dental offices. You can do it yourself with a simple suggestion box, or get help from a third-party provider, like Fraud Hotline, Lighthouse, or Answernet. 

The service is relatively inexpensive with costs ranging from $500 – $1,000 per year depending on the provider and number of employees.

The 5-Minute Fraud Buster

We developed a simple 5-minute fraud buster checklist to help you identify if there are areas to improve the internal controls in your practice. 

Download the checklist and print it out. Bring it to your next staff meeting.

Use it as a tool to perform a self-audit with your team. 

Are you following all of the recommended policies? Is there something on the checklist that you don’t do today, but would be easy to implement tomorrow?

Conclusion

Employee embezzlement is far too common in healthcare practices than it should be. Don’t be a victim. There are simple, proactive measures you can take to protect yourself from dishonest perpetrators.

Conduct a  fraud audit every 3 years, and work with your certified healthcare business consultant to help identify opportunities to strengthen your internal controls.