Embezzlement: It Can Happen in Your Practice!

 

 

 

 

Three out of five dentists will be embezzlement victims

Dr. Jones loved her practice, enjoyed her patients, and felt very lucky to go to work every day and do what she loved to do. She also was well aware that a major reason her work was so enjoyable was because her office manager handled the financial side of the practice effectively and efficiently. She could enjoy doing what she did best — helping patients improve their oral health — while not worrying about the financial details. In fact, she frequently bragged to other dentists about how lucky she was to find such a hard-working office manager. She was saying that right up until the day she found out the office manager had embezzled $150,000 from her practice!

How could this happen? How could she be so wrong about somebody she thought she knew so well? The surprising answer is that her story is not unique; embezzlement in the dental office happens far more frequently than most dentists realize. But don’t take my word for it. Join me in a conversation with David Harris, CEO of Prosperident — the only company in North America specializing in dental embezzlement prevention and detection— who has been investigating embezzlement in dental offices for more than two decades. You may be surprised at who is likely to embezzle from your practice and what it really takes to minimize your risk of being a victim.

Anderson: With the poor economy, are you seeing an increase in dental office embezzlement?

Harris: Economic conditions are a factor in the prevalence of embezzlement, but there are probably more significant causes.

We see two kinds of thieves in dental offices. We characterize them as either “dishonest” or “desperate.” The “dishonest” steal for reasons not directly related to economic need. Sometimes, they feel their dentist-employer undercompensates them, and others covet things that would normally be unaffordable. We have seen embezzled funds used to pay for luxury automobiles, boats, personal trainers, and expensive clothing. 

The “desperate” thieves are in a different situation. Events have made it so that their basic financial needs are threatened. While a spouse losing his or her job or a suddenly increasing mortgage payment can do this, many other possible scenarios exist — i.e., divorce, a gambling or substance abuse problem, or a family health or legal crisis are some of the circumstances we see that are unrelated to the economy. 

We did see an increase in work from some areas that were hardest hit by the economic crash, but I think economic meltdown is probably the major cause for less than 10% of the embezzlements we investigate.

Anderson: Does the size of the office make any difference when it comes to embezzlement, or do you see it as much in a small office with a few employees as you do in a large office with many employees?

Harris: I don’t think size is a factor.

There are three major misconceptions that my team and I encounter on a daily basis. One is that certain types of practices are more or less prone to embezzlement than others. Embezzlement has a lot to do with the thief's situation and beliefs, and very little to do with the dentist’s. 

We frequently encounter dentists who believe that urban practices are more vulnerable than rural ones (or vice versa), or that general dentists are more prone than specialists, that larger offices are less vulnerable than solo practices, or that practices that do not accept assignment of insurance are safer. The premises on which these theories are based are flawed — the genesis of embezzlement is an employee deciding that he or she has a higher right to practice funds than the dentist. This decision is purely an internal one and has nothing to do with the situation of the office.

Another misconception is that deterrence is a powerful factor … that convincing employees that they will be caught if they embezzle will stop them from trying. I think we can draw inference about the ineffectiveness of deterrence by considering the large number of attorneys who misappropriate client funds held in trust. These are educated embezzlers, who know that this conduct is wrong, that the punishment is severe, and that being caught is a virtual certainty … and yet it still happens. If embezzlement is frequent even in this environment of strong deterrence, what should we expect in a dental office, where conditions for embezzlement are far more favorable?

New York Times reporter Diana Henriques extensively interviewed Bernard Madoff, arguably the most successful fraudster ever. (She received a special award from the Association of Certified Fraud Examiners for her articles about Mr. Madoff.) Her comment about deterrence is enlightening:

“The most important lesson that the Madoff case teaches anti-fraud professionals is that no deterrence program, however elaborate, will work if it can be switched off for the people we trust most.”[1]

The third misconception, which is perpetuated in virtually every article written on dental embezzlement, is that the key to minimizing embezzlement is to employ strong controls, checks and balances. While controls serve a number of useful purposes, I don’t agree that preventing embezzlement is one of them.

I have said publicly that a thief of average skill can successfully embezzle from a well-run office for a period of a year or more, and a skilled thief can continue undetected for much longer. Because dental offices have many possible embezzlement pathways, the notion that blocking a few of them will stop thieves is fallacious. Embezzlers are driven by strong emotions, and they will simply find a way to bypass controls.

Many dentists and consultants believe larger practices have stronger controls and are therefore less susceptible to embezzlement. I question whether the control systems are in fact stronger, and whether it would matter if they were. The other consideration overlooked by these theorists is that group practices tend to have another “layer” of financial activity (frequent intramural transactions between owners). This gives embezzlers extra opportunities not found in solo practices, and we have seen these exploited frequently.”

Anderson: What's the most unusual case of dental office embezzlement you've ever seen?

Harris: As a matter of corporate policy, we don’t discuss embezzlement methodologies in public venues. What I can say is that about once a month, one of my investigators uncovers a new technique or variant. Part of me can’t help but be impressed by the creativity and planning that some thieves demonstrate. I often wonder what these people could accomplish if they applied their considerable talents to an honest endeavor.

Anderson: What's the most common form of dental office embezzlement?

Harris: While I will again avoid discussing specific methodologies, I can say that “skimming” (theft of receipts) is far more prevalent than “fraudulent disbursements.” The main reason for this pattern is that far more employees have opportunities to skim than make an improper disbursement.

My other observation is that the majority of stealing does not involve cash, whereas when I started in this business more than 20 years ago, theft of cash predominated. I think changes in how banks operate have facilitated this shift.

Anderson: What's the perfect dental office setup for embezzlement?

Harris: Published statistics (and our own research) suggest that three in five dentists will be embezzlement victims at some point. By that yardstick, you could infer that the majority of dental offices are “perfect” candidates for embezzlement.

Because every dental office has abundant opportunities for embezzlers, once an employee decides that stealing from his or her employer will solve their financial issues, that person will successfully embezzle. The real question is how long the embezzler will be able to continue undetected. Here is where well-run offices have an edge —usually they will recognize when embezzlement happens far more quickly than a disorganized office.

Anderson: If you were profiling the type of employee who might commit dental office embezzlement, what would that profile include?

Harris: The first observation I will make is that many of the embezzlers we see possess what I refer to as “excess intelligence” — they are far smarter than they need to be to perform their jobs.

Embezzlers are also “take charge” people — they like to be in control and are usually “responsibility seekers.” They will readily accept extra workloads and responsibilities. They display a strong work ethic, seldom miss time, and regularly stay late or arrive early.

I describe many of the thieves as being “territorial” — by this I mean that they jealously guard their responsibilities and refuse to delegate or cross-train.

Many embezzlers practice what I call “cocooning,” which is attempting to isolate the dentist from communicating with patients. Many embezzlers also resist hiring outside consultants.

Some bully other staff members. If their position permits, they often bestow rewards on a select few other employees. For example, if the thief has payroll authority, it is common for one or two other staff members to be paid for hours beyond what they work. (This doesn’t necessarily mean that the recipients are complicit in the embezzlement, but such rewards tend to diminish the propensity for the recipients to report suspicions about their benefactor.)

One final attribute is that a large number of embezzlers are long-service employees (normally eight or more years at the practice) and have clean employment histories, or have come highly recommended by previous employers. I think the thieves had no intent to embezzle when they were hired, and that sometime between then and now, some adverse event changed this.

Anderson: What's the biggest case of dental office embezzlement that you can recall? How long did it go on before it was exposed?

Harris: We’ve seen several embezzlements for more than $1 million! In these cases, embezzlement was undetected for five years or longer. The biggest I have ever seen was just under $2 million.

While these amounts seem impossibly large, most embezzlement involves misappropriation of between 3% and 7% of monthly revenue. In an office billing $100,000 monthly, embezzling more than $75,000 per year is possible, and many offices bring in several times that.

Anderson: What are the signs dentists should look for to detect embezzlement?

Harris: Again, this is an area where I disagree with many of the generalist consultants who claim embezzlement expertise. Many of them advocate that the dentist check a (typically long) list of things daily and monthly. I recently made the following statement to a colleague, which nicely captures my feelings about this approach:

“The frequently advocated concept of controlling the fraud epidemic facing dentistry by encouraging dentists to become untrained, poorly equipped, unpaid auditors is unfounded, unproven, and unlikely to be implemented by dentists.”

The good news for your readers is that there is actually a solution that is both more effective and far less time-consuming. Notwithstanding the many options available to embezzlers for how they can steal, their behavior when they do steal is remarkably consistent. Any knowledgeable dentist who correctly interprets the telltale clues is in an excellent position to spot embezzlement very quickly.

A good place to start is to monitor some of the things I described in my response to your question about embezzler profiles. For a dentist looking for a more systematic approach, I will mention that our most-requested resource is our scored Fraud Risk Assessment Questionnaire. I would be happy to share this with any dentist who requests it at fraudnews@prosperident.com.”

One other observation I will make is that once they become suspicious, some dentists consider embezzlement investigation to be a do-it-yourself project — it isn’t! Unfortunately, I have seen many cases where dentist-victims or well-intentioned advisors have made the victim’s situation far worse through their clumsiness. Mishandling an investigation may create outcomes ranging from lawsuits against the dentist to destruction of electronic records to, in one extreme case, the dentist’s office being burned in an attempt to hide evidence. 

Anderson: What preventive steps can dentists take to make it difficult for embezzlement to occur?

Harris: While I know that this statement is controversial, I don’t think “preventing” embezzlement is possible or that “making it difficult” will work. However, conducting behavioral assessments properly and regularly normally allows a dentist to detect embezzlement far more quickly.

Anderson: Is embezzlement taking any different forms in this era of computerized office systems?

Harris: When I started in this business in 1989, virtually every dentist used a manual “pegboard” system to track production, payments, and receivables. Embezzlement happened with about the same frequency as it does today, but the methodologies were crude and the amounts were modest by today’s standards, even considering inflation. (A $35,000 theft was a large one in those days.) In the pre-computerization era, most thefts involved stealing cash, and most thieves were caught relatively quickly.

In the mid 1990s, as practices moved from pegboard systems to electronic ones, we started to notice that the average amount stolen was climbing. Many dentists had little knowledge about using their computer systems (a tradition that continues to this day). The dependence on staff to provide practice information to the doctor allowed larcenous staff members to manipulate or filter the information they were providing. In turn, this allowed them to steal more and to prolong the period before discovery.

While the practice-management software available today has improved dramatically over the first-generation software — and despite a growing comfort on the part of dentists with technology in general — using staff as intermediaries between dentists and practice information doesn’t show any sign of ending.

I should mention the emergence in the past year of software specifically designed to detect and report activities consistent with embezzlement. We consider this to be a very promising development, and look forward to seeing these programs develop and improve over time.

Anderson: Any final advice or information you would like to share with our readers?

Harris: I’ll leave your readers with three actions they can take to minimize the impact of embezzlement on them:

  1. Take frequent stock of employee behaviors that are consistent with embezzlement.  
  2. Respond decisively when these signs appear.
  3. Obtain expert assistance if they find embezzlement or have concerns that it is happening.

[1]“The Wizard of Lies,” Carozza, Dick, CFE, Fraud Magazine, September/October 2012

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