In one of my study club presentations, I begin with this question: "How is employee fraud like gingivitis?" As it turns out, there is more than one answer. Both are costly and both can progress over time. The answer that was my focus, however, was "Both are preventable."
No procedures can guarantee that you will never become a victim of employee fraud. There are, however, things you need to know to minimize the chances of its occurrence. As the saying goes, "Knowledge is power." I believe that it is knowledge that leads to appropriate action that constitutes real power.
The most familiar model that is used to explain the components of employee fraud is the fraud triangle, the result of the research of Donald Cressey, PhD, a sociologist and criminologist. According to his model, there are three elements which, when present, can set the stage for fraudulent activity. The first is a secret need for cash or other convertible assets. The secret is generally because it is needed for a socially unacceptable purpose such as a gambling or drug addiction, an affair, or even a lifestyle beyond one's means. The "secret" makes other forms of obtaining the funds unavailable.
The second component is justification. The story that the fraudster tells him- or herself (and genuinely believes) separates the fraudster's self-image from the activity. He sees himself as a good person who has become a victim of circumstances beyond his control.
The third component is opportunity. This is the area that you can control-this is your power. If the opportunity does not exist, an employee who has the "justified need" will have to go elsewhere.
Eliminating the opportunity involves having a general knowledge of your systems, your staff, and your software.
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Know the red flags
- Living beyond one's apparent means
- Appears to be the ideal employee; first to arrive and last to leave
- May work when the office is normally closed (evenings or days)
- Maintains excessive control over his or her work function
- Rarely takes time off
- Has high personal debt
- Has addictive personality; priorities may seem abnormal
- Appears to feel underpaid or underappreciated
- Has undue family or peer pressure
- Does not work well with others; intimidates or bullies others so that interaction is minimal
Understanding your systems involves knowing who performs what functions. It is important that one person not handle too many functions. If such is permitted, an employee can have the ability to not only create the fraud, but to control the cover up. Because smaller offices have limited staff, the functions may not be allocated properly to ensure that one employee does not control a function from beginning to end. This may be something that you want to discuss with your accountant or practice management team.
How much do you know about the people who have access to your practice's patients and data? These same people can make or break your retirement. Do you include background checks as part of your hiring procedures? Note that neither a Google search nor Facebook activity search constitute background checks. While these may be beneficial, I believe they do not qualify as proper due diligence.
Assuming that you have a clean background check, be aware that things change. Dr. Cressey's research focused on employees who accepted employment in good faith (i.e., they had never engaged in fraudulent activity) and then later engaged in it. The employee's change in circumstances is almost always accompanied by changes in behavior (see "Know the red flags"). Note that while these may be indicators of fraudulent activity, they may also represent normal activity for some.
Both your dental and accounting software have reporting features that can provide you with a great deal of information. Some of these reports show the activity of the practice as well as that of the user. Both systems should have different levels of access. It is important to allow only the access needed for the employee to perform his or her function. Going into detail here may provide the wrong people with the information needed to commit fraud. Please contact me directly if you would like to know more about reports and which ones you should monitor regularly.
Protecting your practice from employee fraud requires knowledge of many nonclinical areas. Just as important as knowing your systems, staff, and software is knowing yourself. If your passions do not include such nonclinical aspects, turn to someone you trust to manage these areas. This can mean training a spouse, engaging a practice management team, or ensuring that your accountant has the skills to help you understand the proper workload allocation and the reports needed for proper practice maintenance.
Editor's note: This article originally appeared in the January-February 2016 issue of Apex360.
Jean Patterson, CPA, CFE, has more than 25 years of tax advisory and management experience. She has worked with dentists and their practices since 1999. She earned a Certified Fraud Examiner designation in 2009 and today helps dentists understand the risk of fraud in their offices. She speaks to study clubs about areas of vulnerability and steps for prevention. She has been approved by the State of Indiana to offer dentists continuing education credit.
Ms. Patterson welcomes your questions and comments and can be reached at [email protected].