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Dental practice fraud: Beyond the red flags

June 26, 2018
When you suspect embezzlement in your dental practice, it's good to know the red flags of fraud. However, sometimes those flags can be red herrings.

You do not need in-depth knowledge of employee embezzlement to have heard of the common "red flags" that indicate that an embezzlement may be taking place. It is important, however, to understand that while red flags may be indicative of fraud, they may also be indicative of nothing more than good—or bad—luck. Let’s look at three of the most common red flags.

Red flag No. 1: Living beyond means

The first and most often occurring red flag in the report is living beyond one’s means. This was also the one most present in the 2018 report—as well as the prior five reports. The indicator is evidence of wealth that seems to exceed earnings. Large homes, expensive vehicles and extravagant travels can be such evidence.

You know exactly how much your employees earn, but you most likely do not know what else may be included in their "means." Other sources of wealth can be spouse’s income, inheritance, or even a high tolerance for debt. It should also be noted that not everyone who steals spends on visible goods. The gamblers and addicts spend a lot—but not so visibly.

Red flag No. 2: Financial pressure

This is another one that may not be obvious. Financial difficulties come in many forms. For example, high medical expenses, educational expenses, and excessive debt require a high cash outflow. However, financial challenges do not necessarily lead an employee to steal from you.

Financial pressure is one of the three components of the fraud triangle (see "Behind the Fraud Triangle" for more information). Such financial pressures—those that could cause an otherwise honest person to steal—are most often "secret" pressures. These include gambling, drug use, affairs, or anything else deemed socially unacceptable. Because of this, financial pressure may be present, but you may not see it.

Red flag No. 3: Control issues

I find this one to be the most interesting. An employee who is stealing from you needs to have certain things in place to succeed. In addition to being able to accomplish the fraud, the thief must also be able to cover it up. A certain amount of control over functions and privacy is needed to avoid questions regarding activities. This can be accomplished by creating an atmosphere where coworkers want to spend as little time as possible with the embezzler.

Such an atmosphere existed in a case I worked on several years ago. The embezzler was described by coworkers as "constantly complaining," "always ready to bite your head off if you said the wrong thing," "rarely had anything positive to say," and "moody." These are hardly hallmarks of an inviting workplace. The embezzler's creation of this atmosphere ensured that her activities would not be observed. Coworkers would go to her, state their business, and leave.

While in this case the employee with the bad attitude was in fact stealing from her employer, I have known many employees with bad attitudes who were not. They are not thieves, they are just not happy people.

If you are seeing a red flag—or more than one as they are often seen—it is important to obtain more information to confirm your suspicions. Also, it is equally important to keep in mind that while red flags may be indicators of embezzlement, they are not proof. They may be totally irrelevant. This is when it is advisable to turn to a professional.

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Article updated regularly.