Dentists often ask, “How can I prevent embezzlement in my practice?” This is because it is commonly known that embezzlement occurs more often in dental practices than in many other industries. In fact, according to a publication by the American Dental Association, Protecting Your Dental Office from Fraud and Embezzlement, slightly more than 1 out of 10 dentists surveyed in 1996 reported known embezzlement by an employee in their practice. This, of course, doesn’t account for those that never became aware! Of those who reported embezzlement, the median loss was nearly $10,000.
It is certainly wise to have a good screening process when making hiring decisions for your practice. But that alone won’t prevent fraud. Whether you are concerned about starting a new practice with sound internal controls or cleaning up sloppy policies in place at your current practice, it is important to first understand why this fraud occurs and how to identify a likely culprit. Part 1 of this article will identify the common traits of an embezzler and the fraud triangle itself.
It is important to understand the profile of embezzlers, as they tend to share some common traits. The list below, while not exhaustive, includes some of these traits:
- Best employee. Maybe surprisingly, the typical embezzler is often your best employee. Embezzlers must build unquestioned trust with their targets. They are often the office manager of the practice. They work hard to build an emotional bond with you to distract you from their actions. They will often promote their efficiencies and their strengths. They work hard, take on as many roles as possible, and take as much off your work plate as possible. They want to become the employee you cannot imagine losing. As you get busier with patients and growth, it becomes convenient to delegate as much as possible and turn a blind eye.
- Intimate involvement with all tasks related to money. Typical embezzlers will pay bills, make deposits, make adjustments to patient accounts, check the mail, handle bookkeeping duties, process payroll, process credit card refunds, etc. In order to execute financial fraud, they have to be able to manage most, if not all, aspects of the flow of money to cover their trails.
- Territorial behavior around other employees. Embezzlers will often be territorial to protect the flow of deception. Other staff members can be potential threats to discovery. Embezzlers may even go as far as sabotaging other good employees in an effort to get them terminated and out of the practice. They can use their “unquestioned trust” to influence you to eliminate these threats. For the same reasons, they might also be territorial to your outside advisors, such as attorneys, CPAs, consultants and financial advisors.
- Never takes vacation. Embezzlers have to meticulously maintain their trail of deception and manage the cover-up. This can be exhausting work. Any extended time away from the office will lead to a different staff member, or even you, assuming one of their roles in the office. This increases the chance for exposure of fraud. Therefore, embezzlers will minimize their time away from the office whenever possible. Dentists often confuse this action with loyalty and work ethic, which further solidifies the “unquestioned trust.”
- Private office. A private office allows embezzlers to protect their work area and hide activity much more easily, especially computer activity.
- Works odd hours. Embezzlers tend to work hours when you are not in the office. This can be early mornings, late nights, or days when you don’t see patients. Much like with a private office, embezzlers use this time to execute their frauds without concern of someone noticing.
- Noticeable financial pressure. Most embezzlers have financial pressures at home. Many times these pressures are even known to their supervisors, such as being a single parent or going through a recent divorce. Similarly, embezzlers often appear to live beyond their perceived means. It may be hidden through a perception that a spouse makes a lot of money or they have a significant inheritance.
Beyond the profile of an embezzler, it is also important to understand the three main factors that typically cause someone to commit fraud. This is known as the fraud triangle.
- Financial Pressure. As described in the embezzler profile, it is not uncommon for an embezzler to have financial pressure at home. This serves as the motivation for the crime. It can be in the form of uncontrolled spending habits, addiction, a family member losing a job, family tragedy, or similar circumstance.
- Justification. Not all embezzlers are narcissistic sociopaths. They can be good people with significant financial pressures that find initial, reasonable justification for their actions. A single parent is in jeopardy of eviction, so stealing is justified as protecting her children. Often there is even a plan to repay the embezzled funds. But when financial pressures don’t ease, the pattern continues and spirals into habitual theft through justification.
- Opportunity. The third facet is that there must be opportunity to commit fraud. Employees are given this opportunity when they are allowed to manage all practice tasks related to money. In addition, a lack of internal controls to protect your practice provides significant opportunity.
Not all embezzlers fit the common profile, and not all embezzlement is explained through the fraud triangle. Realize that there are career embezzlers out there that know to avoid the more obvious signs and simply jump from one con to the next. But the risk for embezzlement in your practice can be greatly reduced by implementing smart internal controls, segregating duties and pre-screening new hires. In Part 2 of this article, we will suggest specific steps to take.