Understanding and preventing embezzlement in your practice

Embezzlement costs medical practices billions of dollars each year. In 2016, the U.S. healthcare industry ranked fourth behind information technology/telecom, manufacturing and retail in annual median loss per organization due to employee theft at $437,016.

The importance of protecting one’s practice from embezzlement can’t be overstated. In a July 17 MGMA Stat poll, 81% of healthcare leaders said that they take measures to prevent embezzlement in their organization.

What is embezzlement and how is it perpetrated?

The FBI defines embezzlement as “The unlawful misappropriation or misapplication by an offender to his/her own use or purpose of money, property, or some other thing of value entrusted to his/her care, custody, or control.”

Embezzlement is most often carried out by perpetrators in the form of funds theft and check fraud, but also includes such schemes as false billing, credit card fraud, merchandise/property theft, expense fraud, payroll fraud and/or loan fraud.

There are many reasons employees steal from practices, but as Debra Phairas, MBA, MGMA member, president, Practice & Liabilities Consultants, San Francisco, points out, poor management, especially lack of accounting control, often opens the door to embezzlement. If certain employees feel overworked, underpaid and/or underappreciated, they may be motivated to take what they feel they deserve from their employers.

“We have to learn to appreciate employees because that’s the justification or rationale that starts: ‘Well, my doctor’s all over my case and my manager is yelling at me, so therefore I’m going to get back at them by taking money or property,’” says Phairas.

Common types of embezzlement and fraud

• Funds theft: Practice’s cash or bank deposits are transferred to employee’s account
• Check fraud: Employee alters or forges checks to make them payable to him/her
• False billing: Employee falsifies or inflates vendor invoices or creates fake vendors
• Credit card fraud: Employee uses practice credit card to make personal purchases or gets credit card company to supply unauthorized cards
• Merchandise/property theft: Employee steals practice’s property or merchandise
• Expense fraud: Employee creates fake business expenses, which are then reimbursed by practice
• Payroll fraud: Employee pays fictional or terminated employees and then channels funds to his/her account
• Loan fraud: Employee acquires a loan in practice’s name and transfers funds to his/her account

What are the signs of embezzlement?

According to the Association of Certified Fraud Examiners’ (ACFE) Report to the Nations: 2018 Global Study on Occupational Fraud and Abuse, the top five behavioral red flags displayed by employees who commit fraud are:

• Living beyond their means (41%)
• Financial difficulties (29%)
• Unusually close relationship with customers/vendors (20%)
• Not willing to share job duties (15%)
• Divorce or family issues (14%)

In addition to these red flags, practices should keep an eye out for changes in employee behavior. For example, has the employee become unusually loyal, demonstrated changes in lifestyle and/or become controlling regarding finances?

• Unusually loyal: Employees who go beyond the duties of their job, whether that entails frequently working overtime, bringing accounting work home, not taking vacation or regularly arriving early/staying late.
• Changes in lifestyle: Employees who show signs of emotional stress due to personal financial issues, including those related to divorce, drugs/alcohol or gambling, or because a spouse has been laid off/is unemployed. As mentioned, they also could be living beyond their means; for example, they purchased an expensive home, car, clothes and/or jewelry. 
• Controlling with finances: Employees who want control over the practice’s finances. This can involve not wanting anyone else to review finances, making changes to the accounting system, not following accounting procedures, not reconciling statements or producing incomplete records.

As Phairas notes, physicians should be cognizant of how their staff perceives them. “Another thing I tell doctors is don’t flaunt your standard of living. Sometimes, especially in small practices, the practice manager starts to believe they are the work spouse and they think they are just as important and deserve to live the same way.” This may serve as motivation to steal from the practice if they feel as though they should have a similar lifestyle.

Tips for preventing embezzlement

By recognizing the types and signs of embezzlement, practices can be better prepared to mitigate or prevent it. However, practices should also have a plan of action to combat embezzlement. A good place to start is with accounting control. “No one person should ever have control over the entire transaction of cash,” says Phairas. “You should separate out duties as a double check … so there’s less likelihood of collusion.”

Similarly, it’s a good idea for one employee to prepare checks, while another, preferably the practice owner or managing partner, signs checks. Practices should also carry out unplanned audits without giving prior warning to employees.

“You compare the scheduled patients with the deposits, cash and credit cards at the front desk and see if they match,” says Phairas. To help with this, some medical billing software has a “missing encounter” feature that shows whether payment wasn’t collected from a patient who had an appointment. Phairas also recommends that practices monitor the level of copays to understand each month’s cash patterns.

An independent accountant also can be brought in to analyze the practice’s financial records, including bank statements, checks issued and received and accounts payable and receivable logs.

Besides establishing accounting controls, practices can focus on building a culture of trust to help curb employee embezzlement. As Phairas explains, practices should “schedule good morale and team-building activities, because it makes it a little harder to steal from your work family who makes work fun and a wonderful atmosphere.”

Planning such activities as parties and employee appreciation lunches and dinners, handing out performance bonuses, providing spa treatments and even offering consistent coaching and feedback can go a long way in making employees feel appreciated.

By paying employees fairly and offering them competitive benefits, such as health insurance and retirement savings plans, practices can demonstrate that they are invested in their employees, which may make them less prone to the feelings that have been associated with those who decide to steal. As Phairas states, “Make sure you are surveying area offices so that you know entry-level, mid-level and high-level wages so you can show that data to your employees.”

Prior to hiring someone, practices should take the time to screen candidates properly by conducting background and criminal checks. “Anyone who handles money, in some states you can do credit checks,” says Phairas. “If they are having lots and lots of financial problems, maybe you don’t want them handling money.” In addition, after hiring a candidate practices should screen for drugs because sometimes individuals will embezzle money to support their drug habit.

Another way to deter employees from stealing is by setting up video monitoring, particularly if the practice sells products. However, it’s important to note that it’s illegal to monitor areas where people expect to have a reasonable expectation of privacy, such as restrooms and lunchbreak rooms. As Phairas notes, you can’t violate an employee’s right to privacy: “You have to disclose that and state clearly that they are being monitored by video.” You are also required by law to ask them to sign a consent form.

Finally, practices may want to consider fidelity bond/employee dishonesty insurance to obtain reimbursement if employees embezzle funds or property. Unlike malpractice insurance, bond premiums are fairly stable and inexpensive.

There’s no surefire way for practices to prevent embezzlement, but by understanding how and why it can occur, being able to identify the signs and taking steps to prevent it, practices can gain peace of mind. 

Additional resources

Beyond surveying your practice’s competition, check out the 2018 MGMA DataDive Management and Staff Compensation, which offers compensation data for nearly 140,000 management and staff from 2,658 groups.