Catch them if you can: Don't let staff steal from your practice

Employees can't rob you blind if your eyes are open to the possibility of theft. Here's how to ensure that no one on your staff has sticky fingers, while also not alienating the innocent.

By Robert Kazel, amednews staff. Nov. 24, 2003.

To be able to trust your employees is priceless. To never be on the defensive against rare cases of dishonesty can be costly.

Blindly trusting workers who handle money or who carry out any financial-related task can trigger loss that may go undetected for many years. Cal Klausner, a CPA in Bethesda, Md., recalls a bookkeeper of a two-doctor ob-gyn clinic who embezzled money from the office in a scheme painfully simple in its execution.

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Every month, the longtime worker would take the practice's American Express bill and show it to one doctor, who would sign a check for payment. The bookkeeper would go to the second doctor with the same bill, get another check signed, and would use that check to pay her personal credit card bill. The card issuer was not suspicious that a worker's personal bills were being paid on a medical office's checks. The scam went on for years and cost the practice about $25,000.

"Each doctor wasn't aware of what the other one was doing," Klausner says.

Such instances of deceit and betrayal are not only hazardous to any practice's financial health. They can be deeply hurtful to doctors' sense of trust and to a practice's team spirit once they are exposed.

"She used to baby-sit [the doctors'] kids," Klausner says. "She was considered a member of the family." The long-running fraud ultimately was discovered while the employee was on vacation.

Embezzlement leaves a paper trail.

She didn't go to jail because the doctors decided not to pursue prosecution, which is common in such cases, Klausner says. Practices are often eager to put the past behind them when they find they have been duped, lacking the "resources or inclination" to try to regain the money or punish an errant employee, he says. Yet emotional scars can remain long after the employee is fired.

"Ninety-nine percent of the time when fraud of this type occurs, it's a deep personal shock to the doctor," Klausner says. "The comment I hear from the doctors is ... 'She was so nurturing and trustworthy and part of our personal lives.' "

Doctors can take heart knowing that if they instinctively feel that their staff wouldn't dream of stealing from them, their belief is probably on target.

But cases such as the one described do occur, and scams against doctors by their workers "run longer and take larger amounts of money than the average [corporate fraud]," says L. Burke Files, a private investigator in Phoenix who has many physician clients.

"Nationwide, compared with other businesses such as retail or manufacturing, [physician practices are] much more likely to be victim to fraud and deceit," he says.

When employees violate a doctor's trust, the transgressions can range from occasional theft of money out of the petty-cash drawer all the way to extravagant plots involving credit-card fraud, false billing, the creation of fake companies, identity theft and "ghost" payrolling. Fortunately, the more sophisticated and costly scams are exceptional. But sound loss prevention requires doctors to be continually vigilant that these activities might be happening.

The possibility of deception need not stir up paranoia among doctors. Doctors are far from helpless to place obstacles in the path of crime.

"Embezzlement is one of the easiest crimes to catch," says Mike Corwin, a private investigator in Albuquerque, N.M. "When someone's embezzling, there's always a paper trail. In time, the person will usually be caught."

Putting backgrounds in the foreground

Too often, doctors overlook the most essential protective measure for sorting out bad apples before they join the payroll: a thorough resume check during the hiring process.

"You have to do a background check on your potential employees and check their references," says Tom Hess, a health care attorney in Columbus, Ohio.

For employees who handle money or do the books, experts say there's also every reason to do a criminal background check, obtainable through state crime bureaus or private investigators.

"The prescreening is really about half the battle," Files says. "The No. 1 thing is to look [the applicant] dead in the eye and say a complete background check must be done by an investigator familiar with the medical community. Many won't go along and will leave."

Doctors might well consider looking first to prevent the least dramatic, day-to-day theft of funds from their offices. Sticky fingers in a cash drawer might not be on the mind of a busy doctor, but could become a significant and nearly imperceptible tax on income over the years.

"One rule is that most of the time, frauds start small and grow," Klausner says. "It's very abnormal that someone sits back and plans, 'I'm going to steal $100,000.' There's a couple of lunches out of petty cash. A co-pay is missing. There's a couple of [unauthorized uses of] credit cards. These things tend to start almost inadvertently."

A good way that practices can try to fight losses is to develop a tight reconciliation system between the office billing software and its general ledger accounting system.

This ongoing conversation between computer minds rarely occurs in the average doctor's office, but the linkage can succeed in pinpointing errors and misdeeds involving funds.

Once a medical practice establishes a stronger, formalized system of controls to monitor money, including cash on hand, office workers will understand that honesty is both valued and expected.

"If you're tight on the petty cash box, it sends a statement out that you're running a business, you're tight on your pennies and you're not an open 'profit-sharing' arrangement with the firm's receipts," Klausner says.

Credit card acceptance has meant convenience to many patients but also danger that a dishonest employee, such as the thieving ob-gyn bookkeeper, may play the system for personal gain.

"There's just a tremendous opportunity for abuse when it comes to credit cards," Klausner says. Some experts recommend that credit card bills for the practice be sent directly to one of the doctors' homes and not handled by employees at all.

Additionally, employees should be required to take a vacation every year as a matter of practice policy. If employees resist, that may be a warning flag in itself. And as many people as possible should be brought into the handling of finances -- taking cash, doing collections, working with insurance companies, paying practice bills, billing patients -- because it's much less probable that a group of employees would be guilty of dishonesty.

The practice also might want to consider taking out an employee dishonesty insurance policy, available generally at low cost. Often a practice's business coverage includes a rider for misdeeds by employees but may cover as little as $10,000, Klausner says.

The accountant cometh

A good way to catch crimes in the office is to open up the doors and books to outside eyes. Periodic inspections of financial records by an accountant or certified fraud examiner frequently will lift the veil on long-running numbers games. Often a brief inspection by a CPA is sufficient and costs much less than the potential loss from insider crime.

A physician who suspects wayward activities by employees should specify that a fraud investigation or forensic audit be done, not a standard tax audit, which is not meant to probe for dishonesty.

Though the prospect of a calculator-toting sleuth sifting through books in front of your employees might appear injurious to morale, any doctor needs to view the process as a necessary step to insure the practice's longevity, experts say. Explain to workers that routine, periodic audits are a fact of life for successful businesses and not a personal witch hunt.

"Blame the accountant," advises Steve Bankler, a CPA in San Antonio who does financial audits for medical practices. "The doctor should tell staffers if the practice is audited by the IRS and they get a hint of cash not being deposited, the IRS can in a civil matter say they owe taxes, penalties and interest. The practice then has to prove it did not get [funds that are missing], and it's almost impossible to prove a negative. The IRS doesn't have to prove anything.

"Say to the employees: 'We have to put these systems in place.' "