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3.07.08 Issue #313 Forward This Newsletter To A Colleague

Is Your Practice a Target for Employee Theft?
by Sally McKenzie CEO
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The stories read like fascinating and gripping fiction. Unfortunately, they are true. The outwardly stable, unquestionably loyal employee commits a crime that no one would have expected, least of all her/his employer. More puzzling is the fact that often this member of the team doesn’t have a criminal record.

But what is perhaps most disconcerting is that many of the characteristics that make up this person’s profile would also be the sketch for your “ideal” team member. Dedicated, takes very little time off, first in the office and last to leave, will even take work home, is very particular about how things get done. Some say she/he is controlling; others contend it’s commitment. Working her/his fingers to the bone, this devoted employee is quietly robbing you blind.

According the Association of Certified Fraud Examiners (ACFE), “U.S. organizations lose an estimated 5% of annual revenues to fraud. This percentage indicates a staggering estimate of losses around $638 billion among organizations, despite increased emphasis on anti-fraud controls and recent legislation to combat fraud.” If that weren’t troubling enough, the U.S. Chamber of Commerce attributes 30% of all business failures to employee theft. 

Staggering losses indeed and it’s the small employers, like dentists, that are getting pounded. The average loss per fraud case among small businesses is $190,000. But how are employees accessing that kind of money? They’re fraudulently writing company checks, skimming revenues, and processing fraudulent invoices. In small operations, like dental practices, internal controls tend to be lax and accountability slim providing the ideal environment for employee theft.

One recently reported case involved an employee who routinely crossed out the employer’s name on checks written from customers and inserted his own. No white out, or fancy chemical concoction to erase the ink, just strike through the name on the check and make it payable to himself/herself. And you probably thought the bank would catch something so blatant. But banks process more than 35,000 checks per minute.

Checks present a veritable smorgasbord of opportunities for the small business embezzler. As another thief discovered, it was a relatively simple exercise to write company checks to her/him and then destroy the cancelled checks. Countless fraudsters have discovered the ease of ordering new checks in the business’ name and making them out to themselves. They can steal insurance checks or sign checks using a signature stamp. In a multitude of other cases, the trusted employee accepts payment from the patient or customer, deletes the transaction on the computer, and keeps the payment. Many patients no longer get their cancelled checks, let alone actually look at them.

Then there are the fraudulent billing schemes. These take a bit more effort than your typical check fraud. One small employer was building a new office only to discover by accident that a trusted employee, who just happens to be in charge of paying the bills, had set up a fictitious painting business and was billing the employer for work never done.

But what is it that makes the otherwise stellar employee turn to crime? Research has indicated that there are several inducements that can influence someone’s decision to steal, but three factors must be present. It’s known as the “fraud triangle.” The employee must have the incentive, the opportunity and the rationalization

The incentive may be a gambling problem, or alcohol or drug addiction. The person may be disgruntled or is stretched beyond their financial means. They may be experiencing personal crisis such as a divorce, serious illness or a death in the family. They become desperate, angry or disillusioned, all of which provide incentive to commit the crime.

The opportunity typically comes in the form of lax internal controls. One person has total control of practice revenues. There are few if any checks and balances and a near total lack of supervision over that highly trusted employee who seemingly can do no wrong.

Then there’s rationalization: The employee tells her/himself that they’ll just take a little loan and will pay it back. Then they take a little more the next time. Or the employee hasn’t received a raise and contends she/he works harder than anyone, so she/he deserves the money. Or perhaps their addiction is taking over their life; their medical bills have skyrocketed; their spouse lost his/her job; the dentist makes so much money that she/he will never notice. Whatever forms the rationalization takes, oftentimes in the employee’s mind; he/she is simply correcting a perceived wrong.

Next week, protect your practice from fraud.

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