2.12.10 Issue #414 Forward This Newsletter To A Colleague

Fraud Costing Businesses Billions - Is Your Practice a Target?
by Sally McKenzie CEO
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Every two years the Association of Certified Fraud Examiners (ACFE) releases its Report to the Nation on Occupational Fraud and Abuse. In 2006, the organization reported that US businesses were losing 5% or around $638 billion of their annual revenues to fraud. In 2008 that figure jumped to 7% or approximately $994 billion in fraud losses. With everything that has happened in our economy, from the lending crisis to the Ponzi schemes, I suspect the 2010 report, when it is released, will show a marked increase in those numbers. For some, desperate times call for desperate measures, and employees that most employers would never suspect of pilfering so much as a few paperclips are robbing businesses blind. 

Small businesses, such as dental practices, are especially vulnerable to fraud because, typically, they have few controls in place to protect their profits. It’s a scary fact, particularly when you consider that one-third of all business bankruptcies are due to employee theft, according to the U.S. Chamber of Commerce. And at least 20% of all business failures are the direct result of employee theft, according to the American Management Association.

Case in point: A business manager in Florida was recently found guilty of stealing over $200,000 from a Florida dental practice. For two years this person had been creating fake bills, giving “discounts” to patients who paid cash, and stealing patient identities. Although the former employee was sentenced to 20 years in prison – a sentence that shocked everyone, including the prosecutors – the practice folded, putting six employees on the street. Such lengthy sentences are rare, as most embezzlers, if they are even prosecuted, might serve a fraction of that time. A dental employee in Michigan was found guilty of stealing nearly $100,000 and was recently sentenced to less than a year in jail.

It’s essential for you, the practice owner, to be vigilant in protecting your profits. So how do you spot a potential thief in your practice? Interestingly, ACFE reports that occupational fraudsters are generally first-time offenders. Only 7% of fraud perpetrators in their study had prior convictions and only 12% had been previously terminated by an employer for fraud-related conduct. Although background checks can be useful in some cases, they won’t necessarily protect your practice from a thief. However, there are behaviors that dentists can look for. According to ACFE, the most commonly cited behavioral red flags were perpetrators living beyond their apparent means (39% of cases) or experiencing financial difficulties at the time of the frauds (34%).

How do they do it? Checks present a veritable smorgasbord of opportunities for the small business embezzler. As one thief discovered, it was a relatively simple exercise to write company checks to herself 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. And it appears there is plenty of time for an employee to engage in check tampering as it takes on average about two years for the scheme to be uncovered.

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.

In about two-thirds of cases, perpetrators work alone. More than half of those participating in this particular criminal activity are between the ages of 41-50. About 52% of those engaging in fraud have been with their employer for five years or more. They frequently hold the position of manager, they are trusted, and they have access to the information they need to commit fraud. Not surprisingly, it’s those with the greatest access to the businesses’ financial transactions who are most likely to commit fraud. After all, these employees are responsible for processing and recording the organization’s financial transactions and generally have the greatest access to its fiscal assets, as well as the most opportunity to conceal a fraud scheme.

Next week, protect your practice from fraud.

Interested in speaking to Sally about your practice concerns? Email her at sallymck@mckenziemgmt.com. Interested in having Sally speak to your dental society or study club? Click here.

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