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Professional News Articles : : ON PRACTICE MANAGEMENT by Janyce Hamilton : Don’t entrust your bookkeeper, even if she is your mom

Don’t entrust your bookkeeper, even if she is your mom

February 9, 2009

Working harder and longer hours, but making less money than ever? Bouncing checks? Doctor, this is a wake up call. These are signs that you are not closely managing your financial affairs. Also, it is possible that something more is going on -- that not all your earnings are going to you. Where is it going beyond taxes, salaries and other expenses? A portion of your fee payments may secretly be diverted as “bonuses” taken by one or more employees.

This article provides a glimpse into how experts detect and prevent fraud, embezzlement and theft. The simple, inexpensive tips offered to protect what you earn are guaranteed to work. The aim is to lock the backdoor to the white-collar thugs sneaking in for your money -- not from the alley behind the practice, but in disguise as loyal employees.

The Accountant vs. the Certified Public Accountant

The worst money-skimming betrayal in the dental practice is felt when your office manager is your sister, your spouse your parent. And even if staff members depositing the money and writing the checks aren’t family, they may be so integral to your practice, they feel like family.

This isn’t as far-fetched as it sounds, according to a spokesperson for the largest national organization of accountants, the American Institute of Certified Public Accountants (AICPA), to which 360,000 of the 400,000 U.S. CPAs are members.

“Dentists use bookkeepers and accountants, but they need to use a Certified Public Accountant,” explained David Tolson, CPA, Director, Continuing Professional Education, AICPA. Dentists who do use a CPA, often do so for taxes alone.

“Have a CPA sit down with you and your bookkeeper and brainstorm ways of having good systems and basic controls in place,” he advised. Dentists should do this, even if it takes staff a little aback and they claim they are unaware of how this might be a concern.

Having a formal engagement -- a paid visit to the office -- may be difficult to do in a small dental office, Mr. Tolson acknowledged, especially if a staff member is resisting changing the current way of doing things. This is, however, the only way to be proactive in doing two important things:
  • getting the dentist involved in reviewing the statements and transactions;
  • segregating the duties that involve money and bills to two or more different people.

The Fraud Triangle: Opportunity, Incentive and Rationalization

Dentists do not have audits like larger companies, so having protocols in place for deterring theft is critical. Once a method of stealing works, an employee will be tempted each day to repeat the method to earn some “free money.” Edward McMillan, CPA, has presented fraud prevention seminars to dentists, authored a book on the subject, and is a member of the Association of Certified Fraud Examiners. He explained that the “fraud triangle” has three points: 1) Opportunity, 2) Incentive and 3) Rationalization.

Mr. McMillan, based in Forest Hill, MD, explained that incentive or motive may not be apparent to dentists, such as the employee whose husband was laid-off or whose child has a chronic and expensive illness. Instead, it can be a secret addiction to gambling, drugs or alcohol. Rationalization may be the belief that he or she is undervalued and underpaid. Helping themselves to extra bonus money can help provide pocket money -- “deserved reward” for going out to dinner, buying gifts and clothes. 

Opportunity is what Mr. McMillan says dentists can control. . . accessibility to methods to secretly abscond with money.

Before he wrote a handful of books, including Policies and Procedures to Prevent Fraud and Embezzlement: Guidance, Internal Controls, and Investigation (2006) Mr. McMillan learned many places have theft by employees, including his own doctor!

“I was telling my orthopedic surgeon what I do for a living and he said, ‘I don’t have to worry about that because my wife is the office administrator and she handles all my finances,’” Mr. McMillan recounted. Lo and behold -- his wife was having an affair with a pharmaceutical supply rep and shuffling funds into another account! The tip off was when the bank called and said his checks payable were not clearing. The total amount was a few million dollars.

Like Mr. McMillan’s doctor, Cleveland-based oral and maxillofacial surgeon Donald Lewis, DDS, faced a puzzling situation in the 1990s when he barely made enough money in his practice to make ends meet. “I couldn’t give my employees raises so one quit and I had to let another one go,” Dr. Lewis recalled. He just could not make payroll even while working harder and longer to turn the situation around. “It turns out my best friend, my office manager, thought she was undercompensated and helped herself to the tune of about $100,000.”

While she had a 6 month sentence commuted so she could make restitution (which she did), her 5 years’ probation prohibited her from employment involving duties around financial transactions. Since then, Dr. Lewis became passionate about dental office theft and wrote a handful of books, including one specifically for dentists: Employee Embezzlement & Fraud in the Dental Office: Scams, Schemes and Broken Dreams (1998). He talks to anyone and everyone willing to hear him out. “I felt totally violated and don’t want this happening to anyone else.

With the current state of the economy and creditors foreclosing, the situation is only going to get worse. The temptation to “find” more money from the workplace is increasing, he said, adding, “The criminal mind is a great machine; it thinks differently than you and I. ‘I deserve this’ and ‘This isn’t much’ and so they take pens, paper, inventory, cash, checks, credit cards. They print out your patients’ names, addresses and social security numbers and sell them on the Internet.”

Internal Controls Checklist

Answer the following questions developed by Mr. McMillan to determine the degree to which your dental practice adequately uses effective documented system of internal controls:

  • Are copies of the bank statements forwarded off-site to the dentist-owner and other managing partners, and are checks are debit memorandums reviewed by the dentist-owner and his/her accountant? (Look at the back of checks to ensure the endorsement is not forged.)
  • Are copies of the credit card detail forwarded off-site to the dentist-owner and are charges reviewed?
  • Are two signatures required on all check and wire transfers? (Wire transfers, where the clerk hands the check back to the customer, are increasingly making check-writing obsolete.)
  • Does accounting attach a copy of the bank reconciliation to the monthly financial statements?
  • Is the office administrator prohibited from being a signer on bank accounts? (Once she or he is, she or he can withdraw some of what she or he deposits, too.)
  • For remittances via mail, do you take advantage of the bank’s lock box service? (Patients’ payments can go directly to a bank box so your staff can’t cash checks using a bogus account at another bank.)
  • Are checks arriving in the mail immediately endorsed by whoever opens the mail? (They should be so a fake endorsement and account cannot be placed and the check taken from the practice.)
  • After checks have been endorsed, do you prohibit employees other than accounting from coming into contact with original checks? (Dentist should keep practice’s checks and patient’s endorsed checks locked up and be the keeper of the key to avoid employee stealing account numbers and using checks to open a bogus account.)
  • Does your restrictive endorsement stamp not include your account number? (Don’t have a stamp with the account number on it because then the number can be stolen and checks created with software using your account, by anyone who sees the account number. Banks now do not require account numbers on checks.)
  • Is the amount on manual checks protected with a check protector machine? (An inexpensive device prints check amounts so that they cannot be altered.)
  • Does your CPA undertake a thorough analysis of your internal controls and do you take their recommendations for improvement seriously?
  • Are all employees who handle cash and checks bonded (insured for loss)?
  • Is the amount of your employee dishonesty insurance adequate and are you aware of any contractual obligations concerning it?
  • Do you require employees to take at least one full uninterrupted week of vacation annually? (One dentist only discovered an embezzler when she was out sick and her replacement found regular patients paying $30 rather than $20 co-pays.)
  • Do you require key employees to be subject to a “Management Day” (a day when the dentist can sit at their desk and go through their books and computer to check up on them)?
  • Is the check supply under lock and key? (The dentist has to also keep the key - no matter how inconvenient - and be the one to go to the drawer, unlock it and then lock it.)
  • Are all checks signed manually? (They should be.)
  • Is the check stock non-scannable? (This can be requested from check supplier.)
  • Are two or more people involved in preparing payroll and remitting payroll taxes?
  • In the employee manual, do you have “Conditions of Employment” that explain that if you are caught stealing, you will be prosecuted?
  • Are your internal control policies in writing?
  • Have you instructed the bank to not change authorized signers without approval of management?
  • Do you occasionally test cash, check and credit card transactions? (Have a ghost patient come in and have some dental work, as he leaves have him pay and then you can check to make sure it went into the dentist’s account.)
  • When employees are terminated, do you conduct an “Exit Interview?” (Current employees are reluctant to “get into the middle” and tattle on their coworkers.)
  • Do you prohibit making checks payable to acronyms? (It would be easy for an employee to open a business checking account for Chicken Deboneing Systems so that when one comes in written to “CDS” it can be deposited into the bogus account and the embezzler can enter “paid” into the computer. Without an audit, this irreconcilable ledger entry won’t be discovered.)
  • Do you eliminate employee credit cards (Too tempting for employees, who initially say, “I’ll pay work back for this.”)?
  • Do you do background checks on key employees? (Go to a private investigator and have them do it. Ask your attorney about doing it carefully so you know if you can legally check the educational background, credit scores and criminal records. Saying “You’re under consideration” is usually sufficient while an applicant’s background check is completed.)
  • Do you have approved vendor files and do you investigate new vendors? (If it is not an ongoing relationship, a federal ID no. can be requested along with what number you can call if you suspect unauthorized activity. Vendors can have relationships with staff and together, they can defraud a dentist with false invoicing and checks being sent to P.O. boxes and then deposited into phony accounts.)
  • Do you have a system in place whereby employees are encouraged to report suspicious or unethical activity and a formal “whistle blower protection” policy? (Encourage staff to report any suspicious activity confidentially to prevent fears of retaliation.)


This is Mr. McMillan’s checklist to evaluate existing controls. He says if you did not answer most or all questions “yes,” you must give serious consideration to a more thorough analysis of your internal controls.
“Make changes to improve your controls where you said ‘no’ to make sure your dental practice’s assets are protected,” he said.

Clues to detect an employee most likely to steal

Here are the tell-tale signs of an employee who could be worried about getting caught stealing money from the dental practice:

  • comes in early and leaves late;
  • controls everything to do with financial transactions (no diversification of duties);
  • never takes a vacation;
  • resists or is unwilling to make the dentist’s suggested changes in the financial aspects of the practice;
  • is against software changes completely;
  • tends to meddle in other staff members’ business 


An example of a “meddler” is one who tries to know “the dirt” on everyone’s personal life in the dental office. For example, Susie discovers that Wanda is ordering an extra 100 pills of a painkiller from a catalog each month, and pocketing the pills. While this is a small change type of theft, Susie lets Wanda know she’ll “keep her secret.” When Wanda sees Susie putting some checks into her purse, they meet eyes but say nothing. Wanda does not want her secret revealed, so will keep Susie’s secret, too.

Conclusion

The guilty party in cases of theft, fraud and embezzlement is always “the person above suspicion,” according to Mr. McMillan. It is unwise to wait and see if something happens before acting like a guard dog over your money. Don’t trust anyone but yourself and he added, “Keep honest people honest -- remove the ‘opportunity’ corner of the fraud triangle.”

Janyce Hamilton is an award-winning Chicagoland freelance dental writer and editor. Send suggestions for topics to be covered, or any comments on this column, to review@cds.org.

© 2009, Chicago Dental Society