Prevent Embezzlement in Your Practice

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Practice Management Feature — November 2014

Tex Med. 2014;110(11):35-40.

By Kara Nuzback

If you're like many private practice owners in Texas, "business manager" is one of the many hats you wear for which medical school didn't prepare you. You likely find yourself overseeing payroll, scheduling, and billing. And, like many other physicians, you very well might opt to hire an office manager to take over the administrative side of the practice so you can do what you do best — care for patients.

But paying bills, depositing money, handling payroll, and accepting payments from patients are everyday tasks that give office managers a lot of power over your practice. It's crucial you keep an eye on financial operations to help keep your employees honest.

One doctor learned a hard lesson on just how vital it is to oversee any employee who has a lot of financial responsibility. An Austin surgeon, who asked not to be named, says he had employed his office manager for three years and trusted her with all his private practice's finances. Then he discovered she had stolen at least $61,000 from payroll.

The surgeon says he hired the office manager just as he was opening his first private practice, and for the first year, he vigilantly oversaw the handling of the practice's finances, always double-checking the office manager's work.

"I was a little bit leery about putting a lot of trust in people," he said. 

But, he says, he never had a reason to suspect the office manager was dishonest, so after about a year, he put more trust in her.

"I stopped looking over everyone's shoulder regularly," he said. 

Instead, he hired an accountant to perform a quarterly review of the practice's finances, and he turned his attention to his patients. His accountant noticed bonuses going to the office manager, and when the accountant approached her about it, she told him the surgeon approved the bonuses. The accountant never asked the surgeon about the bonuses, the surgeon says.

In July, the surgeon says he decided to check the latest payroll report. 

"I noticed that the number was several thousand dollars above what it should have been," he said. He did some additional research to see where the extra money was going.

"There was an obvious bonus given to my practice manager that was not authorized," he said. The surgeon started looking at payroll reports spanning the past year. 

"She'd been giving herself raises. She'd been giving herself bonuses," he said. 

The office manager had also taken money from the practice's bank account, labeled it "loans," and put it in her personal bank account through electronic fund transfers.

The surgeon says his office manager started the scam about a year earlier, and the amounts she stole, as well as the methods she used to take the money, increased over time. She barely tried to cover her tracks, he says.

"The way she was doing it was pretty blatant," he said.

After the surgeon shared the information with his accountant, they approached the office manager together. 

"She admitted it," he said. "And we fired her the same day."

He says the officer manager signed a written confession, which included a promise to make payments to the surgeon until she'd paid back the entire $61,000 she stole.

TMA Can Help

The surgeon's situation is not uncommon. According to the Association of Certified Fraud Examiners (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse, private companies are more likely to be victimized by fraud than public companies or nonprofits. Small businesses accounted for the highest number of fraud cases in the study, with nearly 29 percent of all fraud cases occurring at businesses with 100 or fewer employees.

Out of 23 industries, the report ranked the health care industry fourth most likely to be targeted for fraud, with a median loss of $175,000. 

The Texas Medical Association can help you avoid falling victim to embezzlement and can offer support and assistance if an employee starts stealing from your practice. (See "Avoid Hiring Dishonest Employees.")

TMA Practice Consultant Donna Robertson says the Austin surgeon contacted TMA in early July.

She and fellow TMA Consultant Tiffany Deutsch showed up to provide interim management at the surgeon's practice just two days after the surgeon fired his office manager. Ms. Robertson says when they arrived at the office, they quickly saw bookkeeping practices were inconsistent or lacking altogether. Internal controls for daily payments needed to be tightened up, she says. In other words, she says, there was no systematic reconciliation of payments received, posted, and deposited daily.

"While the embezzlement did not appear to have occurred in these areas, the practice was certainly at risk," she said.

Ms. Robertson says she spent four to five hours a day at the practice for the next three weeks, managing day-to-day functions and closing operational loopholes that would allow employees to easily embezzle from the doctor again in the future.

She recommended the surgeon start reviewing payroll, bank statements, and credit card statements regularly and make sure the money coming into the practice matched what his employees deposited into the bank. (See "Turning Data Into Success," March 2014 Texas Medicine, pages 16-23.)

The surgeon says it was a "lifesaver" that TMA had staff to fill the office manager position temporarily and to help him recruit a new office manager.

"The recruitment process actually went very quickly," Ms. Robertson said. "We found someone within a week or two." She says TMA performed a criminal background check and a credit report on the candidate. 

"We found someone who had relevant experience; he had longevity. All of his references gave him glowing recommendations," Ms. Robertson said.

But, the surgeon notes, the office manager who embezzled had no criminal history, and her references also gave her good reviews.

"She probably had over 15 years of medical office experience in her past," he said. 

He suspects she could have stolen from some of her previous employers, but they never caught on.

"I don't think people change overnight and become thieves," the surgeon said.

Many physicians choose not to press charges against employees who steal. A 2009 Medical Group Management Association survey of 945 medical practice staff found that nearly 83 percent had an affiliation with a practice that fell victim to employee theft, and most practices did not prosecute the thieves.

The surgeon says he filed a police report against his office manager and got his lawyer involved, but he feared if he pressed charges he would never get the $61,000 back from her. She has started to pay back the money, he says.

The surgeon also had employee dishonesty coverage included in his business' insurance policy. Also known as bonding an employee, this coverage protects employers from loss due to acts of dishonesty or negligence by their employees. But, the surgeon says, his policy covered only $10,000 — a fraction of what his office manager stole.

In the end, he says, "I obviously put way too much trust in her."

The surgeon says it can be difficult to find time to review the books at the end of a long day, but it's part of the job.

"It's my business, it's my money, and it's obviously worth me taking the extra time to do," he said. "I think even a few more minutes with my accountant could have set off alarm bells earlier."

Ms. Robertson says physicians can stay on top of their practices' finances by spending only a couple of hours a month on checks and balances, such as monitoring payroll and deposits, and reviewing bank statements and financial reports. (See "Ten Steps to Prevent Fraud.")

The Temptation Is There

Another Austin physician, who also asked not to be named, had three office managers embezzle money from his practice — one in the 1980s, another a decade ago, and yet another five years ago. He says physicians should report embezzlers to the authorities so the thieves can't victimize another physician.

"The doctor should call the police … so that will be in the individual's record," he said.

The physician says each office manager used a different method to steal from his practice. The first one worked for him for three years, he says. A patient tipped him off that the office manager took the cash payment the patient had given her and placed it in her purse.

"The patient called me," the physician said. "I confronted the office manager, and I fired her, and she paid me back." 

He says the first office manager stole less than $500.

The second was shredding receipts and keeping the cash payments from patients.

"But one of the coworkers noticed," the physician said. 

Again, he fired the office manager, and she has since paid him back the $1,500 she stole.

The ACFE report says tips are the most common method of occupational fraud detection, with more than 42 percent of fraud cases uncovered this way. The tip comes from a fellow employee almost half of the time.

The third office manager worked only a few months before the physician discovered she was embezzling through payroll.

"She was giving herself bonuses," he said. "It only happened about three or four times." 

But that was enough for her to steal between $6,000 and $8,000 from the practice, he says.

"I went to the police," the physician said. "She went to jail."

While he acknowledges that not every employee is a potential thief, he says he now has various methods of ensuring the money he earns is going where it's supposed to. For instance, he keeps a list of patients he sees each day who have a copay due and records how much they pay. He also says he keeps two copies of each receipt and asks his employees to sign a copy.

"The receipts have to match the money you deposit at the end of the day," he said. "It doesn't take but a few minutes if you do it every day."

The physician also advises other doctors not to put all the financial responsibility for the practice in one person's hands. If you don't have time to oversee the finances daily, he says, put two people in charge so they keep each other accountable.

"It's very rare that two of them would be embezzlers," he said. 

How to Catch a Thief

Jim Rice, a certified public accountant and member of the San Antonio Medical Group Management Association, says physicians can be on the lookout for certain red flags that may detect foul play by an employee.

"If an employee is acting nervously or odd or never takes a vacation or works long hours," he said, it could be a sign the employee is trying to hide something. "Notice if the employee is wearing nicer clothes or driving a nicer car."

Mr. Rice says one of the biggest problems is that employees in positions of control are often family members or friends of the physician. That can lead the employee to become jealous and rationalize thievery.

"In 37 years, I have seen a lot of embezzlement with regard to medical practices," he said. "It's very, very common. Maybe half of my medical practices have had some embezzlement."

In one situation, Mr. Rice says, a physician hired a cousin to work at the practice. The cousin felt underpaid and reasoned the physician made too much money.

"In the family circle, the doctor was highly regarded and the cousin wasn't," Mr. Rice said. The cousin eventually began stealing from the practice.

Similarly, another physician client hired a close friend to work in the office. The two were in the same social circle, and the friend rationalized stealing from the physician, Mr. Rice says.

"Employees find all kinds of ways to rationalize what they do," he said. 

Physicians should ensure they hire a truly qualified person to fill each position in their office, evaluate employees regularly, and pay them well, Mr. Rice advises. 

"Hire people who are good at what they do," he said. "Tell them they're doing a good job, and if they're not, address it immediately."

Mr. Rice says the most common type of theft he sees is employees using the practice's funds to pay for their personal expenses. 

"I see this a lot, where they're paying for their car repairs and credit cards. These things can be easier to hide," he said. 

Physicians should review comparative financial statements monthly to check for major changes in expenses or collections from one year to the next, Mr. Rice says. 

Physicians should also avoid paying for personal expenses, such as credit cards and loans, using their practice's account, he says. 

"It makes it easier for the employee to throw his personal expenses in the fold," Mr. Rice said.

Most embezzlers are caught because "they wind up getting too greedy," Mr. Rice says. Eventually, the physician starts to notice less money coming in.

Mr. Rice says employees don't necessarily intend to steal, but if one employee has exclusive access to all the practice's finances, he or she might one day decide to borrow money to pay an overdue bill.

"They borrow and they borrow, and they never pay it back," he said. "And then they don't get caught. And one time leads to another and another."

Physicians can take away the temptation by simply asking their employee who opens the mail or who makes bank deposits.

"Even though they might already know the answer," Mr. Rice says, it could help curtail bad behavior. Physicians can also have bank statements mailed to their homes, rather than to their offices. If office managers see a bank statement has been opened and looked at, they know the physician pays attention to the practice's finances.

Physicians can have their accountant do basic internal control checks, such as finding out who in the office writes checks and how often the financial reports are generated. 

"It's important for the physician to look away from the patients and see what's happening in the office," Mr. Rice said.

Kara Nuzback can be reached by telephone at (800) 880-1300, ext. 1393, or (512) 370-1393; by fax at (512) 370-1629; or by email.


Avoid Hiring Dishonest Employees

TMA offers a wealth of practice consulting services for physicians who've been targeted by an embezzler: 

  • Embezzlement risk review of your current internal control systems, which identifies potential weaknesses.
  • Interim management to include daily operations oversight, payroll processing, financial reporting, human resources, and workflow.
  • Operations assessment of your practice management operations, revenue cycle, financial systems, and human resources. 
  • Revenue cycle assessment of your business office operations that focuses on billing, collections, expenses, and revenue cycle improvement. 
  • Coding and documentation review of claims coding and medical record documentation.
  • Staff recruitment for front office, billing, clinical, and management positions. 
  • HIPAA analysis and training by a certified HIPAA compliance officer for physicians and staff on HIPAA fundamentals and Texas medical privacy law.
  • Compliance analysis to determine what you need to develop a comprehensive compliance plan for the practice. 
  • Customer service assessment of a patient's experience with your office from the initial phone call through an office visit.
  • Financial oversight of bookkeeping, billing processes, and staff competencies and a complete review of your practice's finances compared with specialty-specific benchmarks. 
  • Practice setup assistance with the challenges of starting a new practice or moving an existing practice.
  • On-site training for physicians and staff on front-desk skills, billing and collections, financial analysis, internal controls, coding and documentation, and HIPAA.
  • Custom services to meet your specific practice needs and goals.  

Find more information on TMA Practice Consulting and inquire about services online.

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Ten Steps to Prevent Fraud   

  1. Segregate employee duties.
  2. Account for charges.
  3. Monitor refunds and payables.
  4. Perform regular audits.
  5. Sign checks personally.
  6. Write receipts for cash payments.
  7. Perform background checks on potential employees.
  8. Bond employees.
  9. Audit payroll records.
  10. Trust your instincts. 

Source: Texas Medical Association Practice Management Services

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Last Updated On

May 13, 2016

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