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Washington State Dental Association

Hidden Losses: Workplace theft is more common than you might imagine. How to protect your practice.

By Alan Wicks, General Counsel to WSDA

Businesses of nearly every size and kind have an inherent exposure to financial loss due to employee dishonesty. Dentists are not immune. In fact, there are some characteristics of dental practices which might add to the risk. These include: small staffs with limited oversight or review; broad authority often delegated to a single individual; the large volume of relatively small transactions; and very busy practitioners. 
How could you learn whether your practice is being victimized? You may be an excellent judge of character in most settings, but such judgment alone should not be relied upon to protect your business. Persons who are engaged in dishonest conduct often function at a high level. Many would be regarded as strong and capable employees in other respects. 
On the other hand, adopting an accusatory or suspicious attitude is hardly the positive leadership your practice needs. The best advice might be to treat employees as presumably honest but, at the same time, to establish procedures and balances which protect the business. In your own mind, perhaps you could borrow the phrase “trust but verify” from the politics of disarmament. This approach is likely to reduce your practice’s vulnerability.
Think of this as emulating what you would do if your practice were larger. You may decide that some things, like formal audits, should be ruled out as too expensive (or you might decide to ask your accounting firm for an audit proposal). 

Here are some common forms of dishonest transactions:

Forged or Altered Checks
A simple form of embezzlement is to write an employer’s check to the employee himself or to an accomplice. If the employee is the person who reconciles the bank account, this could occur over a period of years without detection.
A check properly payable in some amount could be altered or raised to a different amount, or altered to name a different payee. 

Fictitious Payee; Padded Expenses 
The employee could invent a vendor and submit fictitious invoices for services or goods not received. The check for the invoice is then deposited to an account in the name of the vendor controlled by the employee or an accomplice. Usually the amount per transaction is of a size which might look typical. This could also be done with a recurring automatic payment.
  A variation is to steal the identity of an actual vendor. If an account can be opened in that name and controlled by the employee, transactions might be repeated over a long period of time without detection.
Expense reimbursement requests may be exaggerated or presented on a false premise. Generally, documentation and review are good ideas. 

Fictitious Employee
It is possible to add a false name to the business’s payroll and to collect wages without work. This is a risk more likely to occur in businesses with a sizable workforce. A variation would be to continue wages in the name of a former employee. Again, this requires the dishonest employee to have an account in the second name or for that person to be an accomplice.

False Insurance Claims
If the employee is able to open an account in your name, or the name of your practice, he may be able to submit invented insurance claims for persons with coverage. As such claims are then paid, the payments are diverted to the new account controlled by the employee.
Payment Diversion
If the employee handles deposits for your practice (of cash or other forms of payment), there could be a risk that some of such payments are diverted to a second account controlled by the employee. The payment may show as having been made in accounts receivable records to avoid redundant billings which would cause a patient complaint. 

So, what are the safeguards?

Separate check signing authority from bookkeeping
In most practices, the owning dentist should be signing all checks and authorizing each disbursement.

Reconcile statements properly
Reconcile bank statements in relation to both business revenues (deposits) and business expenses (disbursements). Be a part of this process, if you assign it to a bookkeeper. 

Perform random spot checks
Do some spot checking in relation to accounts receivables, insurance claims, and business expenses. For expense reimbursements, adopt the policy of requiring receipts and a brief explanation of the expense. Review each request. 

Know who you’re hiring
For employee applicants, consider doing a general Internet search, including public areas of Facebook and the like.

Pay attention to changes in spending
Be aware of employee changes in spending patterns (such as vacations, new homes, or cars, etc.). If there isn’t an obvious explanation, become increasingly vigilant.

Reporting options
Consider adopting a policy of consumer reports and criminal background checks for employees. As to new employees, normally this would be done as a final step after you’ve selected the person to hire. These checks can be relatively inexpensive. One governmental service for a criminal background check is This is limited to Washington state. A commercial service with the ability to check other jurisdictions and to provide the consumer report is AccurateNow No doubt, there are others, as well. 

The Fair Credit Reporting Act (FCRA) requires an employee’s or applicant’s written consent for the consumer report which includes credit information. Such consent is also advisable with respect to the balance of the search as to criminal background and litigation. The form of consent is usually quite comprehensive and it should be available from the commercial service you select. 
Employers who adopt a policy of requiring background searches should apply the policy on a uniform basis. This would include each new employee (including dentists). Note that the searches can include existing employees with their consent. 
Selective application of a policy of background checks should be avoided as it might provide a basis for a claim of discrimination. 

Insurance Coverage
Your basic insurance policy may have fidelity insurance coverage for employees, usually with a low limit, perhaps $5,000 or so. Consider adding additional coverage by bond or fidelity insurance to provide a limit of $25,000 or more. (WDIA can be helpful here.)

If you are victimized
If you incur an actual embezzlement loss, report it as a crime and cooperate in the criminal prosecution. If your insurance includes a bond or fidelity insurance component, the criminal reporting process will be a condition of your claim. 

Consult with your accountant and your attorney
There may be additional steps they could suggest. Also in the event of a loss, if there is an ambiguity concerning the circumstances or as to the employee or other person responsible, you will want the advice of these persons as to how to proceed with an investigation, and how to implement the resulting employment decisions. 
These general safeguards are not assured to protect you. But they may allow you to make more informed hiring decisions and to become aware of problems or warning signs at an earlier stage than otherwise would occur. Also, the existence of protective policies which are followed may raise the culture of compliance, lowering the risks for your business. 
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