Is Your Team Stealing From You? What Every Dental Practice Owner Should Know

In this episode, Wes Read dives deep into a topic that keeps many dental practice owners awake at night: embezzlement. Drawing from real-life cases and his years of experience working with dentists, Wes explores how trusted team members can sometimes become the source of financial harm. He emphasizes the importance of "professional skepticism", a principle he adopted early in his career at Ernst & Young, and how applying this mindset can help dentists protect their finances without damaging team morale.

Download the Embezzlement Protection Guide for Dentists from Practice CFO:

https://practicecfo.com/wp-content/uploads/PracticeCFO-Embezzlement-Protection-Guide.pdf

🔑 Key Points

• Real-Life Case Study: A dentist in Oregon lost $250,000 over seven years due to embezzlement by a trusted office manager.
• Trust vs. Verification: Even with loyal employees, verification processes are essential.
• Professional Skepticism: A lesson from Wes’s auditing career — trust is good, but professional skepticism is better.
• The Value of Accountants: CPAs bring price transparency, which underpins financial confidence — not just in public companies, but in small businesses like dental practices.
• Common Discovery: Most dental embezzlement cases are uncovered accidentally, making proactive systems critical.

Transcript:

Wes Read: [00:00:00] Everybody to another episode of the Dental Boardroom podcast. It's Wes Reed, C-P-A-C-P, owner of practice CFO, coming at you with another episode on the financial aspects of owning a dental practice. And today I have one that keeps, I think some dentists up at night at times. It's on the subject of embezzlement.

Now, embezzlement occurs at a significant level in dental practices, and I've been working with dentists since 2008, and I have come across a few occasions where dentists were embezzled and it was a terrible situation for the dentist because not only were they out significant amounts of money, in one case I can remember, we uh, basically had a prospect come to us asking for services, particularly helping investigate a fraud that was uncovered in her dental practice.

This was up in Oregon about 2012, and it was estimated. A loss of about [00:01:00] $250,000 to that dentist over about a seven year period. And she could not believe it. She could not believe that her office manager, highly trusted, hardworking, front office team member, dedicated and very trusted, would've committed that fraud for so long.

And that attempts to be the outcome I find in dentists who discover many times it's by total accident, but that discover that embezzlement was occurring in their dental office. It comes as a complete shock, and it causes a lot of dentists to question how much trust they can have in their employees. So one thing you're gonna hear me emphasize in this podcast is that no matter how much you trust, and no matter how much you like.

Your employees and they are valuable to you. Absolutely. You could not run your dental practice without these key employees. [00:02:00] That said, it is good practice. I'll say it is. Best practice to always verify even though you trust. So when I started off in accounting, I graduated, um, in 2000, 2006 from BYU and I went to one of the, what, what they call the big four accounting firms, and it was called Ernst and Young.

And my first day on the job at Ernst and Young, I remember them telling me a key theme. A key theme as an auditor in these large public companies, many s and p 500 companies, for example, that we would audit at Ernst and Young. The theme was to always have professional skepticism, professional skepticism.

It's professional because that's good practice. It has nothing to do with you disliking in, in my case at the time, and nothing to do with us disliking the company that we were auditing or the people that we had to, um, question or ask documents from when we would do our due diligence as we would, [00:03:00] uh, do the audit on the financial statements for that public company in order for that public company to give, uh, their financial statements to the public with what's called an unqualified opinion by the chief auditor on that engagement and professional skepticism was saying, Hey, we, we, we don't think that you're committing fraud or embezzlement.

We don't think that you're Enron or WorldCom, if you remember those massive frauds which led to significant, uh, regulatory overhaul in the public sector. It's not that we believe that you're doing that, but it is our job. To be skeptical that everything is done right and honestly, and without that mindset, we're not going to unearth what could be a devastating inaccuracy or even fraud embedded inside of the financial statements that a lot of people are relying upon in order to make decisions around the stock of that company.

Now, I remember being in a little [00:04:00] debate with my brother who is a programmer. Uh, he just recently left Amazon, but he was pretty high up, been a programmer for probably 25 years. Very good at what he does. And he said, Wes, now we were bantering, kind of sarcastically with each other, but he said, Wes, what do accountants actually do that provides value?

I mean, as a programmer, I'm literally creating something from scratch that then produces a value, either a sort of creating efficiency and a function or a task, whatever the software does. Well, you know, I thought about that and here's my answer to him. What. The CPA world does is it creates price transparency.

The whole stock market is dependent on price transparency. What are the earnings per share? What are the profits? What is the revenue? What's the change in revenue and profits over time? These trends, this is what really good accounting can do. Yeah, maybe I'm defending the bean counter accounting industry out there, but the reality is, is that [00:05:00] they make sure that investors and banks and other parties relying on the financial statements of a business, they make sure that those financial statements can be reasonably relied upon to give an accurate reporting of the economic health of that business and that.

Allows then those investors, those banks, those reliant parties to determine an appropriate price for the stock of that company or an appropriate interest rate on a loan lent to that company by a bank. That price transparency is actually incredibly critical. Alright, now back on topic with embezzlement.

I'm not asking you to be an auditor. I'm not asking you to even prep your own financial statements or to even audit your own financial statements, but what I am asking you to do is to have a mindset of professional skepticism. Your office and how is that professional skepticism displayed to your team?[00:06:00]

It's not that you're gonna then approach your office manager, your financial coordinator, or anybody in your team and say, Hey, I suspect that there may be fraud or embezzlement. Obviously that's not what I'm asking you to do, but instead to approach them and say, Hey team, you know, you're incredibly value to me.

We couldn't do this without you, so thank you for everything you do. However, one of the things that I'm instituting because it's a good practice and I've been advised to do this again, not because we're skeptical of anything that you've done wrong, but only because this is best practice to ensure that we don't fall victim to what are significant trends in the industry, which is a lot of errors in reporting and there does, there is embezzlement.

In fact, it's estimated that about 50 to 60% of dental practices are embezzled. Over a longer period of time. Some have even said it's close to 70 to 80%, and that an office at times will be embezzled more than once. They estimated around 20 to 30% of offices [00:07:00] are embezzled even more than once. Now, one of the reasons why this occurs is because it's an embarrassing moment for a dentist to have been embezzled.

They don't want anybody to know. They don't want the public to know. A lot of times, they don't want their own family to know. They don't want the other employees to know they don't want this to get out because it just can tarnish. What is this goodwill that you're working so hard to managing your practice, which is the reputation?

Because what is the most important thing a dentist have? Some people will say, oh, it's my employees or it's my, most people will say it's employees. The reality is it isn't your employees, although they're incredibly important. It isn't necessarily even your clinical skillset. It isn't your equipment and the really nice office that you have, actually, your most valuable asset is your reputation.

And a lot of times when embezzlement occurs, doctors have this feeling of almost like shame, even though they didn't do it, but like it shouldn't have happened to them. And they've essentially been cheated on financially speaking [00:08:00] by somebody in their office. And that creates so many emotions for a, a business owner, especially because in most cases that Embezzler has been in the office for a very long time, maybe even the longest time.

And there tends to be a very close relationship between the embezzler and the doctor, and maybe even the doctor's family. Maybe they've done activities outside of the office together. And that's what makes it so devastating when this occurs. And so these fraudsters will go from one practice to another and they will repeat it and they get better every time.

They're sharpening their own saw of embezzlement skillset. And it's a really unfortunate thing, but it's one of the reasons why embezzlement is so dramatically high E dental office is, is because we're not reporting these embezzler. They need to be reported, they need to be pulled out of the system to prevent that from happening again, not only to your office, but to others.

You would be thankful if you knew that somebody that you were interviewing had been embezzled [00:09:00] and that a doctor warned you don't hire that person. That's why it's so important to report it when you discover it. Alright, I wanna talk about, I have a, a guide, I call it the Embezzlement Protection Guide, but I wanna qualify this a little bit.

The truth is, is that a lot of these employees who embezzle, are exceptionally good at their job. They know their job very well, and they know what areas in their job that no one's looking at. They're very in tune with what they can get away with. They'll test it a little bit and a little bit more until they realize they have pretty much an open door to commit certain embezzlements because nobody is going to find out.

So what I wanna do is profile these people a little bit. The first thing I wanna do is explain what are the variables that exist when fraud occurs in a dental office? What are the, what are, what are the, [00:10:00] there's three things that come together that create a vulnerability in a dental office. Now, by the way, I'm sharing this from an embezzlement protection guide that I have here at Practice CFO, and I will try to include this in the show notes for anyone to download.

It's actually quite extensive and there's no way I'm gonna go over all of it because I have symptoms of embezzlement. So I have a pro profile of an embezzler symptoms of embezzlement. Causes of embezzlement, methods of embezzlement under methods of embezzlement. Sheesh. I've got 34. I've got 34 methods embezzlement on here.

And actually there's probably a lot more than that. I've got safeguards in here. Got a lot of safeguards in here, actually all the way up to 42 safeguards. And then I have on the last page kind of a segregation of duties where different people do different tasks in order to minimize the likelihood of embezzlement from occurring.

Now I'm gonna emphasize minimize, because there is [00:11:00] no perfect guarantee that you are gonna prevent embezzlement. I'm sorry, there just isn't in, uh, one of the people that I follow, his name is David Harris, and he founded a company called Persin. And I really like this guy David Harris. And I had David Harris on a podcast a long time ago.

It's probably there if you scroll way down in your podcast, uh, app for the practice. Um. CFO our, our, our Dental Boardroom podcast, David Harris with Perspire. And I actually, you know what, actually I don't think I did a podcast. I had him actually coming into a webinar, this was years ago here in my office.

And I had a, a number of dentists actually show up in person and had a really great event. But one of the things he said is he, he has found that he and his team, he's got quite an extensive team now, and he said this was at that point a few years back, that on average once a month, they're discovering a new way that Embezzler commits fraud in a dental office.

There's a lot of ways to do this and I mean, I just think off [00:12:00] the top of my head, just a few, actually, you know what, I'm gonna pause that 'cause I'm actually gonna go through some of my list. Not gonna go through all of it, it's fairly extensive, but I'm gonna go through some of it, so stay tuned on that.

But I've got this edleman protection guide that I'll include in the show notes and it's very detailed. The thing I'd want emphasize. What David Harris says is, as much as you think you can set up controls to prevent these from happening, no amount of controls are gonna guarantee any embezzlement protection fully.

It's setting a lot of things in place to try to minimize the likelihood. One of the things, if you stay tuned till the end, one of the things I think you can do will have the highest chance of preventing embezzlement from occurring, even catching it. So stay tuned at the very end. I'll share with you what that is.

Alright, let's go through the three variables that make up what's called the fraud Triangle. Now, many years ago when I was coming outta college, I was really interested in fraud [00:13:00] and I don't know if it was from the movie with, uh, Tom Hanks. Catch Me if You Can. Leonard Leonardo DiCaprio. What a great movie.

And I wanted to go work for the FBI. In fact, I interviewed with the FBI when I was at school in BYU. I went up to Salt Lake, I interviewed with their FBI director, uh, in the office up there and there were like 150 students applying from various colleges in the area. I got down to the last three and then I completely bombed my interview with the FBI and I did not get the job, but that's okay.

Who knows Had I got that job, frankly I'd probably still be with the FBI today. 'cause I really wanted to work in the white collar crime of the FBI And, and one of the, one of the things that I was studying at the time was how to become what's called a Certified Fraud Examiner, or CFE. And these are people that are, that are hired.

By companies or sometimes they work for large accounting firms and they will go [00:14:00] and investigate fraud in a business. Well, the CFE, I believe this is where this fraud triangle came from, was from the organization of Certified Fraud Examiners. And here's what they say are the three variables that make up what's called the fraud triangle.

Now, when these three things are present, fraud can and often does occur. The first one is that there is a pressure or a motivation the perpetrator feels a need for money. Now, David Harris from Per Spirit Events, I have one of his articles here. He says that there are really two types of these embezzler.

One are just straight up dishonest people, and the other one are people who are desperate. Now, both of these are gonna feel this sort of pressure slash the second variable I'll get into here in a second, which is rationalization. But the dishonest person feels that they just, they just, they deserve it.

Maybe they feel that they're undercompensated [00:15:00] for what they do. A lot of really good office managers are quite intelligent and sometimes feel that they produce or are capable to do more, or that they produce more value than what they're compensated. Maybe they see the doctor and feel, they don't see the p and l and they don't know the doctor's income, but they may feel that the doctor is just sort of extrapolating or extorting them for everything they have.

And it's just simply not true. But sometimes. Office team members can get this perception a little bit like they are underpaid, and so that sometimes lead leads them to do dishonest things. They're just people who don't feel the same guilt and shame that a normal person would. When it comes to things like embezzlement and the second one are desperate people, people who are in a financial situation where they're desperate for money, maybe they're going through a divorce, maybe the spouse lost a job, various reasons why suddenly they really need money.

So that is variable number one. It's pressure. [00:16:00] The perpetrator feels a need for more money. Pressure slash motivation. Number two is rationalization. The perpetrator feels justified in taking from the practice and may even have the intent to pay back the stolen funds. By the way, if any of you are watching this on YouTube, I'm sharing my screen and I'm actually sharing my embezzlement protection guide on the screen where I'm using it as a reference for this podcast episode.

So number two is they rationalize it, they feel justified, uh, in, in taking the funds. And it is very true that many times it starts off with them having the intention of paying it back. And so the rationalization is, I'm gonna take this just temporarily. I need to get through this moment. I need it for this purchase, whatever it is, and I'm gonna, I'm gonna pay this back.

And so they rationalize this, that they deserve this. Number three is opportunity. The perpetrator perceives there is an opportunity to steal [00:17:00] without being caught. Now, generally speaking, a dentist spends the vast majority of their time in the operatory room and in their private doctor's office. When they're not there, they're usually checked out so they can go home and do the things that they want to do.

They certainly, most of the time, don't spend a whole lot of time at the front office. And so there's this mentality of the doctor that they've hired a front office team to run all the front office functions and that they can delegate those tasks to them comfortably. And that's true. And you hear me talk on this podcast often about this concept of delegating.

In order to elevate, elevate your team and elevate yourself. And I'm a big believer in that. But at the same time, you can't just blindly delegate, walk away, never turn around and look, that creates an opportunity in the fraud triangle. So pressure, rationalization, and opportunity. And the bad news is that within a dental office, we commonly find these three variables present.[00:18:00]

Often per office personnel may not be financially prudent with their personal spending and consequently fill financial strain in their life. They might feel underpaid for their contributions to the practice and therefore easily rationalize the taking of a few dollars. Lastly, and most unfortunately, is that the opportunity for theft is pervasive in dental practices.

So when, when I get down to talking about the methods of embezzlement, you'll see what I'm talking about. Alright? The good news is that you only have to stop one of these variables and you dramatically reduce the risk of fraud. So you reduce pressure, you reduce rationalization, and you reduce opportunity.

Now, some of these are in your control, others are not. How you hire that's in your control controls you have, that's in your control. How much you check in, that's in your control. So the variable most in your control is this opportunity. You should establish checks and balances known as internal controls, which reduce the opportunity for theft.

And I'm gonna discuss those a little bit in this [00:19:00] guide. Now, again, I'm gonna go back to David Harris, who he and I had a little bit of a banter about this. 'cause he was like, Wes, you can set up all sorts of controls in the office and you're not gonna prevent embezzlement. And I think we met on a sort of a common ground to say that, okay, maybe controls aren't gonna prevent embezzlement, but they should reduce the chances of it happening.

And although he felt that they were minimal in the effect, I believe that yes, it is true that good controls. Do in fact reduce the likelihood of theft otherwise, what's the importance of controls? Why is it important to have segregation of duties? Why is it important to have authorizations on certain processes?

Those are all controls because they actually do prevent embezzlement at some level. I think what David Harris is saying with Persent is that, and again, I'm a huge fan of him. I endorse him. I'm even gonna tell you to maybe get in contact with him if [00:20:00] you're ever concerned about it, but is he sees so many variations of embezzlement that I think he's probably become disillusioned with the effectiveness of controls.

And you can't put in controls to stop it all. You just can't. Alright, let's go on. Sorry to sound discouraging there. You can minimize it. So you definitely should put into, into place behavioral, behavioral, um, controls, culture, system controls, that kind of thing to prevent this. Let's go on to profile of an embezzler.

Here they are, an embezzler shows a lot of commitment to the practice. An embezzler has been there for more than a few years. An embezzler is trusted, almost like family. They're entrusted with a lot of access to financial responsibilities. They know the practice management software [00:21:00] very well. The embezzler doesn't want anyone doing his or her responsibilities.

The embezzler may appear to be living a lifestyle that isn't likely to be sustained by his or her income. Now, if they're married to a spouse that has a very strong income, that might be. Difficult to distinguish there. So take that one with a slight grain of salt. But still, if they've been driving an old beta Honda their whole life, next thing you know, they're driving a brand new lucid costing 120,000 with no change in their family circumstance.

That could be something to raise your eyebrow. Number eight, they're oftentimes workaholics. Number nine, they resist training others and, and they resist taking vacations. Number 10, they resist third party services like HR consultants, um, maybe even certain practice management consultants or CPAs coming in and looking at books and records.

Number 11, at least 67% of those embezzler [00:22:00] are repeaters. So these are people, another profile characteristic is that they repeat themselves. Lastly, over 70% of offenders do not have a previous criminal record. So they may not be caught when you're doing the hiring, even with a very good hiring, uh, a vetting system, background checks.

Now, I'm not saying you shouldn't do this. I absolutely recommend that you do those, especially in a dental office where embezzlement is very high and there are so many ways to commit that we do it here at Practice CFO. That should be a standard part of your onboarding process with a new employee.

Alright, now let's go on to what are some symptoms of embezzlement? Okay, here are a few, I'm not gonna name all of the symptoms. I've highlighted a few in my embezzlement guide, so I'm just gonna run through a few of these symptoms of embezzlement. These are red flags that embezzlement might be occurring.

Number one, account re accounts receivable balances are increasing to higher [00:23:00] than expected levels, even though production hasn't shown a commensurate change. As you know, ar is for work you've already done. You just haven't collected the money from the insurance company or from the patient. So if your production stays the same or is rising, but you're actually collecting less, it means your AR is going up.

And that could be a sign or a symptom, a red flag that embezzlement is occurring. Unusual amounts of write-offs. Write-offs are absolutely a common area where embezzlement is covered up is through write-offs. Increase in patient complaints about their accounts because oftentimes a patient account will show as still outstanding because the the embezzler was able to skim or take that payment and somehow route it to themselves.

Here's another one. Employee is frequently working during off hours. Now one thing you can do here [00:24:00] is. If you have a system in your office where employees can have to, they have to swipe a security card to get in or outta the office, or maybe when they clock in or clock out, you can track if they're ever coming in, in off hours.

Now, in a lot of cases where embezzlement occurred and a and an investigation was conducted, it was found out that that employee was coming in and off hours and the doctor did not know, and they were doing a lot of their, their work, their embezzlement work, because again, there's a process to embezzlement.

It doesn't just happen. They have to set things in place. They have to perform a sequence of functions. It's almost like their own process that is undisclosed to anybody else, and they have to do it sometimes off hours when they're not doing the normal day-to-day work and they have to sort of structure it and then hide it.

And that happens off hours. Now they may. Most of the time they're not gonna be clocking and clocking out when they do that. So your time clock isn't gonna cache that. But if you have a system [00:25:00] of when they come in the building, you either to maybe a main building or inside your actual suite, depending on the setup.

Like in my office here, um, if it's after hours, they have to have a specific card that they swipe and that is tracked that specific card and that is specific employees in and out is tracked. Then when they come into my office, they use a key that is not tracked. So this may or may not be something you can do in your office, but just get a log and look over the past year and see if there's anything that looks fishy around when an employee is coming in and leaving the office.

Alright, carrying on to other symptoms of embezzlement. Employee does not like to take schedule the vacations or takes only a day or two off at a time. The employee. Slash Embezzler constantly works overtime, takes work home, and is seldom absent. The employee openly resents the owner's income, lifestyle size of fees charged, [00:26:00] et cetera.

The employee feels they're entitled to more. We talked about that. Another one, employee wants domain and control over their workstation and openly resents anyone else overseeing their work and or implementation of a new financial accounting control. They do not like when somebody comes in to temporarily fill in for them because they're worried that somebody's gonna stumble upon the tracks of their embezzlement and then that's gonna come to light.

So those are some, some, there's many, but those are some of the key symptoms of embezzlement. All right, let's look at causes, just a few causes here. One of the causes is just this unconditional trust of the employee by the dentist. I talked about that. I can't emphasize that enough. It's okay to trust, but they have to know that that trust is still backed by a professional process of oversight and, [00:27:00] and check, just like the government has three branches in order to create a check and balance.

It's not that one disa, it distrusts the other. It's not even that we look at one as Americans and we say, we distrust Congress or we distrust the the White House, or we distrust, um, we distrust the court system. It's that you need those in place to systematize the prevention. A breach of that trust. All right, let me carry on more causes of embezzlement.

Number two, dentist does not keep abreast of the business aspects of his practice due to always trusting everyone. And this is, in other words, the dentist rarely comes up to the front office. They rarely look at what's going on in the practice management system. They're oftentimes not looking at their collection reports, they're not looking at their write-offs, they're not looking at patient refunds.

They're not looking at their [00:28:00] accounting statements. They're not looking at bank checking and credit card accounts for unusual transactions. They're not reviewing their financial statements. And we hear at practice CFO prepare really comprehensive financial statements that show a lot of trend data over time.

And a lot of times these things are spotted when you see trends over time. So this is where I say, as much as you went to school to be a clinician, if you own a dental practice, in my strong opinion, you have to have some level of business education in order to run a good business. It doesn't matter what kind of business it is, whether it's a business like mine, as a financial planning and CPA firm or yours as a dental practice, understanding the business aspects is critical.

Now, yes, what I do deals with numbers. That's true. What you do deals with teeth. But that said, I wasn't taught aspects of running a business. What I was taught in school, in my undergrad and grad program was to how to [00:29:00] understand accounting transactions, what's debited, what's credited, how to prepare financial statements, that kind of thing.

But I wouldn't, wasn't necessarily trained on processes, division of responsibilities, I wasn't. Trained on characteristics of embezzlement. I wasn't trained on creating culture. I wasn't trained on what it means to be professionally skeptical and how you actually apply that to running a business. So all this stuff I've had to learn myself as well, and we're all in this together, but I have put a lot of time into this knowing that my clients could be susceptible to embezzlement.

And one of my worst nightmares is a client comes to me and says, Wes, I was embezzled by $300,000 and I feel like you should have seen it. Now, I always have to have a conversation about this because what we see is what hits the bank. That's what we see. We, we, in order to run our financial statements, to do our financial analytics, to prep, to prep the financial statements, to do a financial forecast, you know, to restructure debt, to do all that [00:30:00] stuff, all we need to know is what is the cash flow, the actual cash flow in and outta the bank account.

And if something never hit the bank account, then we're not, we're not gonna know that, and we're not necessarily trained. That's why within the accounting profession and the finance profession, there are people who are, who specialized in financial crimes. And you see that in both government units, uh, financial crime units.

You see that in, uh, at the big accounting firms. They had specific people who were trained to go and do embezzlement reviews and audits. It's a very specific skillset to do that. And we're hired at practice CFO not necessarily to go do embezzlement audits. Now that said, we try to put into place good practices that can help prevent that.

It's just what we do isn't a guarantee of that for sure. And that's why at the end of this podcast, I'll give you a few suggestions on things that, that you can do, uh, important controls and checks that you can put into, into place. I'm gonna give, uh, I'm gonna take [00:31:00] a little tangent here and give a real life story that happened recently.

And this is a client, a practice, CFO, and I want to emphasize that. This is real. This happens, and it takes a intentional effort on the practice owner to prevent things like this. A uh, a a client of ours runs their payroll on our payroll. We, we process their payroll and we use a software called rippling and payroll is a very, very complicated thing.

And so everyone who runs payroll has a very intricate software. A DP has their own software. Paychex Gusto rippling is a really big one, come outta Silicon Valley. It's got over a billion dollars of investor money to create a really great payroll system that is solving a lot of the legacy problems from the big stodgy ones like a DP and [00:32:00] Paychex.

Now that said, it's a very layered software and configuring it right and setting into place controls and authorizations. Is essential to make sure that it's working correctly. So being educated on the software, adopting it properly, setting in place controls on the software is what's needed to make this work really, really well.

Well, what happened was the client did not have on two-factor authentication. So 0.1 here, please make sure that you have two-factor authentication turned on for your technologies, especially ones like bank account access and payroll software. That's critical. And if you don't know what two-factor authentication is, yes you do.

That's just when you put in your login and then makes you get a code on your phone or have a, a separate, um, tool that feeds you a number that you type in, and then you can log in. It's an extra step in addition to the username and password, and that is gonna prevent significant amount of frauds. Well, in this case, an employee opened a a scam [00:33:00] email.

That had, that looked like it was from the payroll company rippling, and it wasn't. And they clicked on it and it asked them to put in their username as password and the employee did. And what happened was that then scammer, that hacker dot, that employee's login detail, they logged into the software behind the scenes, they prepared a fake employee and then they processed a payroll for that employee.

It's actually a few employees for I think about $42,000. And that doctor lost the $42,000. Now we went to every length we could. We contacted rippling. We had many meetings over this subject. And at the end of the day. This is something that every business has to do, not just around payroll, around their accounting software.

We have so many controls that practice CFO, around our firewalls, around access to our accounting software, around access to our client's. Banking. We don't like to get transactional authority. We only want view access. We have, [00:34:00] we, we pay a tremendous amount each month to prevent cyber crime and control our client's data.

It's especially a firm like mine, that's exceptionally important. And it's important too at your. Practice in a dental practice and so have your two factors turned on, please do that. Number one. Number two, inside the system, you can set controls. I will never allow a payroll. We use rippling as well at practice CFO, and I will never allow a payroll to run without me looking at it.

It's just I have to be the one who ultimately pulls the trigger. Now, I don't do anything leading up to that point. I don't gather the hours. I don't review every single employee. I don't do everything in there, but when I get it, I scan this. There's two things that are important here. My team all knows that I look at this, I look at this, I'll take about five minutes.

Now I have, I have about 40 employees, so it takes me a little bit of time. I mean, it doesn't, to be honest, it doesn't take me that much time, but I just look through this. If there's any name [00:35:00] I don't recognize, trust me, I'm gonna see that. If there's an amount that just doesn't look accurate, trust me, I'm gonna realize that it doesn't take a long time to do this, but have these authorizations in place.

Order to prevent embezzlement and embezzlement through payroll is one of the most common types in of embezzlement. Employees cooking their time or padding their time as they say. Um, creating a false employee with a, going into the employee's bank account. There's a lot of different ways to do that. So I'm, this is not a embezzlement prevention through your payroll episode, but just know that payroll is one area that this can occur, that hackers can actually embezzle from outside in.

And that recently did happen. And so we are really trying to force our clients to make sure that they have two factor authentication on. The other thing too is that there needs to be a training. I recommended training once a year where employees are taught about the behavioral aspects of following [00:36:00] processes and creating a con, sort of a, a culture of honesty and a culture where everyone knows that there is oversight.

It's not because of a lack of trust, but it's a trust but verify mentality that needs to be in the practice. Okay, let me, lemme now carry on. We are talking about causes of embezzlement, so let's go to new hires. Please do background checks with your new hires. That one is just, should just be a given.

Number five here on the screen for any of those who are looking on my screen is, are there segregation of duties in the office? This can get a little bit difficult if your office is smaller and you don't have many employees, but there's still some level of segregating out duties or tasks that you can implement in your dental practice.

Lemme pause there and make one key statement. This is something also that, that David Harris with Prosper [00:37:00] didn't mention that it isn't just big practices that that are embezzled. It isn't just small practices. It isn't just well-run business operated practices. It isn't just sort of old school practices.

All practices are being embezzled. So I wouldn't exempt your own practice thinking that for A, B, and C, you're not susceptible to embezzlement because trust me, you are. In a minute, I'm gonna go through what are the, some divisions of duties, some segregation of duties that you can have in your dental office, so stay tuned for that.

Alright, let me now carry on to the methods of embezzlement where there are a lot, and I would just say to maybe get my guide and read through this guide. I guess I'll just share a few of these. Skimming is a big one. Now, back in the day when doctor offices dealt a lot more with cash, skimming was the most common reason for embezzlement.

Now that's just a lot less common for obvious reasons. [00:38:00] You just don't deal with cash very often. You do still deal with some checks, although that's becoming less and less frequent as well. But just keep in mind that with checks, somebody can fraudulently endorse the back of a check and then go deposit it in their own account, and then they can go and write off the employee's ar and call it a, a friend and family discount, whatever.

There's different reasons that they can do a write-off so that it never looks, uh, suspicious. That's why the doctor should be having a system of reviewing write-offs in the patient records, in the practice management software. So skimming is a big one. Lapping, that's where you take one patient money to satisfy another patient's accounts receivable because you, the embezzler had formally embezzled some of that.

Second patient's money, insurance fraud, billing for insurance, not provided billing for a higher level of service than were actually performed. Billing for [00:39:00] non-covered services routinely waiving a patient's copay or deductible while keeping an altering claim. Forms and dental records, uh, others are personal pur purchases using the business credit card or checking account.

That definitely happens. A bigger practice is that have a lot of transactions. A lot of times if an embezzler buys a hundred dollars here and a hundred dollars there on Amazon, guess what? Usually that's not gonna be found. Your accountant may see these purchases at Amazon on the credit card statement, but they don't know what it's for.

They're just gonna assume that the doctor made another purchase. Since doctors make a huge number of Amazon purchases and Costco purchases on their business credit cards, that's gonna be very, very difficult for an outside person to spot that. This is why I think one of the controls is that the doctor every month should just look at their general ledger and their accounting reports, and we have practice CFO provide this.

All accountants should provide this. It's essentially your bank statement, but all in one place. [00:40:00] So we'll show all your checking account transactions, all your credit card account transactions all in one place, and you can review, review them by category. So you can go to office supplies and see everything on whatever card was purchased during that period and see what was purchased in office supplies and look for things that just don't look right.

Alright, there's a big long list here of 34 other items. I'm not gonna go through all of those. Let's go through some of the safeguards here. Some of the safeguards are to pre-screen employees, so I talked about this. Lemme go into a little bit more. Detail on this contact, at least the most recent employer, ideally the last two employers.

This is one of those steps where I always wanna skip when I hire somebody because it takes time. You gotta go have somewhat of an awkward conversation. Your potential employee who you want to be excited to come on board knows that you're doing this sort of checkup on them. Sometimes it just [00:41:00] feels a little uncomfortable.

This is why being open and direct with new employees, just like established employees by saying this is a best practice thing that we do, because we like to run best practices as a business for everybody's safety and the sustainability and the success of our practice. We all benefit by that. And so please don't take this personal, we do it every time.

It has nothing to do with you and you contact the prior employers. If an applicant is licensed, check the status of their license on relevant sites. Are they a licensed EF? Ta, are they a licensed dental assistant hygienist doctor, check their licenses, check the status of those licenses. I think all that, that's also a good idea when you hire consultants or attorneys or CPAs check their license.

Um, number three, contact third party companies that can do some screening services or do these background checks more systematically if you're not able to do that. And then also make sure that your employee handbook clearly states that any amount of embezzlement will be [00:42:00] grounds for termination.

Alright, so those of you watching on YouTube, let me scroll down to this section right here. I'm on these safeguards right here as well. So this is something that should be verbal and not just assumed. Okay? The next one is create a division of duty. So I'm gonna talk about that one here pretty extensively in just a moment.

Um, a third one I have on here is establish embezzlement control procedures. And there's a number of them here. I'm not gonna go into the details, but here's what I will say. As a doctor, I do think it's very important that periodically, perhaps once or twice a week, you look at the day sheets and you look at write-offs, and you look at your bank account, either online or on a statement, and you verify that what you're seeing on the day sheets is actually hitting the bank statement.

And then you look at any write-offs or justness for that day and make sure you recognize those things. If you do that, that's gonna prevent a lot of [00:43:00] improper behavior here. There are many, many ways of embezzling outside of that, but that's gonna be a key control as a doctor and make sure that your team knows that this is just something you do.

As a standard practice, just like when you leave your office at night, you lock the door. This is just a standard practice. Okay? And I just did an episode with the founder of a company called Dent Rec, which tries to automate this process of taking the day sheets, and it's dropped into this software online called Dent Rec, and then it does an automatic feed into QuickBooks that shows what should have landed in the bank account from Visa, MasterCard, discover Amex, CareCredit, cash checks, et cetera.

And then when a reconciliation is done between QuickBooks and the bank account, all you're doing is mapping from what's in QuickBooks, which is what's supposed to hit the bank account with what actually did hit the bank account. And then if it didn't hit the bank account, that's where questions need to be asked.

[00:44:00] Go to the front office team member who did the day sheet and put it into the Dent Rec software and ask them, Hey, these aren't mapping. Help me. Help me figure out why. It said cash in checks of $4,586. I only saw cash in checks of $2,346. Where's the rest? Oh, well there was a write off. Okay, tell me about that.

Write off, let me understand it. Having those kind of conversations periodically, not in a way where you're making them feel bad, but in a way where you're just saying, Hey, I like to watch my, my numbers. I like to watch my reports. I like to be a good business owner, and everyone should understand that.

Okay, so let's go down to the division of responsibilities or what we call segregation of duties. And here are a few of the activities that I think should be segregated. So ideally you have kind of an office manager that is separate from a biller. Now that may or may not be possible, but if you could make that happen, here's what a, what a, what an office manager [00:45:00] would do, they would post payments to the practice management software.

They would enter fee adjustments, write offs in the practice management software. They would, uh, daily enter all collections on the day sheet into the bookkeeping software, or if you use Dent Rec going back to that vendor, then they would be entering that data into Dent Rec. Now I wanna emphasize something real quick.

I do not go into dental offices. Everything I do is outside of the dental office looking from the outside in, pre primarily on the financial statements and accounting records and tax records and payroll records. But some of these things I am, I'm going off my research more than anything. So I'm hoping this maps to what you see and can do in a dental office.

So there are those main three things right there. I guess this person would also be the one that would print checks where needed. Directly from the accounting system. That said, these days most people are not printing checks from their accounting system. They're doing bill pay through their online bank account, [00:46:00] or they're just not using checks.

You don't need to use many checks these days. So the main things are they're posting payments of the practice management software, entering adjustments and write-offs as well, and then they're ending the day sheet collections into the dent rec, or theoretically they'd be putting it into QuickBooks. Now, for many of our clients, this isn't done because it is a significant increase of time for us to do this mapping because there's always a tremendous amount of errors and it literally, I tried to do this in the beginning.

Literally, it took four times as long to prepare the financial statements when we mapped every day's day sheet back to the accounting records that is best practices. But we have found just that most doctors did not feel that the extra fee required, because I can't run a business at a loss just like you can't.

Didn't feel that that extra fee was necessary for us. I think at the time, we were charging $500 to do that because it did take a tremendous amount of time every month. And so what we did is we gave sort of a best practices for doctors [00:47:00] to review or periodically reconcile between the day sheets and the bank statement.

Let the front office know that. And that was sort of a, a compromise. That's why I'm so interested in Dent Rec and why I did my podcast is because this could be a way that essentially automates that control system, which is such a valuable control system. Now that said, I did the podcast with Dent Rec.

I'm not necessarily endorsing them because I haven't seen it in action now. They've offered to do it in, uh, on a client for free for a period of time. Any volunteers, and you're a client of ours, reach out to me. Or even if you're not, reach out to me. You can reach out to info@practicecfo.com or go on our Contact us page, and I will connect you up with the, uh, founder of Dent Rec and you can, you can do that.

Otherwise listen to that podcast to learn more about that. Alright, so that's the office manager. The second position, ideally would be a biller. And this person opens mail. They immediately stamp all checks for deposit only. They calculate deposit [00:48:00] totals per day. Uh, they prepare the bank deposit slips.

They compare the daily deposit slips to the day sheet to make sure that they agree. And then they staple together a copy of the deposit slip, the day sheet, and the terminal batch out reports. That's what comes outta that merchant terminal that your patient swipe their credit card on and they staple those and they put it in a folder.

And then I think that they should take that folder. They should put it in the doctor's office, put it in the doctor's office. That way they know that every day the doctor has these documents from the practice management software day sheet, the deposit slip for the bank and the terminal batch out.

Showing credit card receipts and refunds all in one place, and then the doctor can quickly look at those. Now, even doctor, if you're not always looking at that, the fact that they're putting it on your desk or in a file somewhere in your office every day, or maybe they do it upfront and you come up and get it so they see you actually taking it over, however you wanna do that, that is a [00:49:00] huge benefit to minimizing.

And again, I'm not gonna use the word prevent. I'm even hesitant to use the word deter, but I do think it reduces at some level the amount of fraud that can occur. So I'll use the word minimize. Alright? You as a doctor, you should be the one depositing the funds at the bank or. I'm such a believer in delegation, and if you're trying to run a really successful two, three, $4 million dental practice, you do have to delegate really well if you want to have some balance in your life.

Trust me, I know this. As we've grown a practice CFO, there were things that I used to do that I was reluctant to let go of, that I had to let go of. I had to fire myself from certain jobs in the company in order to have sanity in my life in order to be a great business owner. And in order to elevate myself to do the things that I'm passionate about doing, I had to let go of a lot of things.

Maybe depositing funds at the bank is one of 'em. I don't get cash. So this isn't an issue for me at practice CFO, [00:50:00] if you still get cash and checks. Now, most of the time checks now are being deposited through electronic deposits from insurance companies, but you never know with patients, you're probably still getting these things and you may feel more comfortable doing it yourself, and that's great.

And if there's a bank on your way home from work. You aggregate 'em, put 'em in a lockbox. Lockbox, do it once a week. That's fine. Um, as well, that does mess a little bit with the mapping on the day sheet, which will show cash and checks by day. So if you do take the cash and checks and you only deposit it once a week, you may want to break it up to do five or four different deposits if you had four operating days that week.

So it's easy to map out those deposits at the bank, back to the day sheets and the accounting records. So if you do delegate that, just make sure that you do check from time to time what's actually being deposited in the bank and that it maps back to the day sheets because that's an easy area where embezzlement can occur.

Alright, this other thing the doctor should be doing is [00:51:00] they should be signing all checks. Again, if you have a very trusted person in the office that you wanna delegate that to, you should be able to review checks at, at least at a minimum. And then a lot of doctors have a spouse who handles this, which is great.

Alright. Number four, approve all credit card purchases. Um, as well, that can be difficult if you're bigger offices and the front office is buying lunch for everybody. Do you approve everything? Well maybe have some system of controls. Now, I love, I absolutely love these tech credit cards out there. They're really technology companies that are built on top of Visa, MasterCard, discover, and we here at Practice CFO, we use ramp.

We are a strategic partner with ramp. We can, uh, get that set up for you. If you want to have a tech driven credit card, it does give pretty good cash back as well. A lot of you doctors love your airline miles. You love your cash back, you love whatever that reward is, and I get that. But please don't let the tail [00:52:00] wag the dog here.

Having a really good control system over your spending, what's called your expense management program, your expense management program is more important than getting a few extra airline miles. That said RAMP gives really good cash back. And there's others, there's Brex, there's Divvy, there's a few others.

But we, we really love RAMP here and we encourage our clients, clients to use ramp. It also helps us to get the accounting done faster so we can get the financial statements out the door sooner each month. But in RAMP you can set up all sorts of controls. You can give an employee a given card. It can just be a virtual card only.

You can create a hundred virtual cards. We set up virtual cards by, by vendors oftentimes, and put limits on that. So the vendors can't pull the fast one on us either. And this is, we have found many, we have saved many lost dollars most of the time by inadvertent efforts or [00:53:00] inadvertent instances, and not necessarily by fraud, but it's a really valuable control system.

It just takes a little bit of time to set that up. Um, but that's a way that you can set controls around credit card purchases by your employees if you do delegate that. I have certain employees here at Practice CFO that I've given cards to, and I put limits on those and it, uh, will highlight things that look suspicious.

And every transaction that is purchased with that card, they have to provide a receipt. And it's super easy because as soon as the transaction occurs, they get a popup on their phone. They can take a picture of a receipt, they can enter the details, and it feeds into the RAMP accounting system. It's really wonderful.

Okay. Uh, and RAMP is free. They make money on the interchange and, uh, and that's why it's such a valuable thing. Okay. Another thing that the doctor should be doing is I think that they should be, uh, let's see, reviewing their, their bank statements, or like I said earlier, their general ledger, which is almost the same thing.

They should [00:54:00] authorize and review all adjustments to patient accounts on a regular basis. They should review refunds. They should review financial statements for unex, unexpected changes in collections and expenses. They should review and sign the employee time sheet at the end of each pay period. Now, you don't have to review and, and sign the time sheet per se.

That can be built into the accounting software that it doesn't get processed. No payroll ever gets processed without you, the doctor, or perhaps a spouse. I'm okay with that too, approving that payroll. You should never allow a payroll to be run by one of your general team members no matter how long they've been there, and no matter how trusted they are, without you at least giving that a nice, healthy review.

Okay? Review your payroll reports and look for any irregularities. Review your merchant processing statements, uh, for credits as well. It has been known. For refunds to be given, but refunds to be given and put on the employee's own personal credit card. And then it's written off on a given patient's record.

So watch out for that as well. And then [00:55:00] we see PAs. What we do is we make sure we reconcile to the bank. We also do look for trends. Of course, we always do a financial forecast whenever we meet with our clients as we do strategic financial decision making, tax planning, debt restructuring, personal budgeting, all of those things that we do as well.

And of course the CPAs will prepare the tax returns and provide a lot of these reports for the doctor as well. So that is a very, um, summarized explanation of a proper segregation of duties inside of a dental office. Alright, let me go ahead and end this podcast episode on what do you do if you have discovered that you are a victim?

Well, in the beginning of the podcast I said. One thing that you can do that will dramatically reduce the likelihood of embezzlement and uncover embezzlement that has occurred is to do spot audits, not by you, but by a professional third party. There are [00:56:00] CFEs out there. I can Google certified fraud examiners, and you'll get a list of people have been trained in this.

I haven't looked myself, but you might be able to find people who specialize in certain services, business or healthcare businesses or, I really have a lot of confidence in Prosper. And so I'm giving a little shout out here for David Prosser. He did me the honors. He came to my office, he traveled to San Diego, free of charge.

He did a service by giving a great webinar many years ago. And, uh, and so I, uh, found him to be very reliable. You can go on his website, you'll find he has something called the Hall of Shame. I mentioned this in my last podcast. This shows perpetrators of embezzlement and he has incredible number of embezzler on the site.

'cause someone that's prosecuted and found guilty of embezzlement, this becomes public record. And you can take that and you can post it. And he's done that and, uh, calls it the Hall of Shame. And there are some people who have embezzled over a million dollars. That's how bad it can get. So here's my [00:57:00] recommendation.

Once every, I don't know how often, I'm just gonna take a guess here. I would say once every 18 to 36 months have somebody, like a member of David, David Harris, sorry, David Harris' team at Prosperity. Come and do a spot audit. Your, your staff won't even know. They'll do it after hours. They'll do it on a weekend.

They know what they're doing. They'll look under records. They'll uncover most likely an embezzlement if there's an embezzlement occurring. Now, I hope I'm not speaking out of turn there, but that's the impression I got when I speak with. David, he doesn't recommend trying to self implement or DIY this because there's so many complicated factors and they've seen, they've seen hundreds and hundreds of different, uh, episodes of frauds, thousands.

And so they're gonna be very, very good at doing that. So that's my one piece of advice that I think will really help prevent fraud. I think it's okay to let your team know that every so often you do an a, an, uh, an impromptu, [00:58:00] unscheduled audit of the records inside of the practice management software and also the bank statement and the accounting software.

Let them do their thing. And then not only will you find if embezzlement did occur, I think you will also help minimize, or I'll go so far as to even say deter. Embezzlement from occurring in the future. If your team knows that this is just a regular thing you do every so often, don't tell 'em how often, but you just do it every so often and that it's really a surprise and it's not because you don't trust them, it's because this is what the guidance you've been given from coaches and business consultants and people like me, your external CFO, as a good practice to prevent embezzlement from occurring.

I should also say, and I didn't plan on this, but CPAs and bookkeepers are also guilty of embezzling from their clients, and that's why you don't wanna give them access to your bank accounts for [00:59:00] full control. You only wanna give them access to C, what's called view only access. That's really important.

You don't wanna give them your actual login credentials. I know you may trust them, and I've had many clients. Try to give me their, their access credentials just to make everything easier. I get that. But that's why I love these tech enabled accounts like Relay Fi, love Relay Fi Ramp. Love Ramp is because you can give your accounts very specific controlled access without giving them permission to ever transfer money.

And if you're a client with us, you know that we manage almost all of our clients' assets, like their 4 0 1 Ks defined benefit plans, IRAs, trust accounts, things like that. And we use Charles Schwab and Vanguard who have massive Chinese walls in between us and the client's money. This is where we are different.

An investment advisor, if they're structured properly, should be different than say, Bernie Madoff. Yep. Remember Bernie, when his [01:00:00] investors invested their money with him, they wrote a check. They didn't write it out to Charles Schwab. They didn't write it out to Vanguard with their deposit two in the subject line, and then their account number.

No, they wrote it out to Bernie Madoff in the two line, and Bernie would deposit this and this money was invested in his, an account, in his own name, and so he did not have a wall between him and what's called the custody of his client's assets. That's what Charles Schwab is, and that's who we use is Charles Schwab.

They're the custodian, they're the largest custodian for independent financial advisors like us here at Practice. CFO. An independent financial advisor is someone who doesn't work for one of the big wirehouses like Merrill Lynch, Goldman Sachs, Morgan, uh, Stanley, et cetera, et cetera. Others, Edward Jones and uh uh, there's a few many others out there.

We are independent. We don't work for any of those companies. We are only paid by you. We are not paid by any third parties. No kickbacks, no commissions, nothing like that. It is a what's [01:01:00] called a fee only service. And in my opinion, it's the safest, most honest way to give investment advice and the most objective way.

But we never wanna be able to touch your money without your dis deliberate authorization to do so. And that's why we use these custodians whose primary job is to protect your money from anybody and everybody. Hackers, investment advisors who have bad intentions. Investment advisors are also subject to those three dynamics of the fraud triangle, which if you call what those are, it's opportunity, it is pressure, and it is rationalization scrolling up to see that it's not just people in your dental office.

Everyone can be subject to that. So, uh, ending off here, if you've been embezzled. If you detect embezzlement in your practice, then here's what I recommend that you do, is you, uh, you may be tempted, and I'm just gonna read this from my guide. [01:02:00] You may be tempted to simply terminate the employee, move on.

However, remember that embezzlement is a crime, and you should therefore approach it with a legal mind frame as if you were a lawyer. Immediately terminating an employee might endanger you further and will most likely allow the perpetrator to commit embezzlement at a future employee employer. So before any action is taken, you should stop the embezzlement by requesting that the employee take a few days off.

Remove all remote access given to your practice management software. Immediately during that time, investigate. The incidents and determine to what extent the embezzlement had OC HA has occurred. This is a perfect situation to contact Persin and have them come in. You may need the help of your accountant to do this, or, as I'm recommending persin, establish the evidence of the embezzlement to, to the fullest extent possible.

As soon as the evidence is acquired and documented, then terminate the employee. Upon doing so, refer the employee to the handbook section that discusses embezzlement as a grounds for [01:03:00] immediate termination. We qualify this recommendation by stating that you should consult with an employment attorney regarding this employee and solicit guidance specific to the situation.

Nonetheless, once you have evidence that embezzlement had has occurred, you should consider these further options. Prosecute the embezzler, Sue the embezzler civilly. Or prosecute and sue the embezzler. Well, that sounds like a repeat, so I'm not sure what I'm trying to say there. But basically, don't just let it go.

Prosecute the embezzler, sue them. If you have enough evidence, you should both prosecute the embezzler and sue. By prosecuting you might be saving another employer from becoming a victim of embezzlement because if it's prosecuted, it can become public information. By suing, you might be able to recover some or all of the stolen funds.

Consult with an employment or business law attorney before doing this. So you, if you have an hr, uh, company that helps you like C or HR for health, you can contact them. [01:04:00] They will likely take you to a, an attorney or a specialist to help you sort through the incident if it's happened to you. My sincerest condolences.

It's not an enjoyable thing to experience as a business owner for all the obvious reasons stated. Alright everybody, I hope you enjoyed this episode of The Dental Boardroom. Embezzlement is prolific. Please take this seriously, put some things, some basic things into place. Otherwise, there's a good chance that you may unfortunately fall victim to this.

Thanks for tuning in to this episode of The Dental Boardroom Podcast. Until next time.