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

Everybody to another episode of the Dental Boardroom podcast. It's Wes Reed, cpa, cfp, 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 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 $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 have committed that fraud for so long. And that tends 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 going to hear me emphasize in this podcast is that no matter how much you trust, 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. That said it is good practice, I will say it is best practice to always verify even though you trust. So when I started off in accounting, I graduated in 2000, 2006 from BYU and I went to one of the, what they called 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&P 500 companies, for example, that we would audit. At Ernst and Young, the theme was to always have professional skepticism. Professional skepticism. And it's professional because that's good practice. It has nothing to do with you disliking, 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 question or ask documents from when we would do our due diligence as we would do the audit on the financial statements for that public company in order for that public company to give 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 regulatory overhaul in the public sector. It's not that we believe that you're doing that, but it is our job to, 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 debate with my brother who's 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 accounts 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 in a function or a task, whatever the software does. Well, you know, I thought about that and here was 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 account accounting industry out there, but the reality is, is that 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. Are you looking to buy or sell a dental practice? If you're a seller, how do you find a strong list of potential buyers? There's no MLS or Zillow for dental practice sales. In such a fragmented market, many dentists selling their practice feel discouraged. That's why I built practiceOrbit.com practice orbit is modernizing how dental practices are bought and sold. It's a platform technology. Y' all know them, Zillow, Airbnb, Uber and OpenTable. Just to name a few. These technologies do two things. First, they help match buyers and sellers by centralizing the marketplace. Second, once the match between buyer and seller is made, these technologies help them navigate the sale to a successful close. Here are a few of the features inside of Practice Orbit users can determine a reasonable sale price for practice in just minutes. All they need is the most recent business tax return. Practice owners can use the directory to find important service providers like practice brokers, attorneys, accountants and bankers. Practice owners and their brokers can invite those service providers into into the platform so all parties are coordinating the sale together. Practice owners will have a beautiful digital listing of their practice like a home on Redfin. And importantly, the listing will be anonymous and personal information like your address, name and pictures are only released after an NDA is signed and approved by you or your broker. Practice buyers can create saved searches to be auto notified when new listings come on the platform that fit their desired specialty and location. And hey, dental practice brokers, you can list all your practices on the site for free. By doing so, you'll get access to Practice Orbit's large pool of buyers, all of whom have created profiles and saved searches to be auto notified when new listings come for sale. You can use the platform to introduce your listings to a targeted set of buyers. Additionally and optionally, you can use the platform tools such as a built in NDA, a customizable loi, and a workflow tool to navigate the sale from LOI to closing. In fact, you can manage all your listings on the system from listing the practice to NDA to loi, and finally to closing the deal. Create your free account today at www.practiceorbit.com.

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. All right, 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, is to have a mindset of professional skepticism in your office. And how is that professional skepticism displayed to your team? It's not that you're going to 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, hey, team. You know, you're incredibly valued 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 now 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 estimate around 20 to 30% of offices 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 manage in 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 say it's employees. The reality is it isn't your employees, although they're incredibly important. It isn't necessarily even your clinical skill set. 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, by somebody in their office. And that creates so many emotions for 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. And so these fraudsters will go from one practice to another. And they will repeat it. And they get better every time they are sharpening their own saw of embezzlement skill set. And it's a really unfortunate thing, but it's one of the reasons why embezzlement is so dramatically high in dental offices is because we're not reporting these embezzlers. And 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 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. All right, I want to talk about. I have a guide. I call it the Embezzlement Protection Guide. But I want to 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. And 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 want to do is profile these people a little bit. The first thing I want to do is explain what are the variables that exist when fraud occurs in a dental office. What are the. What, what are the. 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 going to go over all of it because I have symptoms of embezzlement. So I have a profile of an embezzler, symptoms of embezzlement, causes of embezzlement, methods of embezzlement, under methods of embezzlement. Sheesh. I've got 34. We 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 going to emphasize minimize, because there is no perfect guarantee that you are going to prevent embezzlement. I'm sorry, there just isn't. In one of the people that I follow, his name is David Harris, and he founded a company called Prosperidant. 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 app for the practice cfo, our dental boardroom podcast, David Harris with Prosperidant I actually, you know what? Actually, I don't think I did a podcast. I had him actually come in and do a webinar. This was years ago here in my office, and I had 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 the top of my head, just a few. Actually, you know what, I'm going to pause that because I'm actually going to go through some of my list. Not going to go through all of it. It's fairly extensive, but I'm going to go through some of it. So stay tuned on that. But I've got this embeddlement protection guide that I'll include in the show notes, and it's very detailed. The thing I want to emphasize that 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 going to guarantee any embezzlement protection fully. It's setting a lot of things in place to try to minimize the likelihood that 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 the very end. I'll share with you what that is. All right, let's go through the three variables that make up one. What's called the fraud triangle. Now, many years ago, when I was coming out of college, I was really interested in fraud. And I don't know if it was from the movie with Tom Hanks, Catch Me if youf can, 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 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 because I really wanted to work in the white collar crime of the FBI. And 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 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. That 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 Prosperide Events, I have one of his articles here. He says that there are really two types of these embezzlers. One are just straight up dishonest people and the other one are people who are desperate. Now both of these are going to 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 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 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 are 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. 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 am 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 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 going to take this just temporarily, I need to get through this moment, I need it for this purchase, whatever it is, and I'm going to 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 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. And 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. Do you ever feel lost in your practice finances? And how about your personal finances? Ever wonder where your hard earned money goes and why you're not seeing the financial progress you've worked so hard for? If so, listen up. As a dental CPA and financial planner, I've created our company Practice CFO just for you. With all, with almost two decades of experience, Practice CFO integrates great CPA services like accounting and tax with customized financial planning, both business and personal. Think of it this way. Our dental focused CPA services give us the x rays we need to clinically plan your global finances and be effective financial planners. It's a highly customized approach we call the CFO model. Historically, having a CFO or chief financial officer was an advantage of large corporations only. But today, practice CFO gives that same advantage to private dental practice owners. As a client of practice cfo, you'll be assigned one of our dedicated CFO advisors. You'll receive insightful financial reports each month, have regular financial review meetings, reduce taxes, grow your wealth, and feel more in charge of your numbers. Because we believe that in the competitive landscape of dental practice ownership today, you have to be an effective business owner, not just a capable clinician. Reach out to learn more at www.practicecfo.com.

And the bad news is that within a dental office, we commonly find these three variables present. Often, office personnel may not be financially prudent with their personal spending and consequently feel 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 will see what I'm talking about. All right. 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 going to discuss those a little bit in this guide. Now, again, I'm going to go back to David Harris who he and I had a little bit of a banter about this because he was like, Wes, you can set up all sorts of controls in the office and you're not going to prevent embezzlement. And I think we met on a sort of a common ground to say that, okay, maybe controls aren't going to 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 prosperident is that, and again, I'm a huge fan of him, I endorse him. I'm even going to tell you to maybe get in contact with him if 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. All right, let's go on. Sorry to sound discouraging there. You can minimize it. And so you definitely should put into, into place behavioral, behavioral 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 are entrusted with a lot of access to financial responsibilities. They know the practice management software 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 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 beat up 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 they resist taking vacations.

Number 10, they resist third party services like HR consultants, maybe even certain practice management consultants or CPAs coming in and looking at books and records. Number 11, at least 67% of those embezzlers are repeaters. So these are people. Another profile characteristic is that they repeat themselves. And 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, 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. All right, now let's go on to what are some symptoms of embezzlement? Okay, here are a few. I'm not going to name all of the symptoms. I've highlighted a few in my embezzlement guide. So I'm just going to run through a few of these symptoms of embezzlement. These are red flags that embezzlement gu might be occurring. Number one, accounts receivable balances are increasing to higher 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 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 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 out of 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 an investigation was conducted, it was found out that that employee was coming in in 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 going to be clocking in and clocking out when they do that. So your time clock isn't going to catch that. But if you have a system of when they come in the building, either to maybe a main building or inside your actual suite, depending on the setup, like in my office here, 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, and leaving the office. All right, carrying on to other symptoms of embezzlement. Employee does not like to take scheduled 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, etc. The employee feels they are 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 going to stumble upon the tracks of their embezzlement and then that's going to 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, is still backed by a professional process of oversight and.

Check. Just like the government has three branches in order to create a check and balance. It's not that one distrusts the other. It's not even that. We look at one as Americans and we say we distrust Congress or we distrust the White House or we distrust.

We distrust the court system. It's that you need those in place to systematize the prevention of 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 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 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 here at practice CFO prepare really comprehensive financial statements that, 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 is 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 understand accounting transactions, what's debited, what's what's credited, how to prepare financial statements, that kind of thing. But I 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, 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 and you know, to restructure debt, to do all that stuff, all we need to know is what is the cash flow, the actual cash flow in and out of the bank account. And if something never hit the bank account, then we're not, we're not going to know that and we're not necessarily trained on that. 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, financial crime units. You see that in 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 skill set to do that. And we're hired a 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, that you can do important controls and checks that you can put into, into place. I'm going to give, I'm going to take a little tangent here and give a real life story that happened recently. And this is a client of 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, 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. ADP has their own software, Paychex Gusto Rippling is a really big one come out of 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 ADP and 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 into 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 point one 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 and then makes you get a code on your phone or have a separate 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 going to prevent significant amount of frauds. Well in this case, an employee opened a scam 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 and password and the employee did. And what happened was that then scammer, that hacker got 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 is actually a few employees for I think about $42,000 employees. 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 at practice cfo around our firewalls, around access to our accounting software, around access to our clients banking. We don't like to get transactional authority. We only want view access we have. We pay a tremendous amount each month to prevent cybercrime and control our clients 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 that 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 I don't recognize, trust me, I'm going to see that. If there's an amount that just doesn't look accurate, trust me, I'm going to realize that it doesn't take A long time to do this. But have these authorizations in place in order to prevent embezzlement. And embezzlement through payroll is one of the most common types of embezzlement. Employees cooking their time, padding their time as they say, creating a false employee with a going into the employee's bank account. There's a lot of different ways to do that. So 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 recommend a training once a year where employees are taught about the behavioral aspects of following processes and creating a sort of 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, let me 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. And 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. Let me pause there and make one key statement. This is something also that David Harris with Prosperidant mentioned that it isn't just big practices that are embezzled. It isn't just small practices, it isn't just one 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 going to 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. All right, 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. EDAs 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 friend and family discount, whatever. There's different reasons that they can do a write off so that it never looks suspicious. This is 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 non covered services. Routinely waiving a patient's copay or deductible while keeping an altering claim forms and dental records. Others are personal 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 $100 here and $100 there on Amazon, guess what? Usually that's not going to be found. Your accountant may see these purchases at Amazon on the credit card statement, but they don't know what it's for and they're just going to 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 going to be very, very difficult for an outside person to, 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. So we'll show all your checking account transactions, all your credit card account transactions all in one place and you can 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. All right. There's a big long list here of 34 other items. I'm not going to 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. Let me 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 want to skip when I hire somebody because it takes time. You got to 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 feels a little uncomfortable. This is why being open and direct with new employees, just like established employees, by saying they, 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 EFP ta? Are they a licensed dental assistant, hygienist, doctor? Check their licenses, check the status of those licenses. I think that's also a good idea. When you hire consultants or attorneys or CPAs, check their license 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 grounds for or termination. All right, 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 going to talk about that one here pretty extensively in just a moment. A third one I have on here is establish embezzlement control procedures. And there's a number of them here. I'm not going to 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, any write offs or adjustments for that day and make sure you recognize those things. If you do that, that's going to prevent a lot of improper behavior here. There are many, many ways of embezzling outside of that, but that's going to 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 Dentrec, which tries to automate this process of taking the day sheets. And it's dropped into this software online called Denrec. 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. Go to the front office team member who did the day sheet and put it into the dentrec software and ask them, hey, these aren't mapping. Help me, help me figure out why it said cash and checks of $4,586. I only saw cash and 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 can make that happen, here's what it, what it, what an office manager would do. They would post payments to the practice management software. They would enter fee adjustments, write offs in the practice management software, and they would daily enter all collections on the day sheet into the bookkeeping software. Or if you use dentrec, going back to that vendor, then they would be entering that data into dentrec. Now, I want to 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, primarily on the financial statements and accounting records and tax records and payroll records. But some of these things I'm, 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 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 to the practice management software, entering adjustments and write offs as well, and then they're entering the daysheet 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 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 compromise. That's why I'm so interested in Dent Wreck 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 Wreck. I'm not necessarily endorsing them because I haven't seen it in action. Now they've offered to do it in 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 inforacticecfo.com or go on our Contact Us page and I will connect you up with the founder of Dent Wreck. And you can, you can do that. Otherwise, listen to that podcast to learn more about that. All right, 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 totals per day. 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 report. That's what comes out of that merchant terminal that your patient swiped 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 and 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, 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 up front and you come up and get it so they see you actually taking it over. However you want to do that, that is a huge benefit to minimizing. And again, I'm not going to 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. All right. You, as a doctor, you should be the one depositing the funds at the bank.

Or, you know, I'm such a believer in delegation. And if you're trying to run a really successful 2, 3, $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 Them I don't get cash. So this isn't an issue for me, a practice cfo, 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 patience, 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 and you aggregate them, put them in a lockbox, do it once a week, that's fine 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 in 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. All right, this other thing the doctor should be doing is they should be signing all checks again. If you have a very trusted person in the office that you want to delegate that to, you should be able to review checks, at least at a minimum. And then a lot of doctors have a spouse who handles this, which is great. All right, number four, approve all credit card purchases 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 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 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 CAT cash back. And there's others. There's Brex, there's Divi, there's a few others. But we, we really love RAMP here and we encourage our 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 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 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.

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 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 pop up on their phone. They, 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. And Ramp is free. They make money on the interchange 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, let's see, reviewing their bank statements or like I said earlier, their general ledger, which is almost the same thing. They should authorize and review all adjustments to patient accounts on a regular basis. They should review refunds. They should review financial statements for unexpected changes in collections and expenses. They should review and sign the employee timesheet at the end of each pay period. Now, you don't have to review and sign the timesheet 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 who. 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 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 we CPAs, 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, or 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.

Summarized explanation of a proper segregation of duties inside of a dental office. All right, let me go ahead and end this podcast episode on what do you do if you have discovered that you are a 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 cfes out there. You 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 Prosperidant and so I'm just 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 so I 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 and it shows perpetrators of embezzlement. And he has incredible number of embezzlers on the site. Because 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 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 recommendation. Once every, I don't know how often, I'm just going to 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's team at Prosperidant come and do a spot audit. 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. 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 episodes of frauds. Thousands. And so they're going to 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 a and.

An impromptu 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 go so far as to even say determine 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 them 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 want to give them access to your bank accounts for full control. You only want to give them access to c, what's called view only access. That's really important. You don't want to 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. 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 accountants 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 401ks 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 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 2 in the subject line and then their account number. No, they wrote it out to Bernie Madoff in the tomb 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 Stanley, et cetera, et cetera. Others, Edward Jones and 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 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 want to be able to touch your money without your, this 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 recall 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 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. You may be tempted, and I'm just going to read this from my guide, you may be tempted to simply terminate the employee and 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 has occurred. This is a perfect situation to contact Prosperitant and have them come in. You may need the help of your accountant to do this or as I'm recommending Prosperidant, establish the evidence of the embezzlement 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 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 has occurred, you should consider these further options. Prosecute the embezzler, sue the embezzler civilly and 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 if you have an HR company that helps you, like CDER or HR for Health, you can contact them. They will likely take you to 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. All right 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.