All about Embezzlement Red Flags

Let’s begin with a summary of the key points:

• A “red flag” is an indicator of a circumstance that varies from “normal”.  It shows that something is out of the ordinary and may need to be investigated further.
• Many embezzlement red flags are common to all types of business, while others are specific to dentistry.
• An embezzlement red flag is simply a warning sign. A probability that the red flag being observed is the result of employee dishonesty.
• Red flags are NOT EVIDENCE that theft has occurred.
• There are two categories of red flags to look for in most dental offices:
  • Behavioral red flags (qualitative)
  • Statistical red flags (quantitative)

If you search the internet for “fraud red flags”, you’ll find many articles, assessments and online questionnaires dealing with the subject.

Many of the red flag questions in those articles focus on employee behavior or lifestyle and require a Yes or No response.

For example:

• Does your employee have a wheeler-dealer attitude? Y/N
• Does your employee appear to have financial difficulties? Y/N
• Is your employee resistant to change or territorial? Y/N

The problem with these questions is that you only have two choices when responding.  It’s either yes or no.

These questions should have □ yes  □ no  □ maybe and □ don’t know choices.

These subjective responses are helpful to identify red flags, but they cannot be used as a predictive model to determine if embezzlement is happening.

A well designed embezzlement red flag questionnaire will record the responses for your self-assessment.

Poorly designed red flag questionnaire will score the responses for you and then predict the risk that embezzlement is occurring. (“perhaps”, “good chance”, “almost certainly”)

Bottom line; while you cannot ignore the presence of a behavioral red flag, keep in mind that it can be a subjective measurement.

Consider this statement:

Fraud experts say that in 40% of embezzlement cases reported, the person stealing displayed a living standard disproportionate to their income.

This is how I like to think of it.

Let’s say you are convinced your employee “living beyond their means” and you are unable to find a reasonable explanation to account it; then there is a 40% chance that your employee’s enhanced lifestyle is the result of them stealing from you.

Here’s another:

Fraud experts also report that in 20% of embezzlement cases, the perpetrator displayed “control issues”, or a willingness to share duties.

If you have an employee like this, there is a 20% chance that your employee’s behavior is a result the employee’s desire to “keep control” of things like the practice software and practice accounting for fear that you may uncover the theft.

Conversely, there’s an 80% chance that the employee’s behavior is linked to something else.  Maybe the employee is OCD, or trying to conceal sloppy work, or hiding an unfavorable practice statistic that will reflect poorly on their performance.

The 6 Most Common Dental Embezzlement Red-Flags

At least one of these red flags are found in 85% of dental embezzlement cases.

So, does this mean if you have ALL SIX of these red flags that there is an 85% chance you are being stolen from? Probably.

Every situation is different different. Here is a list of the Red Flags in order of magnitude; as reported by observation after embezzlement the was found.

• Living beyond means – 40% of cases
• Financial difficulties  – 34%
• Wheeler-dealer attitude  – 20%
• Control issues, unwillingness to share duties  – 19%
• Divorce/family problems  – 17%
• Irritability, suspiciousness, or defensiveness  – 14%
• Addiction problems  – 13%
• Past legal problems  – 9%
• Past employment-related problems  – 8%
• Complaining about inadequate pay  – 7%
• Refusal to take vacations  – 7%
• Instability in life circumstances  – 5%

How can I check for Embezzlement Red-Flags?

That’s easy, take our self-assessment.

What to do if you uncover red-flags in your practice.

A red-flag is an indicator that fraud may be present; but it does not guarantee its presence. There may be an innocent explanation, but it may also point toward something more sinister.

Every red flag must be reasonably explained. Do not ignore them. (This should be an unbroken rule for practice owners)

Follow these steps:

Step 1: Skepticism

This is where you apply reason, logic and common sense. 

Don’t jump to conclusions. 

For each red flag that you observe, consider if there could be an alternate explanation, and the likelihood of that explanation being valid.

For example: if your employee is clearly living beyond their means (new Tesla in the parking lot) and the explanation is “I had big win at the casino” – it’s unlikely to be true.

However, the employee recently received a modest inheritance or has a new partner with a second income, there is less concern.

When you assess each red-flag, consider the “weight” of your response.

Consider these two dentists who answered YES to this common red-flag question:

Question: “Does your employee have financial pressures at home?”

Dentist A answered yes based on the fact that the employee’s wages were recently garnished (or creditors were calling the practice, or practice loans were not repaid, etc.)

Dentist B answered yes based on a conversation overheard where the employee was complaining to a co-worker about being late with her last car payment.

Both dentists subjectively answered YES, however intuition tells us that Dentist A should probably be more concerned than Dentist B.

Step 2: Inquiry

If skeptical and careful reasoning cannot explain the red-flags you have observed, the next step is inquiry.

For each red-flag, ask yourself what other identifiable sources of information can be used to corroborate what was observed?

For example: If you are concerned because your employee is the first to arrive and last to leave the each day (or comes in after hours to do work),  then you can inquire further by checking your building alarm system and computer audit logs.

Most practices have an alarm system to that must be disabled when you enter, and enabled when you leave. Therefore, checking your building alarm log  may tell you “how early” and “how late” your employees was coming and going.

Some employees will have a legitimate reason for coming early or staying late. They may rely on public transportation, or get a ride to work with a friend who has to be at their job earlier. In situations like this, the employee will have a predictable pattern.

For example, an employee who relies on public transportation or someone else to get to work, may arrive between 7:00 AM and 7:20 AM every workday, and that’s going to be predictable because your employee is relying on someone else’s schedule.

If an employee is coming in early because they need to do things in order to conceal embezzlement, the pattern will vary. Some days they may not need come in early, other days will require them to come in very early.

The alarm logs will also show the comings and goings after hours and on weekends.

If your alarm logs shows that your employee came in on a Saturday night; check to see how long the employee stayed in the practice. If the employee stayed only for a few minutes, then it’s more likely they came by the office to pick something up that they left behind. If the employee stayed for an extended period of time than it is more likely that they may be up to no good.

You can also run an “audit report” from your practice management software to look for events that occur outside normal business hours. Most practice management software audit reports will show the date and time of events. Using those timestamps, look to see if things were happening when the office should have been closed.

If your own inquiry does not, or cannot remove your concerns, then consider the next step.

Step 3: Diagnostic Examination

If you are unable to confirm a reasonable explanation for the red-flags or your suspicions remain strong, then a diagnostic examination of your practice’s computer data and business records to look for and identify evidence of embezzlement may be indicated.

If embezzlement is uncovered, the diagnostic examination will then estimate its scope and scale, so the practice owner can make informed (and important) decisions regarding recovery, restitution and possible prosecution.

As well,  the diagnostic examination generally can provide the evidence required to terminate the perpetrator’s employment on a “for cause” basis, if they are still employed by the practice when the discovery is made.

Diagnostic Fraud Examination

Contact
William Hiltz BSc MBA CET