Practice makes imperfect

Everybody loved Dr. Brian. He appeared to be the perfect professional, spouse, parent and friend. But he fooled everybody. At least for a while. Here’s how he, as the lead administrative physician of a once-thriving practice, skimmed and embezzled more than $25 million in 20 years.

Each of the 2,690 real cases of occupational fraud reported in the ACFE’s 2018 Report to the Nations has a unique story behind it. Here’s one from investigating CFEs. 

Fraudsters are often able to deceive their victims for long periods of time through gained trust and personability. These cases cut their victims the deepest because they’ve not only lost money, they’ve been personally betrayed. That was the case with a medical practice that housed a charismatic fraudster for two decades.

Twelve practitioners established Total Primary Care Pros with the friendly Dr. Brian (names have been changed) as the lead administrative physician. Charismatic Brian was a well-liked figure in the community. He appeared to be the perfect professional, spouse, parent and friend — the type of person you point to as an example for others.

The practice buzzed with activity for nearly 20 years, but the physicians noticed they were losing money, despite producing substantial revenues. Some of the physicians became suspicious that something was going on. Many were operating at a loss month after month. Millions of dollars seemed to simply disappear. Some of the physicians believed many of the expenses the practice charged to them seemed exorbitant. Several of them left the practice over the years. Eventually, we discovered that more than $25 million had been skimmed and embezzled in the 20-year period.

Initially, the partners were involved in making decisions on expansion of the practice and general matters. But as they increasingly were disturbed about low revenues through the years, Brian transferred decision-making to what were “committees” in name only. He and his closest allies ran the financial committees.

Whenever a physician would call for accountability, Brian and his friends would begin to ostracize them from the rest of the group and punish them with a reduced schedule and inflated costs for supplies and other expenses. It appeared Brian levied these financial penalties to reduce the dissatisfied physician’s ability to hire outside help to pursue an audit or take other action.

Most physicians that Brian and his buddies hired to replace those who left weren’t concerned about the practice’s finances because their spouses were successful, they had family money, or they were nonconfrontational. These new physicians were perfect targets for fraud schemes.

When the seventh physician, Ewan, left the practice, he expected the practice to pay him approximately $50,000 in accounts receivable, but it only paid him a little more than $2,000. He then hired our firm to investigate, and we discovered that Ewan’s accounts receivable at the time of his resignation was closer to $100,000.

I (Judy Wright) realized that Brian was at least complicit in skimming funds when I met with him to discuss why he hadn’t pursued recall or collections, which would’ve increased revenues for all the physicians. He said he was satisfied with things the way they were. I was shocked because if the financial statements were true, any physician would’ve jumped at the chance to use these easy ways to increase revenues. Brian’s body language screamed that he didn’t want anyone rocking the boat. At the beginning of the interview, he was relaxed but then physically withdrew, and his tone of voice became threatening. This was a major turning point in the investigation.

Purposefully confusing structure

When Brian first set up the practice in 1998, he implemented a confusing, overlapping financial records structure with three different software systems, all of which were now antiquated. With poor record keeping and numerous individuals separately handling the incoming revenue, no one except Brian knew how much money was actually coming in to the practice. Brian withheld financial information from other physicians.

He devised the business as a corporation instead of the normal limited partnership, which would’ve avoided double taxation on revenues. We later discovered that he did this to reduce the practice’s liability if the fraud was discovered because corporations can’t be charged criminally, reported losses eliminated corporate taxes owed, and Brian could plead ignorance. The practice also went through a series of untrained, unqualified and overpaid office managers and accountants, which appeared to be by design.

Brian used all these tactics to cover that he was skimming and embezzling millions of dollars in revenue, which he diverted into his 401K funds and used to pay state and federal taxes on the illicit funds. He’d meet with the office manager every Friday at noon behind closed doors and tell her how much money to transfer to his 401Ks and how much to pay on state and federal taxes for himself.

He never made the bank statements available to the other physicians. He’d underestimate the income and overstate the physicians’ expenses to conceal the fraud.

The practice paid physicians biweekly, but they could choose to forego salaries if their debt to the practice became too much. Many often went without a salary for months.

Brian also used company credit cards for unauthorized purchases, such as Christmas dinners for his family at restaurants and personal travel. He underreported revenues and grossly overinflated expenses to conceal his fraud.

Each year the corporation reported losses when the skimmed profits would’ve resulted in double taxation. By fraudulently reporting corporate losses as a result of the skimming, Brian defrauded the federal and state governments of tax revenues on the corporate income he had stolen in the 20-year period.

Deeper than just lost revenue for the physicians

Brian exploited the practice’s honest physicians for two decades. He falsely required them to keep paying more and more for expenses that didn’t exist while they stressed about being able to take care of their families.

Ewan said that whenever any of the physicians asked Brian why they weren’t making enough money, he told them to “work harder.” Of course, the harder they worked, the more money Brian stole from them. Many of the physicians even took on part-time jobs to help support their families.

By the time we discovered the fraud, Brian had taken total control of the administrative and financial leadership and was making all decisions. Ewan took the results of our investigation straight to Brian and asked him to reimburse him for the losses. Brian used the practice’s legal counsel to file a civil case against Ewan, which was eventually dismissed.

Civil and criminal charges are in process against Brian, including criminal tax fraud regarding the fraudulent losses reported for the corporation and embezzlement. The cases are still pending.

Lessons from the CFEs

We shouldn’t  succumb to the charm and charisma of individuals associated with our investigations. This is more difficult than it sounds because it’s human nature to want to trust someone and have an internal confidant during an investigation.

Just because the circumstances of an organization have apparently existed for a long time doesn’t mean that it has nothing of importance to investigate. You might assume that if a fraud scheme had been going on for 20 years, somebody would’ve caught it. This case proves that’s not true.

Most physicians, dentists and other medical professionals aren’t trained during medical or dental school to handle the business side of their practices. Thus, they become prime targets for fraudsters.

Fraud against physicians, dentists and small medical practices is rampant because these professionals often don’t have the means to hire qualified financial administrators, the knowledge to establish internal controls or the skepticism to spot charismatic, yet duplicitous, individuals.

We’ve repeatedly seen this pattern at many medical and dental practices. We investigated one case in which the office manager’s control of the financial data of the practice crippled the physician’s ability to deal with the fraud for fear of losing all his medical records. So, he allowed the office manager’s fraud to continue and hoped for the best.

Always make your own financial documents from outside sources rather than relying on those provided internally. Assume nothing, take nothing for granted and approach any investigation objectively.

Judy D. Wright, Ph.D., CFE, is senior partner at Westminster Investigative Consultants. Her doctorate is in industrial/organizational business psychology — specializing in fraud behavior. She also holds a master’s in business administration. Contact her at drjdwright@outlook.com.

Jack L. Oliver, CFE, CPA, is senior partner at Westminster Investigative Consultants and owner of Oliver and Associates, CPAs. He holds a master’s in public accountancy. Contact him at joliver@oandhcpas.com.