Doctoring the books

A former dental office employee I recently met, after hearing that I’m a CFE, immediately began to fill me in about an embezzlement his former workplace suffered. I smiled wryly as the narrative unfolded. This wasn’t the first time a member of the medical industry shared this kind of story with me. Indeed, this reaction is almost de rigueur.

Medical establishments are uniquely vulnerable to fraud their employees perpetrate. Doctors, dentists and their ilk generally prefer to focus on caring for their patients rather than attending to dry, business-related tasks necessary to operate functioning practices.

Physicians in smaller practices, especially, are likely to trust just one or two individuals to handle every financial aspect of the business — including receipts, invoices and bookkeeping. Medical practices are ripe for exploitation.

Through my work investigating medical employee fraud and speaking to victims, I’ve noticed emerging patterns. These case studies, which I’ve collected through my work experiences, exhibit some common red flags of fraud-susceptible medical practices. I’ve changed names and places.

Ignorance of financial operations

In 2004, Benjamin Perlman, a Boston-based dentist, interviewed a young woman, Tina, to fill the business manager position at his practice. Tina was smart, confident and knowledgeable. He hired her on the spot.

Perlman had a lot going on in addition to his dental practice. He ran a charity dental clinic in the Middle East and held several real estate interests. He didn’t have the time or proclivity to manage the tiresome details of running his busy practice. Perlman felt that Tina could free him of that responsibility.

She proved uber-competent, so Perlman trusted her implicitly. He totally removed himself from financial operations and allowed her to run the practice as she saw fit. Tina opened all mail and cut every check, including her own paycheck. She made all the bank deposits and became well-acquainted with the bank employees. They knew that her boss trusted her and authorized her every request.

After about a year, Perlman began to notice that the business checking account seemed to be perpetually short on funds. He chalked it up to a temporary dip in business and didn’t give it much thought. He knew Tina had everything under control. One morning soon after, however, the bank notified Perlman that four checks had bounced. Confused, he paid a visit to the bank. The teller produced copies of the day’s checks for review. Perlman scanned the images and felt a pit form in his stomach. The very first check amounted to $1,500 — and was made out to Tina.

Perlman quickly asked to see all the practice’s activity for the last 30 days. He did some quick calculations and realized that, during this period, Tina had paid herself $10,000 on top of her normal paycheck. He immediately placed two phone calls. The first was to his accountant; the second was to the police. When Tina arrived to work that morning, two officers awaited her. She wordlessly supplied the officers with her lawyer’s business card and presented her wrists to be handcuffed.

Perlman ultimately discovered that Tina had embezzled more than $100,000 from his practice during her year of employment. And he wasn’t Tina’s first victim — she’d executed the same scheme at several other practices. Tina’s total ill-gotten gains had exceeded $500,000.

She was sentenced to two years in federal prison and deported to her native Vietnam after her release. Perlman wasn’t able to recover all the stolen money, and he had to borrow money from his sister to make it through the year.

Perlman now regularly reviews all the practice’s financial records. He also personally cuts every check and has all business mail delivered to his house. He’s determined to never be victimized this way again.

Insufficient oversight

The billing department at the Franklin Group, which ran a chain of pain-treatment centers, received a call from a patient, Gilbert Moriarty. Moriarty had found a credit card charge of $3,500 from the Franklin Group, but his copay should’ve been only $35. Clearly, a Franklin employee inadvertently added two zeros to the charge.

The billing department reviewed their records and found another problem. The Franklin Group had already issued a refund for the balance. Oddly, the check for $3,465 wasn’t mailed to Moriarty, but to an Anita Gonzalez at a totally unrelated address.

Franklin’s billing department placed a call to Gonzalez and asked her if she’d received a check from the Franklin Group for $3,465. “I did,” she replied. “My mother works at Franklin. I’ll check with her and see if she knows anything about this.”

The billing department found that Gonzalez’s mother, Amy Lopez, worked as a payment poster. Lopez was responsible for recording patients’ payments and alerting the accounting department when a patient overpaid so it could issue a refund. Lopez was immediately escorted off the premises.

A subsequent investigation found that Lopez had manipulated the refund system so she could embezzle $50,000 within three years. Lopez would identify her victims by studying a master schedule of stale payments, which management rarely, if ever, reviewed. Lopez would change patient names and addresses to that of her family members in the computer system. Once accounting would issue a refund, Lopez would change the information back to the patient’s.

We spoke to every payment poster at Franklin. They all told us they didn’t need the ability to alter demographic information to perform their jobs. Therefore, Franklin payment posters are no longer able to change demographic information, and management now reviews the payment schedule each month.

Duties aren’t segregated

Steven Walsh’s father died when Steven was still a boy, and his uncle, Henry Walsh, assumed the role of father figure to his young nephew. When Steven went off to college, Henry encouraged his nephew to follow in his footsteps and become a doctor. Steven did so, even attending the same medical school as his uncle. He ultimately joined Henry’s orthopedics practice.

Five years into the venture, Steven’s wife, Linda, grew suspicious. She consistently earned more money in her job as a physical therapist than did her orthopedist husband even though his practice was busy. Henry’s wife, Debbie, kept the company’s books and handled all the practice’s mail. Henry assured Steven that his low salary was the result of a struggling practice. Steven trusted his aunt and uncle — the last thing he wanted to consider was that they were swindling him.

Debbie eventually convinced Steven to approach his uncle and ask for access to the company’s books and tax returns, but Henry repeatedly rebuffed Steven. One afternoon, while Steven was chatting with the billing manager, he casually mentioned that the practice was doing poorly. The billing manager gave Steven a quizzical look. “What are you talking about?” she asked. “We’re clearing millions every year.”

Steven promptly hired an attorney and a team of CFEs. The team ultimately uncovered almost $2 million in damages and discovered that Henry and Debbie Walsh had paid all their personal expenses through the practice and drew unusually high salaries. In concert with their CPA, they’d hid their fraudulent activity from Steven for five years.

Steven eventually settled with his aunt and uncle out of court and took over as full owner with total access to the financial records. He now runs a thriving practice, but he hasn’t recovered from the emotional toll of his uncle’s betrayal.

Better bored than defrauded

Unfortunately, none of these cases are unique. Medical partner fraud is more common than most medical professionals realize. Medical practitioners who wish to avoid employee fraud can take these steps to protect their practices.

• Consider having business mail sent to your home, a step Perlman adopted. This will minimize, if not eliminate entirely, the opportunity for employees to tamper with correspondence.
• If you run a small practice, don’t entrust an employee to cut checks. Write the checks yourself. It’s too easy for an employee to take an unauthorized cut of your earnings. Remove that temptation and avoid defalcation.
• Properly segregate duties. Henry and Debbie Walsh were able to cheat their nephew for five years because they handled the books and taxes. Had Steven been responsible for some of the practice’s fiscal tasks, his uncle would’ve struggled to hide his illicit financial activity.
• Familiarize yourself with the bookkeeping and business side of your practice. Franklin employees know that, after the Lopez incident, the chances of getting anything by management are slim to none. The knowledge that you regularly review the books should be enough to deter most ethically challenged employees from defrauding the practice.

Take control of your books and protect your practice. Maybe it’s boring and tedious. But better bored than defrauded.

Joshua Wiesenfeld, CFE, CPA, is a financial investigator at Labaton Sucharow, LLP. Contact him at Joshua.wiesenfeld@gmail.com.