CFEs can be medical practices' best friends

Jeffrey Slotten, DDS, a dentist in Palatka, Florida, thoroughly trusted his office manager of seven years, Theresa A. Frank. Most doctors totally rely on their office managers and are convinced that their practices would collapse without them. Slotten was no exception. Frank managed the employees, payroll and the patient billing software, and created the daily bank deposit slips. Slotten thought his practice had good internal controls and separation of duties because he personally delivered the deposits to the bank and maintained the dental-office operating account. Also, his accountant reviewed the collections reports every quarter. What Slotten didn’t know was that Frank had been manipulating the patient collection data to produce the collection reports that the accountant was reviewing. The numbers weren’t real.

After Slotten and his staff caught Frank, he called his CPA office. I work for the same CPA, who asked me to investigate. I soon discovered she’d stolen more than $260,000 from collections over seven years and via other frauds.

Here’s how Frank committed the frauds. She’d stay late or come into the office after hours when she’d alter and manipulate the patient billing accounts and pay herself overtime. She’d prepare the daily deposit but then she’d skim cash from it. Frank also secretly applied for and obtained a credit card in Slotten’s name, which she used to illegally purchase items. She’d collect the mail, so she was able to intercept the credit card bills.

Frank maintained the cash drawer for the practice in her desk. Staff would collect and post the daily cash, checks and credit card payments. They’d then place the daily collected cash and checks in Frank’s drawer for her to process the daily deposit. The practice’s staff began to become suspicious of Frank after a new front-desk clerk noticed that none of the cash she collected for the day was a part of the daily bank deposit she’d prepared for the dentist to take to the bank.

Other staff members began to watch Frank to try to catch her in the act. Now when they’d collect cash from a patient they’d print as documentation the patient’s account ledger that showed their collected payments and how they were posted. Then they’d revisit the patient accounts the next day and find that their posted cash collections had been changed to credit card payments.

After a few weeks of tracking, the staff members took their patient account documentation to Slotten. He realized that Frank was stealing and manipulating the patient collection accounts.

Also, the billing software contained an audit trail, which acted as keystroke logger and a time clock. Her after-hours alteration sprees also nailed her.

The police were in Slotten’s office when Slotten confronted Frank and fired her. The police arrested her and escorted her out of the office. She was charged with an organized scheme to defraud, forgery and grand theft over $100,000. She took a plea deal, was ordered to pay restitution to Slotten and is on a 10-year probation.

Occupational fraud can be as simple as an employee stealing petty cash or as complex as a multi-layered financial scheme detectable only through a fraud examination.

Sitting ducks

According to a 2009 Medical Group Management Association survey of 945 medical practice staff members, 83% have been affiliated with a practice that had been a victim of employee theft. Most cases didn’t lead to prosecutions. (See amednews.com, Aug. 13, 2012.)

As I wrote in a previous “Rx for Fraud” column, medical practices often don’t realize they’re sitting ducks for employee embezzlement and theft. Busy offices, trusting work cultures, and complex accounting and billing programs can create ideal fraud opportunities. (See: Medical businesses’ unique conditions double the vulnerability, “Rx for Fraud,” Fraud Magazine, Nov./Dec. 2019.)

Tired physicians and administrators at the end of chaotic days aren’t interested in checking internal controls and that staff appropriately fulfilled their responsibilities.

Employees at medical practices commit theft or occupational fraud by deliberately misusing practices’ property via their positions. Many employees have access to — and can target — practices’ inventories, assets, currencies, checks and trade secrets. Of course, all medical practices should have plans to detect, prevent and deter fraud. They should never underestimate the potential of attacks from within.

Employees can intentionally and fraudulently misuse practices’ property or assets, steal or embezzle funds, collect credit card information via surreptitious swipers, swipe their own credit cards on legitimate office swipers to obtain refunds from their practices, pay fictitious employees, and alter checks and records through forgery, among other frauds.

Occupational fraud can be as simple as an employee stealing petty cash or as complex as a multi-layered financial scheme detectable only through a fraud examination. It can involve a single employee or several colluding employees. Severe asset misappropriations can bring a practice to its financial knees.

The amount of financial impact is usually dependent on the fraud’s duration, the scheme’s complexity, the employment level of the fraudster and how the practice handled the fraud after discovery.

Guidelines for medical practices

Here are suggested guidelines for medical practices after they detect fraud:

1. Immediately consult legal counsel (to first decide if the medical practice should terminate or suspend implicated subjects during investigations and to consult on employee laws) and hire trained professionals, such as CFEs, to examine financial records.
2. Expect subject employee(s) to file for unemployment if they’re terminated.
3. Don’t seize employees’ personal property, including personal email accounts, without their consent.
4. Maintain confidentiality to avoid alerting accomplices or exposure to defamation claims from accused employees.
5. Know that CFEs will perform interviews of all subjects, including admission-seeking interviews with suspected employees.
6. Because most fraudsters who confess don’t know exactly how much they’ve stolen, they might offer an amount they think they’ve removed from the practice and are willing to immediately repay to avoid prosecution. Of course, the best outcome is prosecution of fraudsters. However, medical practices, to avoid bad publicity, often consider employees’ offers to make restitution. Practices shouldn’t promise anything in return and then check with their attorneys.

Recovering losses

After a medical practice has discovered an occupational fraud or employee theft, it should immediately contact its insurance agent to determine its rights and covered losses under fiduciary bond and employee dishonesty policies. Most insurance policies require that a medical practice report a fraud to the police as a requirement for payment.

A medical practice will usually file a notice of claim within a set period after it discovers an employee theft. An initial calculation of the loss and a description of the theft will be required for the proof of claim. CFEs can provide medical practices with preliminary quantifications, description of thefts, chronological narratives and supporting documentations.

However, medical practice insurance coverage is often insufficient or non-existent to cover losses incurred by fraudulent employees. Medical practices can explore the possibilities of recovering losses through criminal or civil actions or both. Small claims court is also a possibility.

Legal recourse

In the U.S., when law enforcement files charges against employees, the government has the responsibility to prosecute the employee. The same is true for many global provinces and regions. CFEs can again assist with their fraud examination reports. The criminal justice system could be the most cost-effective method for restitution. A criminal investigation can locate assets that aren’t accessible to employers in a civil action.

Police investigators in the U.S. will send a case’s facts to state attorneys’ offices for possible prosecution. Depending on the amount of the fraud, employees could be charged with felonies. After a prosecutor files criminal charges, medical practices can have opportunities to discuss settlements during pre-trial procedures or plea bargains.

If medical practices have strong cases against employees, those employees’ attorneys will usually try to negotiate lighter sentences and probations plus restitution. Trials and convictions will also include court orders of restitution as part of sentences. Corresponding civil theft loss cases provide for treble damages for employee thefts.

Opportunities for CFEs to help quell chaos

When medical practices fail to prosecute employees who commit occupational fraud, these fraudsters just move on to the next victim’s business because they know the worst-case scenario is only termination. Medical practices should strive to help stop these criminals from defrauding other medical practices by immediately reporting them to law enforcement. The stolen amounts can create devastating financial crises, especially if practices have insufficient or no insurance coverage, and the fraudsters have squandered the funds.

Medical-practice occupational fraud is extremely stressful for everyone, including shocked staff and owners who must contend with the actions of formerly trusted colleagues and endure the loss of time and money from investigations and resolutions. CFEs can step in quickly to discover evidence that will help submit insurance cases and facilitate possible litigation. Their professionalism can lend solace during chaotic circumstances and help guide medical practices with organized responses to mitigate losses and install internal controls to prevent and deter future frauds.

Belinda M. Kitos, CFE, is president of SCF Inc. Contact her at BMKitosCFE@hotmail.com.

See sidebar: Treasure chest of fraud possibilities for medical provider employees

Treasure chest of fraud possibilities for medical provider employees

Medical provider employees can submit fraudulent claims for patients and divert payments to themselves. They can use medical practices’ insurance contracts to easily submit fraudulent claims because they have access to the billing systems.

Medical practice fraudsters can call pharmacies for unnecessary prescription drugs that crooked employees will then sell and/or use. For example, a resident of a retirement community sold drugs to her friends and neighbors that she’d illicitly purchased via a medical-practice employee. (See the ACFE's Fraud Examiners Manual.)