The Doctor's Worst Nightmare

Published September 6, 2011 - Business Value Magazine

By Ken Wilson, CFE, CSAR

It all started late Friday afternoon as the doctor was finishing up with the patient charting. This particular Friday, he was in the office alone because Mary, his office manager and part-time bookkeeper, was attending her mother’s funeral. The funeral was scheduled to start at 4:00 PM and Mary didn’t leave the office until 2:30 PM. The doctor convinced Mary he would be able to handle everything himself and she should leave and not worry about the office. Mary had worked for the doctor for eighteen years and was responsible for every aspect of the business, with the exception of patient care. That was the doctor’s sole responsibility.

Mary was considered part of the doctor’s extended family and both he and his wife, who had passed away only four years earlier, thought the world of her. The doctor ran a small family practice by himself and was highly regarded in the community.

About eight months earlier, Mary had convinced him to change banks in order to get better interest rates and better service. The new bank offered things such as on-line banking, paperless bank statements and a host of other services. Because the doctor trusted Mary’s judgment on such things, he agreed. As far as he knew or cared, everything was running smoothly. That is why the phone call he received from the new bank manager was a huge surprise.

“Hello doctor, this is Ron, the manager at your bank. Mary must be out of the office today for you to be available and having to answer the phone. Normally, I wouldn’t bother you with this. Mary has always told us she had checked with you and relayed what you wanted to do whenever these issues came up in the past, but I am glad we finally have a chance to talk. I am calling to find out from which account you would like us to transfer money in order to cover the shortages in your general account. We can take the money from your line-of-credit, your savings or cash out one of your certificates of deposit. I know you understand that if you elect the last option, there will be a penalty associated with the interest, just like last time.”

“Wait one minute Ron, there must be some mistake”, the doctor said. “I always have sufficient funds in my checking account to cover my expenses and what do you mean by, like the last time and issues in the past. have never spoken to you or anyone at your bank. Mary handles all of those matters for me and I can assure you she has never mentioned there ever being a problem.”

“That’s funny. Every time we’ve talked with her about this she said she had spoken to you. She would then give us your instructions. Normally, we moved money from your line-of-credit account or one of your savings accounts, but there was at least one time we cashed in one of your CD’s early in order to have enough funds to cover your expenses. I think we should meet and get to the bottom of this. Right now, there isn’t much money left in any of the accounts to cover payroll and the current credit and debit charges.”

“You are absolutely right we need to meet,” the doctor replied. “I will be at your bank in ten minutes and I hope you have the documentation to back up what you are suggesting!”

And so begins the doctor’s worst nightmare, much like those of many other small businesses. After meeting with the banker, the doctor learned he apparently had one additional employee on the books that he knew nothing about. The business debit and credit cards issued through his new bank were being used for much more than he ever knew. Both cards together were running almost $10,000 per month. In fact, the doctor didn’t even carry either card with him because he knew they were always in Mary’s desk, or at least that is what he thought. He learned there were some automatic payments set up through his business checking account that went to a credit card company, yet he knew he never had an account with that company. In some months, these payments also reached $10,000.00. Then there were the automatic transfers to a bank he never heard of before. These payments appeared to be for some type of a loan. His $1.0 million line-of-credit, which he had set up when he anticipated doing a major remodel of his clinic, was nearly maxed out. Apparently this account was being used to cover over-drafts in his general and payroll accounts. To top it all off, his CD’s, which once totaled five, were now down to one. These too, he learned from the bank manager, had been systematically cashed out early, or in some cases allowed to mature and then cashed, and used to cover over-drafts.

The doctor asked Ron to pull together all of the bank statements for all of his accounts, along with all of his canceled checks and transfers. He knew he would have to go through all of the statements himself, for the very first time. He also decided to call his attorney for advice and possible referrals and then contact the Certified Fraud Examiner he had heard about. Maybe this person would be able to help reconstruct all of the transactions and assist in locating his money.

Walter Scott once said, “O, what a tangled web we weave when first we practice to deceive!” This was indeed a tangled web of financial transactions and deception. But for how long had the deception been going on? The full extent of his financial loss remained to be learned.

As it turned out, Mary’s embezzlement’s had started long before she had changed banks. It started about four years earlier when Mary’s mother became seriously ill and shortly after the doctor’s wife had passed away. The doctor learned the real reason Mary recommended changing banks was because the previous bank was getting ready to close all his accounts because of the large number of insufficient fund checks that required the bank to transfer money from other accounts. The investigation also determined the extra employee on the payroll was Mary’s mother. The payroll checks were set up as a direct deposit into her mother’s account, who didn’t know anything about them because Mary also handled her financial affairs. Upon her death, all of the money in the mother’s account automatically went to Mary.

The doctor was just beginning to come to the realization of his situation. Everything pointed to his trusted office manager Mary, but he still did not have any real proof. Should he call her that evening and demand an explanation or wait until Monday? What if he fired her on the spot without having any proof or provide her an opportunity to explain? Might he face legal repercussions for slander, libel, defamation or wrongful termination? He then realized it was a good thing his wife had passed away, because the shock of all this would have certainly killed her. If the doctor fired Mary immediately, would he ever see any of his money again? What if she offered to repay him all the money, should he keep her employed? After all, her mother had been ill for several years and now she too had passed away. The doctor didn’t know who to call first or what to do. Sure, he had an attorney he had used on a few occasions, but he wasn’t an employment law attorney or even a criminal law attorney. He never had an accountant, because Mary always took care of his taxes and all his books. If he called the police without any real evidence, would they even be interested or would that cause Mary to pack up and leave and hide whatever assets she might have acquired with his money? The doctor had so many questions his head was spinning. What to do? Why me? Why didn’t I know what was happening sooner? How could Mary have done this and why? This case illustrates some of the legal and emotional issues embezzlement’s present.

Lessons Learned:

  1. It is imperative for an owner to actively participate in good fiscal management of the business.
  2. To have separation of job duties and not have one person responsible for all aspects of the business.
  3. Have all bank and credit/debit card statements mailed directly to the owner’s residence and review them monthly.
  4. Use a bank that provides at least a copy of the front of all canceled checks included with the bank statement.
  5. Use the bank’s on-line access to review checks and all statements frequently
  6. Be aware of the “red flags” of fraud.
  7. Lastly, the doctor learned any one of these preventative steps would have stopped the embezzlement before it got started.

Summary:

These types of embezzlement schemes are more common than most businesses know. Some go unreported because the business owner is too embarrassed for having allowed it to happen. Small businesses and not for profit entities are particularly vulnerable because they lack the staff to have separation of duties between employees. Professionals like doctors, dentists and lawyers are too busy running their practice and have no involvement in their own financial business affairs, choosing instead to hire someone to handle all of that for them. In addition, few employers conduct any form of background or reference checks. In one recent dental clinic embezzlement case I worked on, the employee had been terminated and was awaiting trial. She was able to get another job at a different dental clinic while out on bail. Granted, she had not been convicted yet, but the fact she had been arrested, formally charged and was awaiting trial was all public record and available on-line at no cost.

In the above case, the doctor hired the Certified Fraud Examiner who analyzed all of the financial documentation with the assistance of a private attorney who filed a civil lawsuit against the bookkeeper. Together, they were able to identify over $800,000.00 of assets that had been acquired with the doctor’s money. Those assets then became available for civil forfeiture under Washington State’s Criminal Profiteering Act. Once the assets were firmly identified and legal proceedings initiated against them to freeze them from being transferred or sold, the evidence was forwarded to law enforcement. The detective accepted the case that was prepared by the Certified Fraud Examiner and took the case to the local prosecutor, who filed multiple counts of theft, money laundering, and forgery against the bookkeeper. Just prior to trial, the bookkeeper accepted a plea deal from the prosecutor and was sentenced to ten years in prison. This unusually long sentence was due to the position of trust held by the bookkeeper, the long period of time over which the fraud was conducted and the large financial loss of $1.5 million. The prosecutor also noted the complexity of the embezzlement and the fact the bookkeeper had allowed the doctor’s employee dishonesty insurance policy to lapse.

The Association of Certified Fraud Examiners uses as a model what is called the “Fraud Triangle”. The principle behind the Fraud Triangle is when an employee has an “Opportunity”, a “Financial Need” and is able to “Rationalize” their conduct, they will steal. Prior to that time, they will likely be the ideal employee. In the above scenario, Mary always had the opportunity and was always able to rationalize. However, it was not until her mother became seriously ill that she had the financial need. Rationalization statements might include such things as:

  • The owner will never miss it.
  • I am not paid enough.
  • I need this money more than the owner.

Below are some actual rationalization statements made by a convicted embezzler at her sentencing hearing.

  • I would catch myself getting high on shopping…like an addiction.”
  • “You’re just borrowing the money.”
  • "Each time you do it, you’re able to kind of justify it.”
  • “I was writing checks and paying bills like it was my money.”
  • “It got to the point where I felt like it was my business.”

Remember, as the owner of the business it is your responsibility to put the safeguards in place and to monitor those safeguards in order to protect your money. Failure to do so might result in your worst nightmare.

Disclaimer: The facts in the above scenario are not based on an actual case and the names and titles used were for illustration purposes only.