According to a 2014 American Animal Hospital Association (AAHA) survey, 86% of respondents had been the victim of employee theft or embezzlement. In 2011, Marsha Heinke, DVM, EA, CPA, CVPM, and her accounting firm surveyed nearly 200 equine and companion animal veterinary practices and discovered that 68% had been the victim of fraud, theft, or embezzlement. In addition, the survey found that 64% of the criminals had been employed in the practice for three years or less, 34% were the clinic receptionists, and the average duration of theft was 12.2 months. In 38% of cases, an internal controls audit uncovered the fraud.
Why and How Do People Commit Fraud?
According to the Association of Certified Fraud Examiners (ACFE), the most widely accepted explanation for why some people commit fraud is known as the Fraud Triangle. The Fraud Triangle was developed by Donald Cressey, PhD, a criminologist whose research on embezzlers produced the term “trust violators.” The Fraud Triangle is made up of three components: financial pressure, perceived opportunity, and rationalization. When all three are present, that’s when a person is most likely to embark on a fraudulent scheme.
Generally, the fraudster believes they will not get caught because they see that management is not involved in the day-to-day operations, there are few internal controls, and they have been given an inordinate amount of responsibility. When partnered with financial pressure—whether from medical bills, addiction (drugs, alcohol, gambling, shopping, etc.), a spouse’s job loss, financial troubles, or simple greed—they cannot resist fraud if they can justify it in their mind. Their rationalizations include the belief that there are no other options to solve financial difficulties, perceived mistreatment by an employer, or seeing the theft as borrowing with intent to pay the stolen money back.
The ACFE 2024 Report to the Nations states that 21% of fraud occurs in organizations with fewer than 100 employees, and the median loss is $141,000. In a small veterinary practice, loss of this amount could be catastrophic. Small businesses were most subject to fraud related to billing, check and payment tampering, skimming or stealing of cash, and payroll. Skimming is taking a business’s cash prior to entering it into the accounting system. The study found that almost a third of fraud occurred because of lack of internal controls. Small organizations are particularly vulnerable to fraud, as the smaller staff size typically means fewer checks and balances and less segregation of duties.
Warning Signs of Embezzlement
Warning signs of embezzlement include a practice that has always been profitable but now has unexplained low cash flow. Perhaps the practice is growing in clients and patients year over year but is short on cash to meet accounts payable. Increasing credit card bills can also be a warning sign, as embezzlement commonly occurs through personal expenses being charged on a company credit card. Sometimes a fraudster will record the charges in QuickBooks, with a different vendor name than what was on the credit card statement. Or, if practice oversight is nonexistent, they might not make any attempt to hide the theft. Payroll theft of hours is not unusual either. When payroll seems unusually high, review whether the hours were actually worked and rates of pay are correct, and compare them to the previous payroll cycle. Be sure overtime hours are verified and were approved.
The Impacts of Employee Theft
Inventory is a highly vulnerable area for theft, especially if the pharmacy is not locked or regular counts are not routine. As Andy Clark, DVM, MBA, says, “If you have $100,000 in inventory, would you put 100,000 one-dollar bills on the shelf and never lock it up or count it, because ‘We’re all like family here’? Your inventory is just like money!”
It can be easy for low-paid employees to justify to themselves that the supplies they need for their personal horse are never going to be missed and that the practice can afford their loss. They might think, “I deserve it. I should have gotten a raise.” If inventory counts are consistently off, especially for high-value items, do a thorough investigation. A locked pharmacy with a camera is a good deterrent.
Tera Eddleman, CVA, accounting consultant and valuation analyst at Summit Veterinary Advisors, said most equine veterinarians have no idea how common fraud and embezzlement are in the industry. “The statistics would scare you,” she says. The most common ways employees commit fraud, theft, and embezzlement include deleting invoices while pocketing the payment, falsifying accounts payable, using a company credit card for personal expenses, stealing inventory, and fraudulently increasing payroll through unauthorized overtime or a manager with payroll responsibilities giving themselves bonuses, she states.
“Research has shown that 10% of people will never steal no matter what, 10% will steal at any opportunity, and the other 80% of employees will go either way depending on how they rationalize a particular opportunity,” Eddleman says.
One of the most heartbreaking aspects of employee embezzlement in veterinary practices is the personal nature of the crime. A family atmosphere often develops in smaller veterinary practices with longtime staff. Imagine a practice manager, who regularly babysat your kids when you went on weekend trips with your spouse, being the culprit of a $250,000 loss over three years. Imagine a long-term associate you trusted implicitly using the practice credit card for personal expenses for years and diverting Legend and Adequan from your pharmacy into cash sales to clients she then pocketed. The grief that arises in these situations is intense, not the least because with a few preventive measures, you could have protected your practice and your heart.
“Every single practice is probably being stolen from,” says Heinke, with theft of time (employees misrepresent the hours they work, especially overtime) perhaps the most common. She says the most recent ACFE fraud survey estimated that most organizations lose 5% of their revenue to embezzlement and fraud. This loss of revenue can have a huge impact on cash flow and practice value. The longer the theft goes on without detection, the larger the impact gets. In one small animal practice, a bookkeeper processed refunds to her personal credit card, netting about $2 million over 40 years, Heinke shares.
The Importance of Internal Control Systems
Internal controls are essential for preventing fraud and embezzlement. These are systems and methods that reduce the chance of loss or embezzlement, and they include all measures to ensure against errors, waste, and fraud, whether accidental or deliberate. Internal controls are risk management tools that divide responsibilities among staff members. For example, an employee who is not involved in record-keeping handles bank deposits. It is particularly important to control access to practice assets such as cash, accounts receivable, inventory, time, and equipment by creating policies and procedures that employees in these areas must follow. In addition, prevention from theft beyond internal controls is through “setting the tone that theft will not be tolerated,” Heinke says.
One of the primary factors of internal control is to prevent the risk inherent in having one person responsible for the physical management of receipts of money and/or records of receipts that could lead to theft. By spreading the responsibility across multiple people, the practice is protected from most fraudulent activity, as it is unusual for employees to work in concert to steal from their employer. In other words, no one person should handle all phases of a transaction from beginning to end. Segregation of duties prevents much of the inherent risk.
Ways to prevent loss or alteration of records as well as fraud include having procedures to:
- Back up computer records daily or weekly to the cloud or media with off-site storage to prevent data loss.
- Account for all invoices by cross-checking them with appointment records.
- Have all checks received photocopied or scanned daily.
The practice owner should receive, open, and review the bank statements for irregularities before giving them to the bookkeeper for reconciliation of the bank account. Someone other than the one responsible for physically handling payments and preparing deposits should maintain accounts receivable (AR) and perform collection procedures. The person opening and logging mail content, including client payments by check, should not be the same as those controlling AR ledgers and adjusting client account balances. The daily computer report of revenue collected should be compared with the bank deposit slips for accuracy and irregularities, looking for discrepancies between deposit amounts on bank statements and the daily revenue amounts on computer reports. It’s also important to cross-train staff to rotate duties, so when a key position is vacant, procedures can continue without hesitation. This prevents one employee from gaining too much power and control.
Another key step is to make sure every employee is logged into the computer system under her or his unique password so audit trails can identify the employee originating each transaction. You should communicate the need for keeping passwords private and the risk in sharing them with co-workers. Also, limit employee access to areas of the practice management software that are necessary for the employee’s specific job functions.
Take-Home Message
If you find discrepancies or if balances do not match, always ask questions. The employee responsible should be able to explain the issue promptly and bring discrepancies to your attention as soon as they notice them. You must, however, avoid killing the messenger. Another good practice is to require an owner to approve all discounts, refunds, or account write-offs exceeding predetermined amounts and sign each approval.
Most importantly, understand the risk being a small business creates, foster high standards for moral and ethical conduct in your practice, and walk your talk! And as an owner, always follow your practice’s procedures.
Related Reading
- The Business of Practice: Fraud, Theft, and Embezzlement in Equine Practice
- The Business of Practice: Internal Controls for Fraud Protection
- Initiating Payment at Time of Service in Equine Practice
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