Rheumatology Practice Management February 2014 Vol 2 No 1 — February 28, 2014

San Diego, CA—Fraud and embezzlement are prevalent in US businesses, including medical group practices. Knowing the conditions that provide an environment for embezzlement and implementing controls to prevent these conditions are paramount to combatting fraud and embezzlement. The what, who, why, and how to detect and prevent fraud and embezzlement was the subject of a presentation by Linda L. D’Spain, CMPE, CMCO, CMC, CMIS, CMOM, faculty consultant at the Practice Management Institute, San Antonio, TX, at the 2013 American College of Rheumatology meeting.

Fraud or Embezzlement?
Fraud is the use of deception for unlawful gain or advantage. Embezzlement is the theft or use for one’s own purpose of money or other property that has been entrusted to an employee, a servant, or an agent.

Employee embezzlement costs US businesses an estimated $500 billion annually. A 2011 survey by the Medical Group Management Association revealed that nearly 83% of the 688 practice managers who responded were at some point in their careers affiliated with medical offices where employee theft occurred.1 Of the reported incidents, 18% involved the theft of $100,000 or more, and the thefts were usually taken in multiple small amounts by the most trusted employees in the practice.1

Theft can take many forms, Ms D’Spain explained, from pocket­ing a cash payment made by a patient to overbilling an insurance company and stealing the excess funds. “Medical practice fraud often in­volves the manipulation of billing records and patient accounts,” she said.

Who Are the Perpetrators?
Recognizing who is most likely to embezzle is the first step to prevention. According to the Association of Certified Fraud Examiners, only about 7% of embezzlers have been convicted of a previous crime, and about 33% of embezzlers have financial problems.2 Healthcare ranks as the third most embezzled industry, behind banking/financial services and government.

Why Do Employees Do It? Examining the Fraud Triangle
The fraud triangle is a model that is used to explain the personal factors that cause someone to commit occupational fraud. It consists of 3 legs that lead to fraudulent behavior.

The first leg represents the incentive or other pressure that motivates the fraud. An employee has a financial problem that he or she cannot solve legitimately, so the employee commits outright theft or falsifies a financial statement to solve the problem. Having negative work-related feelings may also be an incentive as a way to “get back” at an employer.

The second leg is perceived opportunity. The fraudster is often in a position of trust and figures out a way to abuse this trust. Weak internal controls create a perception that the perpetrator has little chance of being caught.

The third leg is rationalization. Most people who commit fraud are first-time offenders with no criminal history and, therefore, do not view themselves as criminals. They rationalize the act by convincing themselves that they are honest people who are trapped in bad circumstances. In this way, they can justify the act.

How to Detect and Prevent Fraud
The conditions that provide an environment for embezzlement to occur include a failure to present and enforce company policies, said Ms D’Spain. Internal control structures should be in place.

Antifraud controls include creating policies and procedures for handling company assets and segregating cash-related functions, she said. Job functions can be rotated. A system should be established for authorizing transactions and related activities. Ongoing antifraud training should be provided to all employees. The costs of fraud to the practice, including lost profits, job loss, and a decrease in morale and productivity, should be made clear to employees.

Documents and records should be designed to help ensure the proper recording of transactions and events. Adequate safeguards for accessing and using records and assets should be instituted. Independent checks of the internal control process and periodic validations should be conducted. Consider installing surveillance cameras to monitor areas where financial transactions take place.

Risk areas should be assessed and prioritized. “Areas at risk include payment or disbursement by cash, insurance filings, accounting adjustments, and supplies,” Ms D’Spain said. Internal control processes should be monitored, with corrections and improvements made as required.

Any problems that are detected through these internal controls should be investigated. An accidental discovery of something wrong with the books is an alarm that requires investigation, she said. A sudden change in an employee’s lifestyle is a red flag.

A zero tolerance for fraud should be communicated to all employees. It should be made clear that reports of suspicious activity will be promptly and thoroughly evaluated.“The biggest deterrent to a potential embezzler is the knowledge that someone will be reviewing their work,” Ms D’Spain said.

The Association of Certified Fraud Examiners advises medical practices to performs surprise fraud audits in addition to regularly scheduled fraud audits, as well as the acquisition of continuous auditing software used to detect fraud. The use of such software should be made known throughout the organization.


  1. Elliott VS. Medical office embezzlement risk heightens at beginning of year. January 17, 2011. www.amednews.com/article/20110117/business/301179972/5/. Accessed January 14, 2014.
  2. Lowes R. Office embezzlement: are you losing money you do not even know about? December 3. 2009. www.medscape.com/viewarticle/713181_4. Accessed January 14, 2014.


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