Diligence, internal controls help thwart would-be embezzlers

Have you ever been bamboozled by an embezzler?

Dr. Alice Villalobos of Hermosa Beach, Calif., planted the thought inthe minds of about 75 practitioners and practice managers during a managementconference hosted by the American Animal Hospital Association in Boston.

"Financially speaking, it is like having an undetected malignancy.The treatment for embezzlement is as exhausting and unappealing as chemotherapyand radiation, but it lasts longer."

Villalobos speaks from personal experience.

Her longstanding bookkeeper lifted more than $1.5 million over sevenyears, pilfering funds from hospital revenues, accounts, payroll, insuranceand credit lines, even the pet adoption fund.

She was eventually fired while on vacation, but not without taking thousandsmore through severance pay and indirectly through a tangled web of legalfees. At the time of her termination, Villalobos did not even know she wasan embezzler, only that she had not paid the bills. Evidence of stealingsurfaced once Villalobos checked the books.

Not alone

Co-presenter Dr. Marsha Heinke, EA, CPA, CVPM, says Villalobos is hardlyalone in her claims.

She cites recent estimates from the Association of Certified Fraud Examinersthat American businesses lose $400 billion annually to theft and embezzlement.And one-third of America's workforce has stolen from the job.

In many cases, the most trusted workers have turned out to be embezzlers,experts say.

Prototype thief

The typical perpetrator is a college-educated white male, committingnearly 75 percent of offenses. Adds Heinke, "I do know from my ownexperience that the big thefts I have seen in veterinary medicine have beenfemale-propagated."

However, the money stolen by females is mere pocket change.

"Not to get gender-biased, but median loss caused by males is about$185,000; by females, $48,000," she says. "That says males maybe a lot more brave and confident about what they're doing" Most theftsnoted in veterinary practice are typically more than $100,000 in losses,and these incidents occur in organizations with less than 100 employees.

Cash is the No. 1 frequently cited financial account (47 percent) stolenfrom companies in general, above supplies (20 percent), accounts receivable(18 percent), services (18 percent), and sales revenue (17 percent), accordingto Heinke.

Why they steal

The main reason for theft, Heinke says, is lack of division of responsibility.The really motivated, multi-talented, trusted individual can be a likelycandidate.

"You end up having a concentration of duties with one individual,little segregation of duties for record-keeping, accounts receivable, inventory,all assets," Heinke says.

"Typically when you get down to the average two-doctor practice,they're extraordinarily vulnerable when you have somebody in theoreticallyevery position. They have (too) much control over asset activity."

Mind of a thief

Employees put in such a position of control begin rationalizing thatthey are (not really) stealing from the company, says Heinke.

Take for example excessive overtime hours. Heinke sets it up, "'I'vebeen putting in overtime for doc. I went into her office last week and askedher about getting a raise. She said we don't have enough money right now.By gosh and by golly, I am justified in making up the difference, becauseit's not recognized how hard I have been working for the practice.'"

Suspecting practitioners

Once you are convinced a criminal may be in your midst, before you prosecute,contact your attorney first, says Heinke.

Traditionally, prosecution has been a last resort for DVMs. Doctors tendto have a lot of pride, says Villalobos.

"I truly feel that pride and failure to prosecute have kept ourprofession in the dark about how common embezzlement actually is."

Also accept that when you decide to act, small businesses are not consideredprime crime scenes to the police department.

"Investigating white-collar crime is tedious," Villalobos says."Prosecution requires so much paper work that police departments allover the country will avoid the responsibility." If there's not a "deadbody or smoking gun" police have little interest in the case.

The key to effective prosecution is persistence. "It took 312 yearsbefore justice reached our embezzler," she says.

Veterinarians also tend to avoid prosecution because it can get personal."Disgruntled employees who are actually accused embezzlers create nightmareswith their retaliations, allegations, and counter-accusations," shesays.

Some doctors are reported to OSHA or to a veterinary medical board foralleged practice violations. Furthermore, some embezzlement cases are perpetratedby sons, daughters, or the wife of a partner, causing a doctor much painto prosecute.

Prevention measures

Installing internal controls - safety features of a practice's administrativesystem - to guard assets and mitigate liability is a first step toward thwartingembezzlement, says Heinke.

"Devising strong internal controls in a veterinary practice revolvesaround the principle of segregation of duties," she says.

The goal is to separate record keeping from asset maintenance. That meansa person who receives inventory shipments should not also pay the bill.Large inventory quantities could be stolen without any checks and balances.

Next, determine an acceptable level of risk to decide the amount of controlyou need.

Regardless of such measures, says Heinke, "any practice system willnot be able to catch all defalcations or thefts." Regardless, "ownersare responsible for the highest integrity of internal control. It is notthe responsibility of your accountant, attorney or insurance agent to detectloss, fraud, and defalcation.

"Appearances are important. If employees perceive internal controlsystems are in place, that, in and of itself, is a deterrent to theft,"she says.

For starters, Heinke suggests practitioners hire people with integrity,create a work setting that encourages honesty, rotate employees in job functions,report employees caught stealing to authorities, and verify payments ofbills.

Embezzler's red flags

Following is a list of several 'symptoms' of worker theft Dr. Alice Villalobos,of Hermosa Beach, Calif., cited from a Sacramento Bee newspaper article(Nov. 27, 2000).

Take note of:

* Computer breakdowns, crashes, frequent re-entry

* Cash flow problems, unpaid bills, unbalanced books

* Difficulty managing receivables

* Excuses for omissions of duty

* Staff morale issues, suspicion

* Missing or lost files; missing statements or reports

* Postponed meetings with CPA; slow reporting to CPA

* Calls from bank; overrun on bank account

* Not enough profit