Can Internal Controls Prevent Embezzlement?

You just heard from another patient who complained about a recent statement. Later that evening, after your team has left the office, you review some patient accounts. Panic sets in because something doesn’t look right. You decide to hire an investigator to review your financial records, and a few days later, the investigator calls with the news you did not want to hear. Your office manager is committing embezzlement! First, there is stunned disbelief. Second, the inevitable questions begin. How could someone I trusted so much do this to me? I had controls in placewhat happened? How much did he/she steal? And the worst question of all: Is it my fault? If only I had done . . .

These are just some of the emotions doctors face when they discover embezzlement. The financial and emotional pain experienced is real, and the long-term effects can be substantial. Many doctors find it hard to trust their remaining team members, and office morale can suffer as a result. Avoiding these consequences begs the question: Can embezzlement be prevented? Sadly, in most instances, it cannot! What you often hear and read about preventing embezzlement is fundamentally flawed. This observation initially catches doctors by surprise, but I believe that combining prevent with embezzlement is substantially an oxymoron. 

The traditional approach to managing embezzlement involves setting up a series of processes called internal controls. By implementing internal controls, it is often assumed that doctors can prevent embezzlement from occurring. However, for internal controls to prevent embezzlement, we must believe the embezzler will follow the prescribed procedures (which logically they won’t if it interferes with their plans to steal). Sadly, there are so many ways to steal in a dental office that it is nearly impossible to plug all the holes through internal controls alone; at least economically.

This observation does not imply that internal controls have no purpose in the dental office. Internal controls play vital roles in a practice’s daily operations. One of the advantages of internal controls is the detection of innocent mistakes. Internal controls also keep the doctor focused on the practice’s day-to-day business processes, thus providing ongoing practice management feedback. 

The problem is that even though controls may block a particular method of stealing, they are unlikely to stop a desperate and motivated embezzler. To understand internal control limitations, we must know that powerful forces motivate a staff member to embezzle. These forces eventually lead the employee to decide that stealing from the doctor is the best option. Once an employee makes this decision, he/she will almost always find a way to steal. The adage where there’s a will, there’s a way certainly applies to dental embezzlement. The internal controls doctors put in place are simply roadblocks that a motivated embezzler can circumvent.

Consider a drug addict who wants to burglarize a home to obtain money for drugs. If the addict sees that an alarm system protects your house, but not your neighbor’s, your neighbor’s house will likely be the one burglarized. The alarm was effective for you because it diverted crime to a different location (although that didn’t help your neighbor!). However, the consequence of diversions in dental offices is the thief simply changes methods but targets the same victim! Because it is inconvenient for a team member to leave one office and move to another, an embezzler’s first choice is to change their embezzlement modality rather than change doctors. 

Additionally, an embezzler already knows which internal controls the doctor checks, but he/she also knows which controls the doctor does not check. It would be more palatable to assume embezzled doctors did not have sufficient internal controls in place or weren’t enforcing their existing controls. Unfortunately, that is often not the case. 

Actually, the odds of being embezzled are more related to the embezzler’s motivation and not the internal controls in place. For example, a common internal control is the day-end report must match the deposit slip. While I recommend this procedure (as I have done in a previous Seattle Study Club article) for other reasons, it is relatively easy for a motivated embezzler to circumvent this control. Several modalities allow stolen funds to fully reconcile with the day-end reports and deposit slips. Another common internal control is that every check must be stamped For Deposit Only. This control has benefits, but what about the checks the embezzler chooses not to stamp in this manner? Yes, doctors, it is relatively easy to steal checks made payable to the practice! 

To be clear, I am not saying that doctors are helpless when it comes to detecting embezzlement. I am saying internal controls alone can give doctors a false sense of security, especially when doctors consistently hear and read that embezzlement can be prevented by implementing additional controls. 

While this may sound depressing, there is some good news. For embezzlers to steal successfully they must exhibit one or more behavioral characteristics. By spotting these behavioral clues, doctors can detect embezzlement earlier and minimize the impact. This position is bolstered by a 2007 American Dental Association Survey1, which asked embezzled doctors how they detected the embezzlement. More than two-thirds of the responses indicated behavioral clues, rather than traditional control procedures, first alerted them.

While internal controls are a necessary component of standard business practice, the sole use of internal controls often fails to prevent embezzlement because motivated employees will find a way to circumvent them. However, it is nearly impossible to embezzle without exhibiting specific behavioral characteristics. Early recognition of these behavioral warning signs gives the doctor a better chance of detecting embezzlement earlier in the process. You may not be able to prevent embezzlement from occurring, but you can reduce its devastating consequences. 

My next article will discuss specific behavioral clues that can assist doctors in determining their susceptibility to embezzlement.

  1. Survey of Current Issues in Dentistry Series, Employee Termination and Embezzlement, 2007 Full Report, American Dental Association