Tips for recognizing and preventing embezzlement in your dental practice

Embezzlement is a harsh reality in the world of dental practices, and its prevalence might surprise you. In my 30 years in the dental industry, I've encountered it numerous times within dental practices, and it's even happened to me while overseeing operations for six dental offices at a previous company.

Despite how common this issue is, dentists are not trained in school about how to identify and deal with embezzlement. However, it's important because safeguarding your practice's financial integrity is crucial for its long-term success. The last thing you want to do is call a dental embezzlement specialist to rescue your practice because you didn't catch it in time.

Here's what I've learned and what dental practitioners need to know to recognize and reduce the risk of embezzlement infiltrating your business.

Unveiling the reality behind dental practice embezzlement

There are specific reasons why the dental industry struggles with embezzlement more than others.

One primary factor is the complexity of financial management within dental practices. Unlike other sectors with streamlined processes, dental offices operate with separate software systems for managing payables and receivables.

This disjointed approach creates loopholes that can be exploited by individuals looking to manipulate financial records without detection. Also, the close-knit nature of dental teams can inadvertently facilitate embezzlement with trusted staff members who are responsible for financial tasks and abuse their positions.

Discovering embezzlement within your practice can have devastating consequences, both financially and professionally. The financial losses can be substantial, impacting your ability to negotiate a fair sale price down the road.

Beyond the financial ramifications, there's a profound emotional and mental toll. Trust is shattered and the sense of betrayal can be overwhelming. Often, it's not just about the numbers on a P&L; it's the erosion of confidence and security, both for the practice owner and the entire team. To safeguard your practice and ensure a seamless transition when you sell your practice, it's crucial to understand the signs of embezzlement and take proactive measures now.

Intervening sooner rather than later

Often, dentists discover financial betrayal once they're preparing to sell their practice, which can lead to significant financial implications and delays in the transaction process. The journey toward selling your practice involves creating a prospectus, a comprehensive document that delves into the financial health and operational details of your practice. This process unveils the truth about your practice's finances, often uncovering instances of embezzlement that were hidden for years.

The key to mitigating the impact of embezzlement lies in early intervention. Dentists must adopt a proactive approach to detect and address signs of wrongdoing before they escalate. To get ahead of this issue, here are the steps you should take:

1. Reconcile accounting software to practice management software. Hold monthly financial accountability meetings with the doctor, office manager, and, if possible, the bookkeeper to ensure alignment and transparency. These meetings serve as opportunities to review financial data, identify discrepancies, and address concerns promptly.

2. Implement robust internal controls. Establishing multiple touch points throughout daily processes is essential. For example, implementing a daily review process where doctors meticulously examine the day's activities, comparing them with the posted patient ledger. This hands-on approach helps catch inaccuracies or potential instances of embezzlement, such as fraudulent insurance claims, before they escalate.

3. Foster a culture of transparency and accountability. It's crucial to create an environment where transparency is valued and accountability is emphasized. Creating the perception that every aspect of the business is under close scrutiny reinforces accountability among team members and deters potential wrongdoing. By fostering trust and openness within the practice, you establish a strong deterrent against embezzlement.

Recognizing the red flags

You should also be aware of potential indicators of embezzlement. While the signs may vary, some common red flags include the following:

1. Discrepancies in financial records: Discrepancies between reported revenues and actual deposits can signal potential embezzlement. Dentists should meticulously review financial statements and monitor cash flow to identify irregularities.

2. Unexplained expenses or losses: Unexpected expenses or unexplained losses in revenue should raise suspicion. Practice owners must investigate any anomalies promptly and thoroughly. Also, consider running a detailed P&L once the accountant or bookkeeper has reconciled the previous month's bank statement for a comprehensive overview of financial activities.

3. Changes in employee behavior: Sudden changes in an employee's behavior, such as displaying a reluctance to take time off or being reticent when asked to run financial reports, could indicate involvement in embezzlement. If you get pushback or a lack of follow-through when requesting financial reports, it's a sign worth noting. This resistance to standard financial procedures, particularly when it comes to transparency in financial matters, may signal an attempt to conceal fraudulent activities.

4. Lack of documentation or accountability: Insufficient documentation or lax oversight in financial processes creates opportunities for embezzlement. Dentists should establish clear protocols for handling financial transactions and enforce accountability among staff.

5. Overreliance on a single employee: Entrusting financial responsibilities to a single individual without adequate oversight increases the risk of embezzlement. Dentists should implement checks and balances to distribute tasks and minimize the potential for misconduct.

6. A gut feeling: Your intuitive sense, honed through years of experience, can serve as a powerful tool in detecting irregularities that may indicate financial wrongdoing. If something feels off, don't ignore it. Investigate further because sometimes, that gut feeling could be the first step toward uncovering and addressing embezzlement.

Bottom line

Embezzlement poses a significant threat to dental practices and can harm or slow down the transition process of selling to a dental service organization. Keeping your end goal in mind, you should start with proactive steps today to safeguard your practice and ensure a smooth transition when the time comes to sell. 

If you're planning to sell within the next three to five years, begin by having a prospectus created now to understand your practice's financial health and operational details. This step can help familiarize yourself with your options and potential pitfalls, as well as remain vigilant against the threat of embezzlement. 

Remember, early intervention is key to protecting your hard-earned investment. Your diligence today ensures a smoother transition tomorrow.

Kim McCleskey is a practice transition consultant with Professional Transition Strategies. She has worked in dentistry for 30 years and is a certified professional business coach. She can be reached at [email protected].

The comments and observations expressed herein do not necessarily reflect the opinions of DrBicuspid.com, nor should they be construed as an endorsement or admonishment of any particular idea, vendor, or organization.