Every veterinary practice, regardless of size, specialty, or location, is a potential victim of employee theft and embezzlement.
I know, because it happened to my family’s veterinary hospital.
It was a warm July day when I first discovered the embezzlement in our family veterinary hospital. It was a brilliant plan by the employee, but it had one critical flaw: I had just taken a course on Internal Controls. So when I found myself locked out of the payroll system, it set off red flags that something could be wrong. When I finally was able to gain access to the payroll system, I decided to start digging to find out why I would have been locked out. And from there, one red flag led to another, until the entire scheme unraveled.
Our practice was fortunate. While it was a material amount of money stolen from us, the perpetrators paid back most of their illicit gains, and the District Attorney decided to forgo prosecution.
How did they do it?
When we hired our first Hospital Administrator, I was excited to delegate some of the tasks that I did not enjoy performing. I was also starting law school at the University of Pennsylvania, so it was a natural fit that the Hospital Administrator would take on payroll and paying bills. However, this decision gave the Hospital Administrator direct access to our company bank accounts. The amounts taken were small at first, and over time became larger. The amount stolen ranged from $25 spent at Dicks Sporting Goods on Christmas Eve via the Hospital AMEX, to over $2000 in “forgotten” health insurance deductions for the Hospital Administrator’s family to be on the practice health insurance policy. Our practice suddenly began purchasing HWFT products and “forgetting” to charge the employees. Then there were the “typos”, where one employee (who was friends with the Hospital Administrator) would make purchases of supplies at a grocery store, and the administrator would reimburse the employee via payroll for more than the amount of the receipt. The most egregious of the “typos” was when the hospital administrator’s employee-friend took a vacation and received full pay, when the new employee-friend had not yet earned any PTO time.
Common Embezzlement Schemes:
While the schemes described above are how our practice suffered embezzlement, there are many other common ways that practices can fall victim to embezzlement. These include the following:
- Employees issuing unauthorized refunds to their personal credit cards using the hospital credit card terminal, if the terminal does not require a password to process refund transactions.
- Employees writing checks to themselves, but coding them to look like legitimate expenses on Quickbooks/financial reporting software
- Issuing expense reimbursements for more than the actual amount spent
- Employees failing to charge themselves for product or services for their pets or pets of their friends/family
- Hospital Administrators overpaying themselves or fellow employee friends who face financial difficulties
- Hospital Administrators not taking deductions out of paychecks properly
- Paying bogus bills with bogus vendors.
- Not depositing cash received into the bank account, or employees taking cash out of the register.
- “Borrowing” cash, inventory, supplies, or drugs.
- Taking home excessive amounts of office supplies, toner cartridges, or other consumables to resell online
- Taking home OTC drugs and supplies to resell online
TRUST, BUT VERIFY
The following organizational policies and SOPs can help you prevent employee theft:
- Perform Criminal Background and Credit Checks on all employees who handle cash or finances.
- Require a password to issue credit card refunds, and restrict access to this password.
- The same employee who adds employees to payroll and edits time cards should not be processing payroll. This is especially true if you have a hospital administrator that is used to doing payroll – a neutral third party (selected by the practice owner, and who reports to you) should be overseeing the Hospital Administrator’s payroll duties. Ask your CPA to conduct a spot-check of the payroll at least quarterly.
- Employees should not have company credit cards unless absolutely necessary. Institute strict spending limits (most banks allow credit limits to be set per card and/or per transaction).
- Do not give your accountant or bookkeeper spending access to the company bank account. The person responsible for entering charges into Quickbooks should NOT have access to write checks or withdraw money from the bank account. Similarly, the person who writes and/or signs checks should not have access to Quickbooks. Why? Because if the person who writes checks can also code them in Quickbooks, then they have incentive to manipulate the data to make checks paid to themselves appear legitimate on the P&L.
- Ensure that the person who pays supplier inventory invoices is not the same person who placed inventory orders.
- Ensure that quantity of inventory items sold equals the quantity of items ordered. Check quarterly. (Note, the quantity sold vs purchased will not be exact match, but if your PMS shows 1000 tablets sold, and your supplier shows you ordered 4000 tablets, you may have an issue.)
- Never allow employees to take work home.
- Employees handling cash or inventory should not be allowed to work overtime.
- Deposit cash directly into the bank every day.
- Only issue expense reimbursements via paper check. This allows you to see every check written on your bank statement. Remember, bank records cannot be altered.
- Have bank statements and credit card statements mailed directly to the practice owner’s home address or PO box, where they can be reviewed prior to handing them to the accounting team. This allows you to see the “raw data”, and question charges and checks. Unfortunately, we have seen some practice managers use photoshop to make fake statements to hide their misdeed- having statements sent to your home first avoids tampering by unethical employees.
- Require employees who process payroll or handle finances to take a vacation every year. During this time, have a trusted and neutral third party review the records to ensure there are no discrepancies or questionable charges.
Warning Signs to Watch For:
- Employees refusing to take time off (afraid that theft will be detected by other team members)
- Employee opening bank or credit card statements before the practice owner has a chance to review them. Pages missing, or appearing altered in any way. If any doubt, go online and download the PDF statement and see if there is anything different or missing.
- Extravagant expenses for personal vacations that don’t fit the budget the employee should have
- Employees with close relationships with vendors
- One employee who promises to deposit cash at the bank, but sometimes “forgets”
- Employees continuously working overtime, even when there is no business need for it
- Close relationships between an employee and vendors
- Mysterious inventory purchases showing up for items you don’t sell
- Rapidly disappearing office supplies or consumables
- Rapidly disappearing HWFT medication
If you believe your clinic may be the victim of embezzlement, you need an attorney with experience in detecting embezzlement and employment law to help guide you along the way. Your first call when you suspect embezzlement should be to an attorney, so that your rights are protected. Our attorneys can help you determine your rights as a business owner and as an employer, can help you deal with the suspected theft or embezzlement, craft press communications and communications with other employees, and advise you on how to involve law enforcement appropriately so that the employee can be prosecuted.
Disclaimer The information in this article is for general information purposes and is not intended to be legal or tax advice. Every situation is different; before you take any action against an employee, consult an attorney.