Where to Start with Employee Theft: Part II

Accusing an employee of embezzlement is not something to do lightly. There’s a lot of research a practice should do before pointing fingers at anyone. However, once you do confirm that an employee has been stealing, you want to make sure you don’t do anything to jeopardize a case that could mean getting your money back.


What not to do

Reacting without thinking and planning (acting rash) can often prove costly. Many precedents and much litigation exist to support this. Performing procedures without possessing proper qualifications and prior experience can also result in a significant negative impact to the practice.


Shows like “CSI” and “Law & Order” have unexpectedly created a sense of empowerment within some viewers, thus known as the “CSI Effect.”


One practice manager, so “empowered” by television yet unprepared for the meeting by not having completed any investigative measures to define the extent of the potential problem, attempted to solicit a confession from a staff member. The unsuspecting staffer admitted to an amount specified by the manager (an amount much smaller than subsequently proven stolen).


Unlike many cases where that critical interview constitutes a one-time opportunity, the manager subsequently found more evidential transactions, confronted the individual for a second time, and he admitted to the higher amount. The practice manager discovered still more, leading to a third and fourth admittance.


Finally, my firm became involved, and put a stop to the ad-hoc interrogations. Each successive meeting with the suspect created added risks to the practice. The practice should have placed the staffer on administrative leave, preserving the one-time opportunity for a confession once the team quantified the extent of the scheme.


“Too many cooks…”

Another risk occurs when too many individuals gain knowledge of the potential fraud and investigation.


Rumors start. Misinformation spreads like wildfire, often finding its way back to the targeted individual, exposing the practice to the potential of a slander or libel lawsuit if the investigation ultimately clears the individual of any wrongdoing.


Commonly, some employees often have relationships among themselves unknown to the other employees within the practice. Someone placed on paid or unpaid leave during an ongoing investigation may receive information through their internal sources still working within the practice. A tactic of planting disinformation to exploit this connection could prove useful as part of the practice’s strategy, but only after careful consideration with counsel.


In one case, our investigative team wanted the individual on leave to learn of the discovery of their scheme and supporting evidence. Selected employees, made aware of a “mole,” frequently discussed planted “details” of the investigation within his earshot, which likely led to the information making its way to the suspected employee. Psychology plays into financial investigations much more so than most would know.


Keep the “circle of trust” small. Hold all information and conversations in confidence. Don’t speculate. Remind those in the know of their duty to keep things quiet, private and confidential.


Prepare a script of what you will tell others within the practice regarding the proceedings. Counsel should have a big role in preparing your script. Have another script for what you will tell patients, vendors and others if they ask, especially if the targeted individual holds a highly visible position within the practice and the practice abruptly places him or her on leave.


Plan for the unexpected … and the expected.

The advice of counsel will once again prove invaluable when other issues crop up after your investigation reveals an employee diverted funds from your practice, especially should the amount prove significant.


You must conclude the responsible individual’s employment, either through voluntary resignation or through involuntary termination. Ideally an employee who decides to resign creates the least risk to the practice, especially if the resignation includes releases and “hold harmless” provisions. Present the employee with that option, as some actually choose to resign. For all others, you must terminate their employment. I highly recommend a detailed letter drafted by counsel articulating the termination, and it should include a demand for the immediate return of any and all property of the practice.


On the day you conclude the individual’s employment, expect that former employee (and thief) to file for unemployment benefits. Identify a plan of response with counsel, and prepare to prevent further financial impairment by allowing the individual to collect benefits — on your dime.


That said, I caution you not to use the unemployment hearing or process to try your case of theft against the individual. The former employee will crave information, as will his or her attorney, and you should endeavor to give them little to nothing, given your likely ongoing investigation and the speculative nature of anything you might provide.


Next will come the time to fund the practice’s retirement plans, and whether the employee who stole funds qualified as an eligible participant at the end of the most recent plan year. You will need to discuss funding the employee’s contribution, but, in the end, the risk of blowing up the practice’s retirement plans will outweigh the cost of funding the individual’s account.


Something to consider if talks have started with counsel representing the former employee: have the individual’s retirement accounts voluntarily frozen and made available down the road as a means toward restitution. You generally cannot seize retirement assets, but the individual can voluntarily sign them over.


A sharp defense attorney (or experienced fraudster) may try to get you to negotiate a resolution, offering to begin repayments towards the diverted balance. If a victimized practice accepts any type of repayment or deal, it will likely remove the option of criminal proceedings as law enforcement and prosecutors interpret this as reaching a civil agreement (many criminal justice agencies will seek out any reason to avoid taking the case).


A better plan would see counsel accepting into client funds any money the suspect is willing to start accumulating towards restitution. This way the practice makes no agreement or settlement, and it doesn’t accept any funds. Rather, funds are simply being accumulated within an attorney’s client funds account, money that may (or may not) be accepted toward some resolution down the road.


What else can you expect?

Individuals accused of fraud often bring complaints or suits against the victim employer. In some instances, the issues raised may carry credibility, albeit separate from their acts of theft, but in most cases, the allegations constitute a mere distraction to divert attention away from the thievery.


One physician group determined one of their providers diverted funds by altering billing records and changing the provider codes for posted procedures. In essence, the provider stole from the practice as well as the partners within the group. Shortly after upon discovery, investigation and substantiation, the group terminated the physician.


As discussions began on what to do with the investigation results, the practice was served with notice of a lawsuit. The former provider claimed the practice’s general partner sexually harassed her and created a hostile workplace environment. In interviewing staff and providers of the practice, no evidence could be found substantiating the claims, yet the practice had to incur significant professional fees to defend the claim, all the while working to conclude on their theft loss.


My experience substantiates that most fraud suspects file unsubstantiated claims, mainly to distract from their acts of theft.


Working with law enforcement

Here’s my opinion: We should arrest and prosecuted anyone who steals. Get it on their record and get it in the media, so the next employer will know. Caveat Emptor — let the buyer (potential subsequent employer) beware.


However, each crime proves unique, presenting different risks and issues, in every single instance. As part of the strategy discussion with counsel, the practice owners need to weigh the risks and benefits of criminal pursuit. Additionally, realize that your insurance policy may require the involvement of law enforcement in the investigation.


Keep in mind law enforcement’s primary goal consists of making an arrest and successfully prosecuting a crime. While you can request restitution, it is uncertain, and in some jurisdictions no enforceability provisions exist within the criminal system to enforce the restitution order.


Other critical considerations

In many cases, the fraud or embezzlement committed within a medical billing environment is not limited to the practice’s funds. Many villains create billing schemes to divert fraudulent proceeds or to conceal diverted funds, creating a massive exposure for the practice.


Compliance with Medicare, Medicaid and all the other payers’ contractual requirements could all constitute risk exposure, leading to the potential to return funds fraudulently received by the practice (and worse, unbeknownst to the physician owners). Not only will the practice lose the diverted funds, it may have to repay, from the remaining funds, any payments they were not entitled to receive. This could define the end of the practice and expose all the physicians to federal and state investigations, as well as compliance audits from every participating payer.


The importance of contacting counsel at the outset, as soon as the practice detects the first sign of a potential problem, and ensuring counsel oversees the entire investigation, cannot be overstated. The practice must protect these discoveries under the attorney-client privilege, to further discuss how best to report and resolve each issue. Keeping the circle of trust on your investigation minimal can and will pay dividends.



For every case of a practice falling victim to employee fraud or embezzlement that becomes public, eight more exist that do not, mainly due to the risks and issues to the practice discussed in this article.


Recently, I learned that an embezzler whom I investigated and successfully had arrested last year had gained employment at a well-known, high-profile institution. So here’s my question: If this individual’s previous employer terminated her, criminally charged her and her status of pending adjudication in that arrest stood as public record while she applied for the new position, how on Earth did she get that new job?


Stephen A. Pedneault is the principal and founder of Forensic Accounting Services, LLC, a public accounting firm specializing in fraud investigations, forensic accounting, employee embezzlement, fraud prevention, litigation support services, internal control evaluations, due diligence analysis and various other special projects. A forensic accountant, Steve is also certified fraud examiner, certified in financial forensics and a forensic certified accountant.  He is an author and frequent public speaker on issues related to fraud. He has authored or co-authored three books on the subject and is currently working on a fourth. For more information, see: www.forensicaccountingservices.com.