Protect & Defend columnist Ed Branam, DVM, is the veterinary and animal services program manager at Safehold Special Risk Inc. A 1977 graduate of the Michigan State University College of Veterinary Medicine, Dr. Branam has worked in the insurance industry for the past 20 years. He is a former Sacramento, California, veterinarian and a former veterinary affairs manager with Hill’s Pet Nutrition.Read Articles Written by Ed Branam
One of my biggest clients needed help submitting an embezzlement insurance claim. Reportedly, an employee stole flea and heartworm preventives from the veterinary practice. Our initial conversation led me to assume the quantity was relatively small and that the products most likely went to the pets of the employee’s family and friends. Unfortunately, an in-depth accounting and inventory review revealed cartons of preventives stolen over 3½ years. The projected loss exceeded $250,000.
I was not shocked. Over the past several years, numerous clients have told me the same onerous story but with different details. In one instance, a practice manager purchased a new truck, took multiple vacations and put a down payment on a condominium largely with money embezzled from the practice. Due to limitations in the hospital’s accounting system, the total loss was never accurately determined. Worse yet, the employee was the practice owner’s best friend and maid of honor!
Trust No One
Embezzlement is defined as theft committed by employees or other trusted business parties. Interestingly, the embezzlement of money is reportedly only one-third of the thefts involving employees. Most losses involve equipment and supplies.
Who are the people who so freely embezzle from their employers? Unfortunately, trusted long-term workers often justify in their minds that they deserve a bigger piece of the pie. However, depending on the type of embezzlement, perpetrators work in virtually every aspect of a veterinary practice, from entry-level kennel attendants to highly trained senior staff. Access to business property, drugs, non-prescription inventory and money is limited to some degree based on each employee’s role within the hospital.
The main drivers of employee embezzlement include:
- A desire to live beyond one’s means.
- Financial difficulty.
- Substance abuse.
- Weak management controls.
Thus, issues such as those should be red flags to management and require closer scrutiny. That advice is particularly apt when the employee’s responsibilities involve money or inventory and the person is reluctant to take time off or share financial or inventory tasks with co-workers.
An anonymous survey of 700 U.S. small business owners showed that 22% of them had fallen victim to employee embezzlement. Yet, another survey revealed that 75% of workers admitted to stealing from their employer. In the veterinary profession specifically, 86% of the respondents to an American Animal Hospital Association survey indicated exposure to employee embezzlement of some nature.
If those statistics are close to reality, we have a disturbing indictment of employee behavior and veterinary hospitals’ standard management protocols.
Unquestionably, the cost of embezzlement can be high. According to one estimate, more than 30% of U.S. business bankruptcies are linked to employee theft or embezzlement. That’s not a surprising statistic when you realize that the average employee embezzlement reportedly exceeds $200,000 and occurs over two years.
Most alarmingly, data suggests that less than 20% of identified embezzlement activities are reported to law enforcement. One can only assume that most affected businesses elect not to report the events due to embarrassment, denial or a desire to put the whole thing to rest.
Workplace security experts suggest a few embezzlement-fighting steps. These include:
- Background checks: Do your homework before hiring someone. According to one report, 85% of resumes include at least factual misrepresentation or outright lie.
- Separation of duties: Too often, veterinary practices rely on one person for all aspects of specific business functions, especially money management and inventory control. Dividing specific responsibilities among multiple individuals can mitigate the risk of embezzlement to a significant degree.
- Inventory controls: Closely track your products, especially popular, easily resold items.
- Better money handling: Make bank deposits daily, and conduct routine internal audits. An independent accounting firm can assist.
- Formal policy: Make clear to all employees that you won’t tolerate embezzlement or theft. Stipulate the actions to be pursued, including criminal prosecution, if it occurs.
- Dialogue: Stress to employees the professional nature of veterinary practice and the expectations for all who serve within it. Give examples of how theft can harm the practice financially and reduce its ability to provide quality and affordable patient care.
- Watch: Use surveillance equipment where appropriate.
Are You Insured?
Meanwhile, review your insurance policies to look for coverage that responds to embezzlement. Also, pay close attention to the policy limits. Standard limits might be inadequate depending on the size of your practice and its inventory.
Unfortunately, no security system is fail-proof. Therefore, have a safety net. That’s how crime insurance can help protect a practice’s financial integrity.
A quality commercial crime insurance policy provides employee dishonesty coverage and typically covers:
- Theft of money and property by employees.
- Forgery of checks or promissory notes.
- Credit or debit card fraud.
- Fund transfer schemes.
Here’s how to respond if embezzlement occurs:
- Make sure the evidence is strong. Gather facts, review financial records and, if necessary, engage outside accounting and legal representation.
- File a police report.
- Report the claim to your insurance company. Remember to provide all relevant documentation and a copy of the police report.
- Terminate the offending employee. However, ensure that the move follows your practice’s written policies and your state’s employment laws.
- Do not deduct money from the employee’s paycheck. Many states forbid such a response.
- Seek legal guidance regarding employee termination and final payment.