What do you do with a potentially deceitful co-worker?

Okay, here’s the deal: Person didn’t show up for work on a Saturday, Monday, or Tuesday. Wednesday, the boss went to HR to finalize termination and was told she was on disability. He came back to the office and told us that she was on disability, would be back Monday, and to be nice to her. He then said “read between the lines.”

So a bunch of us figured she was admitted psychiatrically. But I worked in a psychiatric hospital, and the hospital would’ve called our boss. If they called HR, HR would’ve called our boss. Plus, disability is more than 5 days, and requires an employer’s signature. To top it off, she came in today and told another co-worker she was on vacation. What do I do? She played the system and should be fired for not showing up if not even for being deceitful about why. She’s terrible at her job, messes up important accounts left and right, and what’s worse, she’s snooty and acts like she runst he place. She brings the morale in the office down a peg or seven. How should I handle this?

I should note that this is a small office where generally, everybody finds out everyone else’s business somehow.