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HOW DO YOU AVOID EMPLOYEE EMBEZZLEMENT

By Jerry E. Bartram, CPA, FHFMA
35460 Beech Avenue
Yucaipa, CA 92399
http://www.jbartram.com

 

Early in 1996, the Association of Certified Fraud Examiners issued the results of a comprehensive study titled "Report to the Nation on Occupational Fraud and Abuse. In the reports conclusion it stated: " Smaller organizations are the most vulnerable to occupational fraud and abuse. Organizations with 100 or fewer employees suffered the largest median losses per capita. Generally, this is because sophisticated internal controls, designed to deter occupational fraud, are less prevalent in smaller organizations."

This study confirms what many physician know from first hand experience.. physicians are easy targets for the embezzler. Knowing this will hopefully increase your awareness but you must take an active role in the financial workings of your practice in order to significantly reduce your exposure to embezzlement.

 

WHY IT HAPPENS

 

Fraud only take three things to be in place..

MOTIVE

RATIONALIZATION

OPPORTUNITY

 

 

 

 

 

 

 

A study by the accounting firm of KPMG Peat Marwick identified three key factors that determine whether a person will commit fraud, These factors are as follows:

 Situational Pressures. An employee may be under pressure due to excess debt, job frustration, etc. Often employees feel they are unable to share these problems with their family or coworkers.

 Opportunities. An employee's opportunity to commit fraud generally increases as his or her responsibilities increase or when there are poor internal controls in place.

 Personal Integrity. This is probably the most important factor. A person intent on committing fraud can often succeed even in a wellmanaged organization. Conversely, a person with strong moral values will probably not commit fraud even when faced with situational pressures and the opportunity to do so.

Embezzlement is a breach of trust. It is for this reason that the study above found that people below 25 had a median loss of $12,000 while the person 60+ had a median loss was $346,000. You trust a person who has worked for your for years more than a person who has just started working also the older person generally has greater access to the assets of the company. The 60+ crowd most likely had fewer incidents of loss but a larger amount in dollars.

 

KEEP YOUR EYES OPEN FOR FRAUD WHEN AN EMPLOYEE:

 Openly resent the physician's, his/her substantial income and the lifestyle they have. They continually make snide comments about it or say ""spend the money, you surly can afford it."

 They always seem to have a lot of cash on hand. If they sometimes blatantly act as the office's resident "bank teller," cashing colleagues' checks out of their pocket "bank drawer."

 Office procedures always seem to be an annoyance to them. For example, in the case of a receptionist "forgetting" to post all patient charges or "running out of gas" before completing the daily verification of accounts receivable. You go by and see that checks have not be stamped with the endorsement stamp

 Adamantly resist any change in the present accounting system. Most people don't like change, but these folks resist any effort to put in controls and a better system. This is especially true if the change involves the replacement of an antiquated system with an easier, more efficient one. Imagine if you were the person who could spend three to ten years in jail if this improved system caught you, what would you do to keep it from happing.

 Using a new vendors that you have never used before for no apparent reason.

 Trying to collecting overdue accounts, using highpressure telephone solicitation techniques.

 Are lax about the petty cash fund, keeping it well-stocked with IOUs from colleagues who require some cash "to tide me over until Monday."

 Refuse to take vacations that last longer than two days. This can be a sign of someone who does not want to lose control.

 Wants to be the one to open the bank statement. They use the excuse that they want to be sure the bank is balanced.

 Appear to be workaholics who are willing and indeed want to get to work before anyone else. They take work home or arrive before everyone else and stay late because "I work better when I'm alone."

 Produce sloppy records that have a lot of erasures or corrections and are hard to decipher.

 Act like empirebuilders, craving increasing amounts of responsibility and rejecting all offers of help from colleagues.

 Seem overwrought about family or personal problems that could include separation, divorce, or a partner or spouse who is an alcoholic, drug addict, or gambler. These are all problems that create severe financial pressures.

 Ask for frequent pay advances, indicating either that they're inept at budgeting their personal funds, creating cashflow problems, or that they're plagued by serious money problems.

 Abruptly change their spending patterns, purchasing bigticket items that appear to be beyond their means.

 

HOW DO YOU FIND IT

Clients are always asking, "How will I know when I am being defrauded?" The following list of indicators will help you decide whether you should investigate further or consult professional help to determine the existence of fraud.

 Patient complaints (e.g., "I already paid that balance.")

 Problems detected through your existing internal controls.

 Unexplained and unusual financial statement trends.

 Accidental discovery of something wrong with the books.

 A sudden increase in employees lifestyle. New cars, vacations, home remodeling, new house, etc.

 Employee confession (this obviously is rare).

 

Occurrence of one of these indicators might be explainable; however occurrence of two or more should lead to further investigation.

HOW IT HAPPENS

By far the most common method of embezzlement in a dental practice is the misappropriation of the practice's cash and checks by the office manager. The office manager generally knows the makeup of the deposits and knows the vendors, what they supply and what they charge. He or she also has a reasonable understanding of your patient base. In most cases, you value the fact that your office manager understands your practice so well; however, this information can also be used against you. Let's look at a few embezzlement scenarios.

 Pocketing cash from patients. This method is the easiest to commit and can be done by anyone in your office who collects patient payments over the counter. A cashpaying patient is a valuable asset in your practice; however, without some basic control procedures, that same patient is the prime target of an embezzler. Think about it. If there is no record that you saw the patient, how would you detect this theft? We will discuss prevention techniques later in this chapter.

 Stealing petty cash. This is another simple and all too common method of embezzling.

 Lapping' checks. In this case, the perpetrator steals cash or checks from the daily deposit and replaces them with subsequent receipts (e.g., from the next day's collections). This is a method of stealing accounts receivable and converting them to cash. Lapping is a more sophisticated embezzlement technique and accordingly more difficult to detect because accounts receivable thefts are not visibly detectable.

 Insurance fraud. This method generally takes one of two forms. In one scenario, the perpetrator may add bogus charges to an otherwise bona fide claim form. Alternatively, the employee might create an entirely fraudulent claim form for an existing patient. Upon detection of this technique, you may be considered just as guilty as your employee because your provider number is being used to commit the crime.

 Forged Endorsements. This is often how checks are stolen from the practice. Or even easier, the employee, when asked "To whom do I make out the check?" responds "Oh, don't worry about it, we have a stamp." The check is subsequently written to the order of the employee instead of the practice.

 Duplicate/phony vendor payments. This technique is also quite common. In this case, the employee might have you sign a check paying an invoice that has already been paid. The employee then simply forges an endorsement on the check and deposits the check in his or her own account. What if the employee creates a bogus supply company that he or she actually owns? If undetected, this would provide a nice income stream for the perpetrator.

 

HOW DO YOU REDUCE THE POSSIBILITY OF EMPLOYEE EMBEZZLEMENT

You should note that the title of this section is not "Preventing" Employee Embezzlement. Keep in mind that if an employee is sophisticated enough and is determined to embezzle from you, he or she probably will. ' Your objective is to reduce your risk as much as possible. Consider the analogy of a three-legged stool to the three key factors identified in the KPMG Peat Marwick study, situational pressures, opportunity and lack of personal integrity. What happens to the stool if you remove one of the legs? It collapses. Likewise, an employee cannot be an embezzler without the three key factors as support.

Here are some ideas you can implement in your practice to significantly reduce your risk of being defrauded:

 Check references. It is extremely important to get as much information as possible from former employers, associates etc. This is the best method of verifying someone's personal integrity.

 Credit bureau. You should consider running a credit report on all employees who have access to money in the practice.

 Bond employees. In the event you are defrauded, insurance coverage can reduce your loss.

 Be visible, take an interest in the operations of your practice. A physician who has a handsoff management style is much more likely to be an embezzler's target. Lack of physician involvement enhances any opportunities an employee might have.

 Accounts Receivable Close the books/deposit daily. Requiring your employees to close the books daily and deposit all the day's receipts intact will reduce your exposure to "lapping" schemes or other accounts receivable manipulation.

Review/authorize adjustments. As discussed above, adjustments to accounts receivable need to be authorized by you.

Pre-numbered charge tickets/encounter forms. At the end of the day, the responsible person should account for all charge tickets generated during that day. This will prevent an employee from accepting cash from a patient and simply "forgetting" to post the charge for the visit. If the patient is never charged, you will never receive the complaint "I already paid for that visit," which could alert you to a potential problem.

Endorse payments immediately. All checks received by the practice should be stamped with the practice's bank endorsement immediately upon receipt. This endorsement should have the bank account number on it. All checks, either through the mail or over the counter, should be stamped.

 Accounts Payable. Proper supporting documents. Never sign a check without reviewing the invoice or other supporting documents. You should know what you're paying and who you are paying. If your employee is allowed to sign on your account, you should still review the invoices etc. being paid.

Mark "PAID." To prevent an employee from paying the same invoice twice, always mark the invoice or other documents as "PAID."

Bank statements should be mailed directly to the accountant. This simple thing will prevent employees from pulling out checks they don't want you to find.

Two signatures/signing limits. Many physicians set up their checking account to require two signatures for amounts more than $1, 000.

 Refund checks. Make sure you know the patient who is being issued a refund check. Ask for a copy of the patient's ledger to verify the credit balance.

 No typewritten checks.

Today's hightech typewriters make for easy manipulation after the check is signed. Computer-generated checks are safer to use.

 Consider using an outside vendor to maintain the accounts receivable and send out statements. Many frauds happen because a office can not separate duties so that the person billing is not the same as the person receipting the money. Care will have to be taken to make sure that the outside service has good internal controls and are financially responsible. I have seen one company that purchases a doctors accounts when they are billed and then bills the patients and insurance company, maintains the A/R and collects the accounts. This works well because the company owns the doctors A/R.

HOW DO YOU HAVE A DIVISION OF RESPONSIBILITIES

The best method of reducing the opportunity for an employee to commit fraud is by properly separating the financial tasks in the office. Table 1 shows one method of delegating tasks to reduce the opportunity for fraud.

You should prepare a similar chart for your office, using table 1 as a guide; however, your list of duties may be different. The important benefit of this exercise is in identifying task conflicts. For example, you do not want the same person that opens the mail to post the receipts and make the deposit. Your accountant can also help you in establishing proper internal controls.

Naturally, this separation is impossible in an office with only one employee handling all of the tasks in Table 1. In cases like this, you are the difference.

THE PHYSICIAN'S FIVE MINUTE AUDIT

 Compare today's patient appointment list to daysheet. Verify that every patient seen was charged.

 Scan adjustments. Know why they are being made. Check out a few to see what the chart says. Look for people that came in on an emergency basis that do not live in town.

 Open the mail, review payments. Check that the daily deposit agrees with the amount of the checks in the mail plus the overthecounter payments received during the day.

 Have the office send what the daysheet/computer says that the cash collected, charges and adjustments to the CPA for reconciliation.

 Compare daysheet to deposit slip. Today's payments per the daysheet should agree to the amount of the bank deposit.

CONCLUSION

If a few basic internal control procedures are implemented such as proper separation of tasks and the Physician's FiveMinute Audit a physician could reduce many opportunities for your employees to embezzle. I said reduce not prevent. One of the main reasons for not having several workers from one family all working in the same office is that most systems relay on the separation of duties to prevent fraud. If two people in critical spots are in collusion there goes the internal control system. The physician will need to take an active interest in the daytoday operations. This means an active interest in your front desk and in the business office. Properly done you will most likely keep an otherwise honest employee honest.

 

Endnotes: 

Adapted from Detecting And Avoiding Employee Embezzlement by Joseph E. Kalinowski, CPA, PFS, CPBC.; ADA Guide for New Dental Practices

Report to the Nation on Occupational Fraud and Abuse by the Association of Certified Fraud Examiners

California CPA continuing education course material on Fraud

Job Separation Chart

 

Assistants' Names

Duties

 

 

 

 

 

CPA

Dr.

Opens Mail

X

 

 

 

 

 

 

List and Copies Checks

X

 

 

 

 

 

 

Post Cash & Check Receipts

 

X

 

 

 

 

 

Post Charges

 

 

X

 

 

 

 

Approves Adjustments

 

 

 

 

 

 

X

Posts Adjustments

 

X

X

X

X

 

 

Prepares Deposits

 

X

 

 

 

 

 

Makes Deposits

X

 

 

 

 

 

 

Have Access to the Checkbook

 

 

 

 

X

 

 

Prepares Payables for Payment

 

 

 

 

X

 

 

Prepares Refund Checks

 

 

 

 

X

 

 

Signs on Bank Account

 

 

 

 

 

 

X

Opens Bank Statement

 

 

 

 

 

X

 

Reconciles Bank

 

 

 

 

 

X

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Yucaipa Office

35460 Beech Avenue

Yucaipa, CA 92399

Telephone  (909) 790-1583

Fax            (909) 790-3862

E-mail Jerry@JBartram.com

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Copyright 1999 Jerry E. Bartram, CPA All rights reserved.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, I inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein."