American College of Physicians: Internal Medicine — Doctors for Adults ®

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Your PracticeTips to detect—and prevent—theft in your practice

Divvying up financial duties among your office staff can help keep embezzlement at bay

From the November 2000 ACP-ASIM Observer, copyright 2000 by the American College of Physicians-American Society of Internal Medicine.

By Bryan Walpert

Did you hear about the trusted office manager who left enough space on the checks her physicians signed to turn $10 into $100? Or how about the office manager who sneaked checks to pay her personal bills into a stack of practice checks for the physician to sign? How about the office manager who embezzled $435,000 over 17 years before she was caught?

These are frightening stories, but consultants say they are true—and not as rare as you might hope. "You hear stories about colleagues who have had money stolen," said J. Howard Shegog, MD, an internist at Tidewater Physicians Multispecialty Group. "You realize you can't be forever trusting of everybody." That's why the 33-physician practice in Newport News, Va., has tightened its accounting controls in recent years.

Internal fraud costs U.S. organizations $400 billion a year, and the average company loses $9 a day to employees, according to a 1996 report by the Association of Certified Fraud Examiners in Austin, Texas. When health care employees get involved in fraud, the median amount of money that disappears is $105,000. "It's a bigger problem than most people realize," said C. David Carpenter, partner of PCSi Health Care Consultants in Southern Pines, N.C.

Here are some ways to detect embezzlement and prevent your employees from dipping into your practice's till:

  • Watch for suspicious behavior.
    Employees who make $15 an hour and suddenly start wearing fur coats or driving luxury cars are an obvious tip-off. But not all employees steal so they can live the high life.

    Keep abreast of office gossip. You might find that an employee has a home situation so difficult he or she could feel pressured to steal, said Gary Matthews, president of Physicians HealthCare Advisors in Atlanta. Pay attention to employees under financial stress or to someone with an unemployed spouse, a seriously ill relative or several children in college.

    Be particularly suspicious of employees who avoid vacations. An employee involved in an embezzling scheme will often hide checks and replace one set of payments with another. These schemes grow so complicated, consultants say, that the employee fears leaving the office.

    "Make your bookkeeper or office manager take a vacation," said W. McKay Henderson, a partner of the U.S. investigations practice in the Washington office of PricewaterhouseCoopers, an accounting and consulting firm. "I can't tell you how many times someone went into the bookkeeper's office while she was on vacation to answer a question and found checks in her desk drawer."

  • Examine accounts payable.
    One of the simplest ways to catch fraudulent check-writing is to flip through cancelled checks yourself and look at the names, Mr. Henderson said. If you don't have time to do this every month, ask your bookkeeper for monthly statements and cancelled checks once a quarter. This type of random probe often acts as a deterrent, he said.

    "I can't tell you how many fraud cases we've investigated where somebody played games with the checkbook," Mr. Henderson said, "but the owner never looked at the cancelled checks, so he never knew."

    Another simple precaution: Read what you're signing. In addition, sign only vendor checks for which you have an invoice.

    "We've seen this: An office manager brings a bunch of checks to the doctor to sign. She puts checks for her own bills in there, but they are for amounts so small that they don't really stick out," said Evelyn Eskin, president of HealthPower Associates, a practice management consulting and education firm in Philadelphia.

  • Segregate duties.
    Ideally, you want to prevent fraud instead of catching it after the fact. A good way to start is to split duties among several employees.

    Start with the mail. The employee who opens the mail should not be the same person who collects co-pays from patients and posts payments. In one common scam, the check-in person pockets cash and posts the checks that come in the mail to the accounts of cash customers, Mr. Carpenter said.

    In another typical embezzlement scheme, the office manager writes checks to herself or to fictitious vendors. To avoid this scam, make sure the person who writes checks isn't the same person who reconciles the bank statements. Since bank statements come in the mail, your check-writer also shouldn't open the mail.

  • Use a lockbox.
    All patient payments mailed to Tidewater Physicians Multispecialty Group in Newport News, Va., go directly to a lockbox, a post office box at the bank. The bank deposits funds directly into the practice's account.

    It's easier for employees to embezzle if they have direct access to that money, said David Warren, a certified public accountant who is Tidewater's practice administrator. "If checks aren't being handled at the office, I know I've eliminated some concerns that employees are taking money."

  • Create checks and balances.
    Someone who doesn't collect money should reconcile posted payments and deposits with daily charges. At MidCarolina Gastroenterology, a two-physician practice in Sanford, N.C., each of the two check-in/check-out employees has a password and an individual cash box. The office manager compares the money in each box with charges posted by password.

    You should also compare charges and daily collections with daily patient activity. Tidewater Physicians Multispecialty Group checks this two ways: In addition to encounter forms, the practice maintains a list of appointments and walk-ins. Any money collected is written next to patient names.

    "At the end of the day, we add up how much we should have collected and compare it to encounter forms," Mr. Warren said. "If I had 60 people go through one of my offices, I ought to see 60 amounts listed next to names and 60 encounter forms."

    Mr. Matthews from Physicians HealthCare Advisors suggested creating computer security codes so that only office managers or front-desk supervisors have authority to adjust patient accounts. (Practices typically make these adjustments to write off courtesy visits or charges that are higher than the discount rates they have negotiated with PPOs.) The more people authorized to make adjustments, the easier it is for someone to write off part of a visit and pocket the cash.

  • Use your computers.
    Computer systems often have features that help prevent internal theft. Once cashiers at Richmond Internal Medicine and Cardiology Associates, a five-physician practice in Rockingham, N.C., enter charges into the computer, any changes (like deleting a charge to pocket the cash) will show up on an end-of-day batch report.

    You should also use your billing software to run an adjustments report at least once a month. "If your contract with a PPO says you're supposed to get paid 20% off your fee schedule but your adjustments are coming in at 40%," Mr. Matthews said, "that ought to raise eyebrows."

  • Act quickly once you discover theft.
    If you have suspicions, consult a forensic accountant or a certified fraud examiner. (For a directory, go to www.frauddetectives.com.) If you can prove that someone has been stealing, consider prosecuting. If you fail to prosecute and simply fire the employee, you may be doing your colleagues a disservice.

    A few years ago, for example, Mr. Matthews found that a cardiovascular surgery group's office manager had been stealing for years. After the senior physician fired her, he was too embarrassed to press charges. A solo general surgeon in the same town hired her. Within a year, her new employer learned about her past.

    "He was livid," Mr. Matthews said. "It comes back to haunt you."

  • Carry a fidelity bond.
    A fidelity bond not only allows you to recover some of the money you lose from fraud, but it also takes the decision to prosecute out of your hands. Once you report the problem, the insurer investigates and, if necessary, prosecutes.

    Your general business insurance carrier should offer a fidelity bond for a few hundred dollars, said Mr. Carpenter from PCSi Health Care Consultants. Your general business policy probably provides some coverage, he added, but you should consider increasing it to cover a month's receipts.

    Once you've terminated someone for theft—particularly if you are considering prosecution—change your office locks and secure all paperwork. Mr. Carpenter recalled one fired employee who used her key to return to the office within a few days to remove incriminating records.

    "She made some restitution, but we had no way of proving the amount," Mr. Carpenter said. The practice recovered only a nominal sum.

  • Run background checks on vendors.
    Make sure your vendors really exist. Cross-check the backgrounds of your vendors and your employees to ensure they're not relatives or friends. (Accounting firms often offer this type of service.)

    The assistant office manager at one practice was assigned to find a vendor to make the computer system Y2K-compliant. Instead, she set up a dummy company with a relative who worked in the computer field, recalled James Mulvaney, director of research at KPMG Forensic and Litigation Services in New York, which provides investigative and consulting services. The two charged the practice $100,000 for a contract that had a market value of between $40,000 and $70,000.

    One way to catch phony vendor accounts is to track expenses. If your vendor costs suddenly spike, an employee and a vendor might be colluding to overcharge you. If one vendor suddenly becomes your largest, said Mr. Henderson from PricewaterhouseCoopers, be suspicious.

  • Run background checks on your employees.
    The best way to prevent embezzlement is to hire the right people. Because so many employers worry about lawsuits, though, it is often difficult to obtain references that do more than confirm dates of employment. Ms. Eskin from HealthPower Associates conducts "back-door" reference checks, where she tries to find someone she knows in the practice who can informally discuss the employee's past record.

    Fraud prevention experts also recommend checking criminal backgrounds. A large accounting firm or private investigation firm can help with this.

    You also want to know if your employees handling money have ever been sued or face pending lawsuits. "Frequently, allegations of theft don't end up in criminal court. They end up in civil court," said KPMG's Mr. Mulvaney.

    Whatever you do, don't be too trusting. "You have to assume that every employee has a price. You just don't know how much it is," Mr. Matthews said. "For some employees, it's pretty low."

Bryan Walpert is a freelance writer in Denver.

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