EyeNet Magazine

Practice Perfect: Compliance & Risk Management

Five Dos and Don’s to Prevent Embezzlement
By Chris McDonough, Associate Editor

Embezzlement? It can’t happen here,” thought the physician-owners of Argus Eye Care,* but a dishonest bookkeeper taught them otherwise. Her ruse was simple. She would take the same credit card invoice to two different physicians. After getting two checks signed, she could use the first check to pay off the practice’s American Express bill and the second to pay her own American Express bill.

She eventually embezzled an estimated $25,000, said Carol A. Poindexter, Esq., a partner in the National Health Law Practice Group of Shook, Hardy & Bacon LLP in Kansas City, Mo. But if the practice had taken some simple precautions—suppose, for instance, the practice used a “paid” stamp and noted the check number and date on the invoice—this loss may have been prevented. Stop embezzlement before it even begins by following these five dos and don’ts.

1. Do a thorough background check on prospective employees . . . Make sure you check an applicant’s references. And if your state law allows you to do a criminal background check, you should make it clear that you intend to do so. “By looking job candidates in the eye and telling them that you intend to do a thorough background check, the person who has a propensity to steal may decide not to pursue the job application any further,” said Ms. Poindexter.

. . . and don’t stray beyond the law. Check with an attorney to see if there are any laws that might limit your use of background checks, said Ms. Poindexter. If, for instance, you plan to run a credit check, you should ask a local attorney to explain what authorization is required by state and federal law. Then you can make sure that your job application includes the appropriate language. 

2. Remember that employees look to your lead . . . “If you fudge an expense account or dip into petty cash to pay for a lunch, it gives people the wrong impression. They will look to that cash as easy pickings,” warned Ms. Poindexter. While small-scale pilfering won’t sink your practice, it fosters an office culture where bending the rules is acceptable—and that can lead to much heavier losses.

. . . and don’t overlook employees’ needs. “Divorce, high medical bills, alcohol abuse—things happen,” said Ms. Poindexter. “And if you know that one of your staff members is really hurting, you should consider arranging an emergency loan or recommending a counselor. By taking that extra step, you show the employee that you care. And when staff know they can come to you with a problem, they’ll be less likely to turn to desperate measures.”

3. Follow the money . . . Is your practice adequately tracking the handling and disposition of all cash? Run through your current accounting procedures and ask yourself whether that’s the case. For instance, when you take a cash payment, do you keep a carbon copy of the receipt? Are those receipts prenumbered sequentially so you can spot when one is missing? Is each copayment stapled to a prenumbered encounter form? Is the approval process for adjustments and write-offs being documented and monitored? Does your computer system match each office visit to the corresponding payment and deposit? Each day, somebody needs to verify the daily deposits and charges, said Ms. Poindexter. “If a report says that $12,000 was deposited to an account, you need to confirm that the whole amount—and not $11,900—was deposited to that specific account.”

. . . and don’t lose that paper trail. If records are missing and accounts are never reconciled on time, embezzlement becomes much harder to detect. A key first step in making sure that your accounting records are organized is to put your operating procedures in writing, said Ms. Poindexter. Those procedures should include a monthly schedule of due dates for the generation of management reports, and you should consider it a red flag if those reports never reach you on time.

4. Institute checks and balances . . . For instance, the payables may be done in the office, but the general ledger might be done through a third-party accountant. “The practice should urge their third-party accountant to focus on fraud detection, so as they’re going through your books each month they can give you a heads-up if anything looks suspicious,” said Ms. Poindexter.

. . . and don’t entrust one individual with too many tasks. The same person should not be taking checks out of the mail, processing checks and depositing checks. “In a small practice, it can be really difficult to split these tasks up,” said Ms. Poindexter. “But without exception, the practices that have had problems with forging and hiding of receipts have been practices where individuals have been allowed great latitude in doing all those tasks.”

5. Provide oversight . . . When physicians analyze their practice’s financial statements and conduct spot checks of appointment books and day sheets, they send a strong message to staff. If this doesn’t deter staff from erring, it will at least help you to uncover embezzlement before the losses become too serious. “Pay particular attention to adjustments, write-offs and patient refunds—for those are the three areas where it is easiest to pocket funds,” said Ms. Poindexter. “If somebody is writing off $5 on every patient and your practice sees 60 patients each day, then that can soon add up. If you see excessive write-offs, then you need to check what they are for.”

. . . and don’t lead staff into temptation. “You don’t want to put people in a position where they’re tempted to do something wrong,” said Ms. Poindexter. “One horrific practice is to sign blank checks. For instance, a doctor goes on vacation and leaves 15 blank signed checks.”

Spread the Risk
While you can limit opportunities for embezzlements, you can’t eliminate the danger altogether. But you can spread the burden of any financial losses.

“If employees are handling funds, they should be bonded,” said Ms. Poindexter. The bonding company essentially guarantees you against a loss that is incurred by a dishonest employee.

You should also ask your insurer about its insurance policies for dishonest employees, said Ms. Poindexter. Although most general business insurance will cover employee misdeeds, you will often find that the policy covers only $10,000 or less, she said. Your insurer may also have a risk prevention program that will help you to put good procedures in place.

When You Suspect Wrongdoing
“You need to be absolutely certain that illegal employee conduct occurrred before making any accusation,” said Ms. Poindexter. “Otherwise you would be inviting a defamation of character lawsuit.” To be safe, ask your attorney for advice on how to proceed. If the employee is bonded, then you will need to get the bonding agency involved.

If you decide not to prosecute, you need to be careful what you say when the person’s next prospective employer calls you for a reference—or you could be exposing your practice to a lawsuit. “That has happened more times than I can count,” said Ms. Poindexter. “An employee leaves the practice sassy, happy and wealthier, and then comes back and sues the practice after they’ve been given a bad reference.”

* The practice name and location are fictitious, but the embezzlement was real.

Learn Embezzlement: Eight Warning Signs

Be vigilant, and you'll limit your losses. Here are eight warning signs to look out for.

Accounts chaos. It is hard to spot irregularities if your financial statements are always late and the documentation is disorganized or missing. Don’t let an embezzler cash in on poor business practices.

Problems with petty cash. Is there a continual pattern of money going missing from the petty cash drawer? Embezzlement often starts small, so you should nip it in the bud while your problem is still “petty.”

Peculiar write-offs. If you don’t check write-offs daily, you should at least do a periodic spot check, said Ms. Poindexter.

Accounts receivable balance increases. If your AR balance is increasing each month, can you establish an innocent explanation for that? Even if embezzlement isn’t the cause, it is still important to identify the problem. (For tips on monitoring collections, go to www.eyenetmagazine.org/archives and see “Are You Collecting What’s Owed?” in April 2003.)

Odd behavior. “If you sense that somebody is developing a problem with alcohol or drugs, it is usually part of a bigger pattern of behavior,” said Ms. Poindexter. “And if they’re going to have a propensity to steal, it is likely to manifest itself early on.”

Turf Battles. Does somebody insist that all billing calls go through his or her phone? If the same employee never takes vacation, you should ask yourself why.

Patient complaints. Consider it a red flag if your patients are telling you that they’re being sent bills for services that they’ve already paid for.

Low morale. If employees feel underappreciated and underpaid, they may be tempted to award themselves an unofficial bonus.

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