Protect your practice from occupational fraud

At the Odd Couple Orthopaedic Group, I.M. Neat, MD, was reviewing accounts. He’d been handling them himself since the practice’s bookkeeper eloped three months earlier, and he was puzzled at how the bottom line had changed. He and his partner, U.R. Knott, MD, were seeing the same number and mix of patients. But for the past three months, their cash flow had been substantially higher.

“We’ve been robbed,” he realized. “That bookkeeper was only depositing half of our cash receipts into the practice account. No wonder he could afford an around-the-world cruise for his honeymoon.”

According to the Association of Certified Fraud Examiners (ACFE), occupational fraud—the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets—is widespread and occurs in every industry, including health care. In fact, 89 of the largest 1,134 fraud cases investigated by ACFE during 2004-2005 were related to the healthcare industry.

Because of the hidden nature of fraud, accurately determining the full scope of occupational fraud is difficult. Fraud in small businesses may also be underreported because small business owners may not know or recognize that the fraud occurred or may choose not to report the crime for fear of bad publicity and embarrassment. They may also be overwhelmed by the sheer cost (in terms of dollars and loss of productive time) needed to examine the mounds of financial data to assess the extent of the loss.

Types of occupational fraud
All occupational fraud falls into one of the following three categories:

• asset misappropriation, such as fraudulent invoicing, payroll fraud, and skimming revenues
• corruption fraud, such as any scheme by an employee to use his or her influence in a business transaction to obtain an unauthorized benefit that is contrary to his or her duty to the employer
• fraudulent statements, which involves falsifying financial statements to make them appear more or less profitable

In the small business environment, the most frequent fraud scheme is check tampering. This scheme is successful when the employee who has responsibility for recording payments and reconciling bank statements is also responsible for paying the expenses of the business. Solo and small medical practices—such as the Odd Couple Orthopaedic Group—are particularly vulnerable because they have small administrative staffs and can become easy targets for unscrupulous employees.

Prevention strategies
According to Michael McCaslin, a certified public accountant (CPA) with Somerset CPAs in Indianapolis, physicians can take several steps to protect their practices from occupational fraud.

“It all starts with developing a sound practice infrastructure” says Mr. McCaslin. Regardless of the size of the practice, physicians must develop an office culture and the expectation that values honesty, integrity, and ethical behavior.

The second step, according to Mr. McCaslin, is to segregate the duties. In other words, never give the same person both the responsibility for recording receipts and access to the checkbook to pay expenses—even if the individual is a long-time, trusted employee. In his experience, in a small medical setting, the most trusted employee, under the right circumstances, may carry out fraudulent activities. Even if someone is employed to do the billing, the bill paying function and checkbook should be delegated to someone else, advises Mr. McCaslin. The physician should also review bank statements and cancelled checks on a regular basis.

Using internal controls for handling cash receipts, billing and receivables management, and account payable procedures can also protect the practice. “If you don’t want to be a victim of occupational fraud,” notes Mr. McCaslin, “you need to be proactive and work with your independent accountant on the preventive measures you should put into place.”

For more information on fraud prevention measures, read Mr. McCaslin’s article, “Medical practice fraud and embezzlement: Strategies to prevent it happening to you” posted on the AAOS online Practice Management Center (www.aaos.org/pracman) under the section, “Private Practice Operations, Information and Resources.”

Marty Krawczyk is the AAOS practice management program coordinator. She can be reached at krawczyk@aaos.org

Facts on fraud

• The most frequent fraud schemes involve fraudulent billing, skimming receipts, and expense reimbursement misappropriation.
• U.S. businesses lose an estimated 5 percent of annual revenues to fraud.
• The median loss caused by occupational fraud in the United States in 2004-2005 was $159,000.
• Small businesses lose more than large businesses—a median of $190,000 for businesses of fewer than 100 employees.