Published 10/1/2012
Larry Elisco, CPA, ABV, CCS-P

Avoid Fraud in Your Practice

Commonsense financial controls will limit your vulnerability

Medical practices lose $25 billion annually to fraud and theft, according to the Association of Certified Fraud Examiners, and are increasingly vulnerable to employee theft. In part this is due to the fact that many medical practices—particularly solo or small group practices—share the following three common characteristics:

  • Supervision of employees is limited or lax.
  • A limited number of staff members handles all accounting procedures.
  • A high number of transactions—many in cash—occurs on a daily basis.

Seventy percent of thefts of $100,000 or more have occurred in practices with 10 or fewer physicians. A typical practice loses 5 percent of its revenue to fraud.

The following steps will help you limit your vulnerability and create an environment where the opportunity to commit fraud doesn’t exist.

Common scams
Be aware of common scams that can infiltrate your practice, including the following:

  • Disbursements—forging or altering checks, invoicing for fictitious services or goods
  • Expense reimbursements—inflated or fictitious business expense reports
  • Payroll—inflating hours or pay rates, unauthorized bonuses, or creating a fictitious employee

Know your employees
Get to know your employees and establish a no-tolerance tone. Be on the lookout for employee lifestyle changes, circumstances, or behaviors. When employees take vacations and are out of the office, have others take over their duties so that any trails that were kept hidden will likely surface.

Combine trust with verification and do background checks and bond certain employees who deal with financial assets. When prospective employees know they will be investigated, those with a problem past will often apply elsewhere. Create an awareness about fraud. Conduct seminars on workplace fraud to let employees know how prevalent it is and what the consequences are.

Monitor reports
Developing budgets and comparing the budgeted results to the actual amounts can provide clues to the possibility of fraud. If actual expenses vary significantly from what was budgeted, it could be an indication that unauthorized fraudulent expenditures have been made.

Get documentation
Always make sure an invoice or supporting document is attached to the back of any check you sign. Oftentimes, due to the large volume of checks practice owners may sign, they will only handle the check itself without taking the time to review the supporting document. Take the time to review the backup document and make sure the expenditure is justified.

Watch accounts receivable
Beware of noncontractual adjustments to accounts receivable. Employees who collect cash such as copayments and have the capacity to write-off balances in accounts receivable can both perpetrate and conceal a theft. Analyze any noncontractual adjustments, such as writing off patient bad debts, to ensure they have been approved by management.

Work with your bank
Provide clear instructions to your bank. In some cases, an embezzler will write checks from the operating account directly to him or herself. It’s a good policy to provide your bank with a list of approved vendors and employees to whom checks are written that should be honored.

Don’t make assumptions
Don’t assume that your accounting firm—or your accounting software—is going to detect fraud. The accounting firm that prepares your income tax return is not being engaged to detect fraud, although it may have a program in place to perform spot checks for unusual activity in certain areas of your business. If so, paying for this service may be money well spent.

Transactions in Intuit’s QuickBooks, the common accounting program used by medical practices, can easily be changed after the fact. In a number of cases, physicians believed the Internal Revenue Service (IRS) was being paid withholding taxes when in reality the practice managers were making checks payable to themselves, then intercepting and destroying the IRS underpayment notices before they could be presented to the physician. Huge liabilities to the practice were incurred due to this fraud, which could have been avoided by hiring a payroll service as opposed to doing payroll in-house.

QuickBooks does have an audit trail feature that allows your accountant to review all changes to transactions after they have been initially recorded. This control feature can uncover changes to the payees of checks and lead to the discovery of a fraudulent scheme.

Employee fraud and embezzlement may be on the rise, but you don’t have to be a victim. By being proactive and taking preventive measures, you can safeguard your practice.

Larry Elisco, CPA, ABV, CCS-P, a member at Weltman Bernfield, LLC, specializes in providing physicians with best business practices.