Take Steps To Detect And Deter Employee Embezzlement Losses — Part 2
BY JAMES B. CALNAN, CPA
In the November issue of The Healthcare News, we discussed why embezzlement occurs in medical practices, who is responsible for prevention and detection, and steps to minimize embezzlement losses. In this article, we will identify various methods of embezzlement and steps that can be taken to detect such schemes.
Common Methods of Embezzlement
The ways in which an employee may embezzle from a medical practice are limited only by the individual’s creativity and opportunity. The following are documented methods used:
• Patient co-pays paid in cash are pocketed and not recorded or later adjusted off.
• A stamp is used to alter the payee on patient checks. An employee writes the balance off as bad debt or another adjustment.
• An employee opens a checking account in the name of the employer, forges doctors’ signatures on bank forms and signature cards, and channels deposits to an account.
• Refunds of managed care withholds are misappropriated and not recorded in whole or in part.
• Petty cash funds are misappropriated.
• The patient self-pay is pocketed, the encounter form is discarded, and the transaction is not recorded. The patient name is deleted from the appointment schedule.
• Old outstanding checks are voided but not added back to cash, freeing up funds to write fraudulent checks against or to cover account transfers.
• Deposits are recorded at a lesser amount on the general ledger, freeing up funds to make fraudulent transfers to an unauthorized account.
• An employee writes a check to himself or herself or to a personal creditor, forges the practitioner’s signature, then records the check as payment to one of the practice vendors.
• Checks are manually written to individual or personal creditors, recorded as voided on a computer, and later en-tered by a journal entry crediting cash and debiting an expense account.
• An employee submits an invoice from a non-existent vendor, sets up a bank account in the same name, and channels checks to that account.
• An employee uses a corporate credit card for personal expenses and then misclassifies the expense to one or various practice expense accounts.
• Cash is pocketed by an employee and shown as deposit in transit on the bank reconciliation.
Steps to Detect Embezzlement
The following steps can help you detect an embezzlement scheme. Implementing these procedures may actually deter an employee from engaging in fraudulent actions. Where indicated, ‘designee’ refers to a practice administrator, outside accountant, or other individual who has no cash receipts, cash disbursements, accounting or billing responsibilities.
All bank statements should be delivered unopened to the owner practitioner or designee. The doctor should scan canceled checks for appropriate signature, payee, and amounts. Bank statements should be scanned for unusual debit charges, account transfers, etc.
A monthly check register should be printed and submitted to the owner practitioner or designee along with all bank statement reconciliations for review. All check numbers of used and voided checks should be accounted for.
At the end of each month, the bookkeeper should reconcile the monthly production report of collections with the patient-fee income accounts in the general ledger, and differences should be documented and brought to the attention of the practitioner or designee. The owner practitioner or designee should review this reconciliation every month.
Periodically, the doctor or designee should select the patient appointment schedule for a few days and have office personnel pull the encounter forms, patient charts, and daily activity reports for those days. The patient transactions should be traced through all these records. Check for collection of co-pays on the day of the visit.
Quarterly payroll tax returns should be reconciled with the general ledger and reviewed by the doctor or designee along with the detail of payroll by employee.
Internally generated comparative financial statements should be printed and forwarded to the practitioner or designee monthly. Fluctuations in income and expense amounts between comparative periods and budgeted amounts should be satisfactorily explained.
All general journal entries should be printed out monthly, kept in a binder chronologically, and reviewed by the doctor or designee for propriety.
At the end of each month the practitioner or designee should receive a listing of unpaid bills and aged patient receivables.
Quarterly, the doctor or designee should receive a detailed analysis of all adjustments to patient accounts, including contractual adjustments, managed care withholds, courtesy discounts, bad debts, refunds, billing errors, etc., and these should be presented on a comparative basis.
The practitioner or designee should periodically request from the bank a copy of the authorized signatures on file for all bank accounts to review for appropriate authorized individuals, genuine signatures on file, and bank accounts of record.
An Ounce of Prevention
The old adage, “an ounce of prevention is worth a pound of cure,” is very appropriate here. Doctors endorse preventive medicine to their patients to promote their health. Likewise, preventive measures in the business office can help avoid embezzlement losses and promote the fiscal health of your practice.
James B. Calnan, CPA, is partner-in-charge of the Health Care Services Division of Meyers Brothers, P.C. in Longmeadow; (413) 567-6101.