Guard Against Embezzlement

Strong financial controls are the best defense.

BY JERRY HELZNER, SENIOR EDITOR

Four years ago, Ophthalmology Management detailed how Eyesight Associates, the successful and fast-growing practice of widely recognized Georgia eye surgeon Johnny Gayton, M.D., was brought to financial ruin through a theft of more than $1 million perpetrated by two "trusted" employees. Dr. Gayton told his story to this magazine so that it could serve as a lesson to other ophthalmologists — especially those who are so busy with the medical side of their practice that they leave the business side to others.

This article will show how failing to heed the warning signs of embezzlement can devastate a practice for years. It will also offer guidance on putting in place solid financial controls that can prevent internal theft from taking place.

Recovering From Ruin

At the time Dr. Gayton told his story to this magazine, his practice was in bankruptcy and he faced the possibility of having to pay millions to the federal government in back payroll taxes and penalties. Dr. Gayton, who was highly entrepreneurial and diversified in his approach to business, was also in the process of working with his new accounting firm, Bowen, Phillips and Carmichael (BPC), of Tifton, Ga., to rescue his practice by putting tight financial controls in place, negotiating with debtors, closing a number of satellite offices and divesting himself of businesses ranging from art galleries to auto dealerships.

Jane Freeman Phillips, C.P.A., a BPC partner who has continued to work with Dr. Gayton, says that the practice was in such bad financial shape when her firm was hired that she had to "triage" the various problems so that the most pressing issues could be dealt with first.

"We had to remove the immediate pressure on the practice," she says. "With the help of a first-rate tax attorney, Dr. Gayton was able to negotiate a good settlement with the IRS. He had to pay approximately $500,000, but it could have been as much as $2 million with all the penalties the IRS could have placed on the practice."

Next, BPC helped Dr. Gayton deal with a mountain of bank debt. "The bank worked with us and gave us time," says Phillips. "They knew Dr. Gayton had considerable earning power and they wanted to retain him as a long-term customer. Today, most of the bank debt has been paid off and the rest of it has been refinanced. Dr. Gayton improved his financial position to the point where he was able to negotiate more favorable terms with another bank."

While Dr. Gayton was negotiating with his creditors, BPC was helping him downsize his practice and his diverse business interests to create the greatest immediate cash flow.

"We had to go back to his core business, the practice of ophthalmology, which was capable of generating profit in the short term," says Phillips. "Anything that was a long-term investment had to go."

From a peak of 13 offices, Eyesight Associates, based in Warner-Robins, Ga., now operates in four locations. Dr. Gayton, the father of nine children, has divested his car dealerships, art gallery and recording studio.

"Though Dr. Gayton's overall net worth is now considerably less than what it once was, his income is now at the level of the world-class surgeon that he is," notes Phillips. "It is a remarkable recovery. It is a tribute to Dr. Gayton that he was always determined to pull through this ordeal."

Though Dr. Gayton's story has a happy ending, he is the first one to acknowledge that he would have spared himself a tremendous amount of grief by placing his trust in solid financial controls instead of in two close friends who betrayed him (and later pled guilty). A deeply religious man, Dr. Gayton is willing to serve as an object lesson so that other doctors are not victimized.

"I tend to be a 'big picture' kind of person," says Dr. Gayton. "They say the devil is in the details. I left the details to other people. This was a tremendous distraction from what I really want to do, which is help people see."

Heed the Warning Signs

The thefts at Eyesight Associates were able to continue over a period of several years because the practice had limited financial controls that the two thieves, working in concert, were able to circumvent. If Dr. Gayton and the honest members of the staff had heeded at least some of the following 10 warning sign described by Jane Freeman Phillips, they would have more quickly caught on to the embezzlement. These "red flags" include:

1. Disorganized operations in bookkeeping and purchasing
2. Unrecorded transactions or missing records
3. Excessive voids or credits
4. Bank accounts not reconciled on a timely basis
5. Continuous out-of-balance situations in accounting records
6. Employees with lifestyles beyond their means
7. Unused vacation time
8. Employees in close association with suppliers
9. Employees in close association with one another in areas where separation of duties could be circumvented
10. Little or no owner involvement in the business side of the practice

An Ounce of Prevention

But why wait for the warning signs to appear when you can take effective steps to prevent embezzlement?

Both Phillips and Mark L. Kropiewnicki, a principal consultant with The Health Care Group, Inc. and a principal attorney with and president of Health Care Law Associates, P.C., Plymouth Meeting, Pa., agree that it is much better to have tight financial controls already in place and to head off problems before they have a chance to begin.

"Internal theft would be much more difficult if ophthalmologists would follow some fairly simple, basic principles," says Kropiewnicki. Here are seven such rules he recommends that a practice should institute and periodically review:

■ Seek accounting advice. Bring in your regular accountant and instruct him to recommend basic accounting controls. The recommendations should be in writing and rigorously followed. Keep your accountant involved in your practice finances and tax return preparation and also have tax notices sent to your accountant (not to your practice).

■ Outsource payroll processing. Using an outside payroll service could have prevented the massive embezzlement that Dr. Gayton endured. Most payroll services require the practice to deposit not only the payroll amounts owed to employees to a special payroll account, but also the federal and state taxes as well. This would have eliminated a huge portion of the source of amounts embezzled.

■ Keep duties separated. Separation of responsibilities should be a basic policy. Distribute the following duties among several employees: opening mail, posting checks, handling cash, completing deposit slips, ordering supplies and writing checks. Such separations tend to become poorly respected over time and under work pressures, so be sure to insist that they be maintained. Have your accountant irregularly review for adherence to those routines.

■ Save transaction records. Patient-visit slips should be pre-numbered and accounted for daily. Each patient's visit should be shown on a sign-in list, running day sheet and the master daily schedule. All these materials should be checked, reconciled to each other and stored away for several years before being thrown away. Cash can too easily be embezzled if a cash-paying patient's visit is simply allowed to disappear because those records are incomplete or unavailable.

■ Make "regular" irregular audits. Informally check over the appointment books, day sheets and ledger cards now and then on an unplanned, irregular basis. If this information is on a computer, check from the appointment schedule to these various items within the computer software. Employees who see this non-routine attention will be less likely to even consider the idea of stealing.

■ Have tough check-signing protocols. If possible, you or a practice partner should sign every check. Each check should be filled out completely, with an attached bill or invoice. Never sign incomplete checks, such as blank checks or those without a payee. Be especially critical of checks made out to cash, or to suppliers or individuals without an attached invoice or with incomplete or confusing invoices. Discourage the use of a signature stamp for check signing.

■ Maintain your personal honesty. Your personal honesty sets the tone for the practice and a good example for your staff.

You could be embezzled from even if you follow these rules, says Kropiewnicki, but the odds of it happening will be vastly reduced. OM