A Primer for Basic Embezzlement Prevention

Theft increases in a tough economic environment.

BY MARK E. KROPIEWNICKI, ESQ, LLM

For most accountants, consultants and attorneys regularly dealing with medical practices, embezzlement is a fact of life and is almost certainly significantly underreported. Historically, we have thought that more than 70% of medical practices have been embezzled at some time — although many practices just don't realize it yet.

There has been little factual documentation of that percentage; however, recent events and information tend to support that norm. With the current downturn in the economy and numerous significant financial pressures on employees due to losses in the stock market, decreased values for their homes, spouses losing their jobs and various other economic circumstances, there is more reason and incentive than ever for employees to embezzle from their practices.

This article will provide some relatively simple and effective steps that your practice can take to discourage would-be embezzlers from even thinking about theft.

Thieves Thrive on Lack of Oversight

In our own backyard, for example, the economic downturn seems to have caused an increase in embezzlement (or at least an increase in the media's reporting of it) in medical and ophthalmology practices and healthcare-related firms, typically involving longtime, trusted employees embezzling from their employers.

In one recent case, the bookkeeper for an ophthalmology practice was sentenced to 40 months in prison for embezzling nearly $1 million from the practice. That practice was nearly bankrupted as a result of the embezzlement, but has apparently recovered. According to prosecutors, that employee was motivated by insatiable greed and abused the trust and friendship of her employer to feed her greed. She submitted time sheets showing that she had worked 8,000 to 9,000 hours per year and often claimed to have worked 20 to 30 hours a day. In fact, she went so far as to claim that she had worked 32 hours in a single day. According to the practice, the employee was thought to have been trustworthy. Obviously, she wasn't.

In another recent case, a medical practice's bookkeeper was charged with embezzling more than $234,000 over six years in an embezzlement scheme that was described as "nothing exotic" by the prosecutor. In that case, the bookkeeper was a longtime employee who did not start embezzling until after she was with the practice for more than 12 years. According to the prosecutor, the case illustrated yet again a need for businesses to employ the internal accounting and other check practices necessary to assure that that this kind of fraud is not ongoing. That scheme went on for six years before being discovered.

In yet another situation, a chief financial officer for a healthcare-related firm was charged with embezzling $386,000 by writing out checks for former independent contractors and later altering the checks to make them payable to himself. That scheme went on for about five years before being discovered accidentally. The prosecutor in that case remarked that companies should protect themselves by maintaining basic accounting principles and requiring that no one person has complete control over the receipt and the disbursement of funds.

Lastly, the results of a very recent survey by the American Society of Ophthalmic Administrators (ASOA) shows that 51% of ophthalmology practices responding have been embezzled/stolen from; about two-thirds of the embezzlements were for less than $10,000, although 11% were for more than $75,000; and that ophthalmology practices responding sought prosecution of the employee in only 30% of the cases.

It's Usually a "Trusted" Employee

What can be gleaned from the above examples and information? First, the majority of practices have been or will be embezzled or stolen from at some point. Second, the employee involved is typically a well-trusted, long-term, seemingly honest employee who eventually "goes bad" when presented with access and an opportunity to embezzle. Third, the embezzlement is typically discovered quite by accident. And finally, although there are instances of prosecution of the embezzler, most practices don�t bother to pursue prosecution. Presumed reasons for this last point are that the practices are simply ignoring the problem to avoid embarrassment, settling with the employee beforehand or collecting on the practice�s fidelity bonds or insurance policies to reimburse the practice for the embezzlement.

Take Prevention Seriously

What should most ophthalmology practices do? First, the practice, with help and involvement of its accountant, should assess its billing, collection and payment procedures to ascertain if there are any gaps or additional safeguards that need to be implemented. In particular, clearly separate duties involving the practice's finances so that no one person has complete control over cash receipts and disbursements. Distribute the revised procedures to all employees in writing. Make sure to implement any recommended new procedures and safeguards. And lastly, since most embezzlements and frauds are discovered by accident, increase your chances of discovering embezzlements. How do you go about that? See the Embezzlement Checklist below for some tips on preventing embezzlement. OM

Embezzlement Prevention Checklist

Ophthalmology and other medical practices are embezzled far more often than one might expect; it in fact surprises us how often we encounter practices that have suffered the loss and embarrassment. And yet, such internal embezzlement and theft would be quite difficult if practices would follow some fairly simple, basic principles. Here are five such rules for your periodic review:

1. Accounting Advice. Bring in your regular accountant and instruct him to recommend basic accounting controls. The recommendations should be in writing, distributed to all practice employees and you should obviously adhere to them closely.

2. Keep Duties Separated. The suggested audit controls will almost certainly include a separation of responsibilities. For example, the person who opens the mail should stamp all checks "For Deposit Only" but should not post them to the office records. The person who does collections work should not also post payables. Unfortunately, such separation of duties tend to become poorly respected over time and under work pressures, so be sure to insist that they be maintained. One approach is to simply tell your employees that your accountant insists on them.

3. Keep Transaction Records. Patient visit slips ought to 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 or the equivalent in the practice's billing and practice management software. All these materials should be checked, reconciled to each other and stored away for several years before being thrown away. Shortly after the close of the day, cash can too easily be embezzled if the cash-paying patient's visit is simply allowed to disappear because those records are incomplete or not available.

4. Make "Regular/Irregular Audits." Informally check over the appointment books, day sheets, ledger cards, etc. now and then on an unplanned, irregular basis. If on computer, check from the appointment schedule to these various items within the practice�s billing and practice management software. Do likewise for other aspects of your practice, such as reviewing time cards for employee hours and reviewing payments to the practice�s independent contractors, credit card companies and other vendors. Employees who see this non-routine attention will be less certain of patterns within the practice that might otherwise give rise to embezzlement opportunities.

5. Periodically switch it up/cross train. Having a second person looking over someone else's shoulder and asking, "Why?" is rarely a bad idea. Never have one person with unfettered control over multiple accounts or activities.

You could be embezzled even if you follow these rules, but the odds of it happening will be vastly reduced. At a minimum, ophthalmology practices should readily be able to prevent the embezzlements that are "nothing exotic."

Mark E. Kropiewnicki, Esq, LLM is a principal consultant with The Health Care Group, Inc. and a principal attorney with Health Care Law Associates, PC, both in Plymouth Meeting, PA. He regularly advises on financial, legal, strategic and operational issues, including new doctor employment, income division, buy-in and pay-out arrangements. He can be reached at mkrop@healthcaregroup.com or 610-828-3888.