Know signs of embezzlement before your cash vanishes

Question I've heard horror stories about how physicians have had to shut down their practices because they could no longer turn a profit. The reason: A trusted employee was embezzling money. I have a great and loyal staff. However, that seems to be the same thing that these other physicians say. What precautions can I take to make sure that this situation doesn't happen to me?

Answer: First of all, most practice employees are just as you described yours: honest and loyal. The ones who are not are in the minority. However, this does not excuse you or any physician practice owner from making sure you are aware of some of the signs of embezzlement, that you implement appropriate controls and monitor staff on a regular basis.

What does an embezzler look like?

Embezzlers come in all shapes and sizes. There is no "one" particular look to them. However, there are things that you should be aware of, including positive significant lifestyle changes such as extravagant purchases and participation in more expensive activities. Some employees will cover up by attempting to "keep you totally informed all of the time," while others refuse to answer questions because "everything is under control and your job is to take care of the patients." Some employees refuse to take more than one vacation day at a time because they want you to think they are indispensable.

How can I be working harder but making less money?

The initial responses from many people are that reimbursement is decreasing or your billing department is not performing at par. This may be true. However, your investigation into this situation should also include a look at the financial side of your practice. The first place to start looking is your accounts receivable and accounts payable to see if they are growing. Review your monthly expenses to see if there are any inconsistencies that cannot be explained.

What about your co-pay deposits -- is the amount of cash deposited consistent? What are your gross collection and adjustment rates? Are they lower than normal or lower than the industry norm for your specialty and location?

Many times the first indicator can come from patients who complain about receiving statements for payments they have already made, or from vendors who complain about slow payments when the checkbook shows that they had been paid on schedule. Sometimes your accountant may report missing accounting records or monthly bank statements that have not been reconciled, or other sloppy bookkeeping tasks.

How does it happen?

There are several ways for employees to embezzle your money. One way is for an employee to simply pocket cash co-payments and not record receipts. Another way is for the person handling deposits to have access to a signature stamp or to forge your signature. Sometimes payments are made to fictitious vendors. Personal use of the company credit card (with no back-up receipts) is another common method of embezzlement.

What can I do to identify and stop potential embezzlement schemes?

There are several steps you can take to identify and minimize the risk of embezzlement in your practice.

First, be aware and watch for the "red flags" with respect to changes in your employee's behavior and the practice's cash flow. Next, develop internal control policies and procedures that will make it more difficult for the potential embezzler to obtain your money.

To identify check fraud, start by reviewing the list of vendors and make sure that you recognize each one listed. Investigate any company name that is not familiar to you. Have the bank statement sent to your house, then review both sides of cancelled checks. Compare the cancelled checks on the bank statement to those included with the bank statement before bringing them to the office to be reconciled with your accounting software transaction totals.

Make sure all outgoing checks have supporting documentation for you to review before signing them. Most important, remove your signature stamp from the premises so no one ever has access to it except you.

Sign up for online access to your bank account and review the balances on a regular basis. Be sure to check the payroll reports to make sure that they are accurate with respect to who is getting paid and how much they are being paid.

Eliminate potential for credit card fraud by limiting use of the company credit card to company business only. No employee, including the office manager, should be allowed to charge personal items on the company credit card. All transactions on the credit card statement should be matched with supporting documentation.

There is probably the most opportunity for embezzlement in the cash management and billing processes. In small offices, there is often only one person responsible for handling and recording the over-the-counter cash transactions as well as the mail payments. Without proper controls, it is very easy for charges and payments to be understated, cash drawer totals to be altered and transaction entries to be falsified or voided.

One way to avoid these situations is to separate cash management and billing responsibilities whenever practical. This may not always be possible, nor foolproof, because two people could be acting in collusion. Having pre-numbered superbills and receipts, and comparing them with the appointment schedule and payment log, is another way to verify all transactions are being accounted for.

Review accounts receivable management and production reports on a regular basis, and ask questions.

Review your employee handbook and make sure that employees are required to take at least half of their vacation time in periods of three or more consecutive work days. This accomplishes several goals. First, it gives the employee a more productive break from the workplace. Second, it provides you the opportunity to become more involved with the daily financial operations and to identify any potential misappropriations.

Chances are that you will not find yourself caught in an in-office embezzlement scheme.

However, implementing policies and procedures that provide checks and balances throughout the entire financial side of your practice will help minimize the potential for this risk and make it a less worrisome environment for you.