Fraud & Internal Controls


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This session shows how your practice can utilize internal controls to promote efficiencies and effectiveness in the workplace and prevent the susceptibility of fraudulent acts by employees. Learn about the risk factors, vulnerable transactions, methods of detection and prevention as they specifically relate to your practice.

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Fraud & Internal Controls

  1. 1. Fraud & Internal Controls Jonathan G. Kassouf, CPA L. Paul Kassouf & Co., P.C.
  2. 2. Should you be concerned? <ul><li>33% of all employees have stolen money or merchandise at least once </li></ul><ul><li>The average company loses 6% of its annual revenue to fraud, committed by its own employees </li></ul><ul><li>Theft occurs in 95% of companies </li></ul>
  3. 3. Should you be concerned? <ul><li>According to the Association of Certified Fraud Examiners, 3 out of 4 physicians will suffer a significant loss due to theft during their careers </li></ul>
  4. 4. Should you be concerned? <ul><li>On average, embezzlement takes 18 months to discover </li></ul><ul><li>Average loss is estimated at $80,000 </li></ul><ul><li>Recent reports estimate losses as high as $500 billion annually among all businesses – half the projected cost of national health care reform! </li></ul>
  5. 5. Key Points <ul><li>Physician practices are easy targets </li></ul><ul><li>Knowledge of financial workings can greatly reduce embezzlement </li></ul><ul><li>If someone wants to embezzle, they will </li></ul>
  6. 6. Key Points <ul><li>True danger is that embezzlement is indicative of larger weaknesses </li></ul><ul><ul><li>Patient data integrity </li></ul></ul><ul><ul><li>Payer information </li></ul></ul><ul><ul><li>Historical records </li></ul></ul><ul><li>Your goal? To make it difficult to embezzle </li></ul>
  7. 7. Is your practice at risk? <ul><li>Donald Cressey </li></ul><ul><ul><li>Indiana University student in the 1940s seeking his Ph.D. in criminology </li></ul></ul><ul><ul><li>Dissertation on embezzlers </li></ul></ul><ul><ul><li>Interviewed 200 incarcerated inmates at prisons in the Midwest </li></ul></ul><ul><ul><li>Referred to embezzlers as “trust violators” </li></ul></ul>
  8. 8. Is your practice at risk? <ul><li>Cressey’s final hypothesis </li></ul><ul><ul><li>“ Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-shareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.” </li></ul></ul>
  9. 9. Is your practice at risk? <ul><li>Hypothesis has become better known as the “fraud triangle” </li></ul><ul><ul><li>Motivation + Opportunity + Rationalization = Fraud </li></ul></ul>
  10. 10. Is your practice at risk? <ul><li>Types of offenders </li></ul><ul><ul><li>Active </li></ul></ul><ul><ul><ul><li>Driven by motivation or greed </li></ul></ul></ul><ul><ul><li>Passive </li></ul></ul><ul><ul><ul><li>Tempted by system weaknesses </li></ul></ul></ul>
  11. 11. Why do people embezzle? <ul><li>Greed </li></ul><ul><li>Support personal problems </li></ul><ul><li>Jealous of physician’s earning capacity </li></ul><ul><li>Angry at boss or co-workers </li></ul><ul><li>Feel unappreciated </li></ul><ul><li>For the challenge </li></ul>
  12. 12. Warning Signs <ul><li>Billing department </li></ul><ul><ul><li>Cash flow </li></ul></ul><ul><ul><li>Changes in A/R statistics </li></ul></ul><ul><ul><li>Patient complaints about statements </li></ul></ul>
  13. 13. Warning Signs <ul><li>Bookkeeper </li></ul><ul><ul><li>Cash flow </li></ul></ul><ul><ul><li>Unexplained overhead increases </li></ul></ul><ul><ul><li>Incurring late charges/penalties </li></ul></ul><ul><ul><li>Missing sequence of checks </li></ul></ul><ul><ul><li>IRS notices </li></ul></ul><ul><ul><li>Untimely data </li></ul></ul><ul><ul><li>Unusual behavior </li></ul></ul>
  14. 14. Which transactions are vulnerable? <ul><li>Cash receipts </li></ul><ul><li>Cash disbursements </li></ul><ul><li>Accounting adjustments </li></ul><ul><li>Insurance filings </li></ul><ul><li>All of the above </li></ul>
  15. 15. Embezzlement from Cash Receipts Cycle <ul><li>Employee pockets cash received from patient (skimming) </li></ul><ul><ul><li>Higher deductibles and copays </li></ul></ul><ul><ul><li>Employee does not record patient visit or payment </li></ul></ul><ul><li>Employee uses payment from Patient B to credit account of Patient A (lapping) </li></ul><ul><ul><li>Complicated, time-consuming, and </li></ul></ul><ul><ul><li>lengthy </li></ul></ul>
  16. 16. How can you limit embezzlement opportunities? <ul><li>Use internal controls: </li></ul><ul><ul><li>One employee collects receipts </li></ul></ul><ul><ul><li>Another employee makes the deposit </li></ul></ul><ul><ul><li>Another employee posts payments and adjustments </li></ul></ul>
  17. 17. How can you limit embezzlement opportunities? <ul><li>Review and compare daily activity reports to bank deposits and vice versa </li></ul><ul><li>Use EFTs whenever possible </li></ul>
  18. 18. Methods of Detection <ul><li>Review appointment calendar </li></ul><ul><li>Follow every patient on that day … </li></ul>
  19. 19. Methods of Detection <ul><li>Balancing </li></ul><ul><li>Three-legged stoo l </li></ul><ul><ul><li>Each of these items must be in line with one another in order for balancing to work and serve its purpose! </li></ul></ul>
  20. 20. Methods of Detection <ul><li>Balancing is a monthly, rolling process! </li></ul><ul><li>Don’t neglect credit card reconciliation </li></ul>Monthly Cash & A/R Reconciliation Cash deposited XXX.XX Less: A/R payments posted (XXX.XX) Difference XXX.XX A/R posted last month, deposited this month - A/R posted this month, deposited next month + A/R posted this month, deposited last month + A/R posted next month, deposited this month - Subtotal XXX.XX Non A/R income / bank adjustments - Net difference ZERO!
  21. 21. Methods of Detection <ul><li>Dr. Smith, </li></ul><ul><li>  Each month we compare accounts receivable reports, QuickBooks and the bank statement.  We would like for payments posted to your billing system, QuickBooks and the bank to be in balance.  The balances have been very close up through May.  However, the balances have not been close for the past two months.  The discrepancy may just be a timing difference between the collections being posted, deposited in the bank and recorded in QuickBooks.  As your volume of business increases, it becomes more important and also more complicated to balance these items.  </li></ul><ul><li>Would you like us or your staff to investigate the differences? </li></ul>
  22. 22. Methods of Detection <ul><li>Tie superbills to posting analysis </li></ul><ul><li>Investigate patient complaints about incorrect statements, using a separate person for billing inquiries </li></ul><ul><li>Make sure there are no duplicate patient accounts </li></ul>
  23. 23. Methods of Detection <ul><li>Control hardcopy and electronic charge tickets and cash payments, so breaks in sequence can be monitored – follow through on monitoring </li></ul><ul><li>Review electronically generated missing and voided charge ticket report – check-ins must match check-outs </li></ul>
  24. 24. Embezzlement from Cash Disbursements Cycle <ul><li>Invoices from fake company </li></ul><ul><li>Paychecks to phantom employee </li></ul><ul><li>Paychecks to existing employee </li></ul><ul><ul><li>Employee increases gross pay and withholdings, keeping net pay the same </li></ul></ul>
  25. 25. Embezzlement from Cash Disbursements Cycle <ul><li>Items purchased for personal use are coded as payments for supplies </li></ul><ul><li>“ Kickbacks” from suppliers </li></ul><ul><ul><li>Over-ordering supplies and accepting/cashing refund check after forging payee’s name </li></ul></ul><ul><ul><li>ATM deposits </li></ul></ul>
  26. 26. Embezzlement from Cash Disbursements Cycle <ul><li>Know your vendors </li></ul><ul><ul><li>Ask about new vendors and/or contact them </li></ul></ul><ul><ul><li>Sign checks only with proper documentation of shipping, service tickets, and invoices </li></ul></ul><ul><ul><li>Review monthly bank statement(s) and cancelled checks, paying attention to endorsements </li></ul></ul>
  27. 27. Embezzlement from Cash Disbursements Cycle <ul><li>“ Borrowing” money or non-receipted expenses from petty cash or change funds </li></ul><ul><li>Non-specific or undocumented employee reimbursements </li></ul><ul><li>Multiple bank accounts for practice </li></ul>
  28. 28. Embezzlement from Cash Disbursements Cycle <ul><li>Patient and insurance refunds </li></ul><ul><ul><li>Verify patient and review chart notes </li></ul></ul><ul><ul><li>Sign checks only with proper documentation of patient account and insurance payments </li></ul></ul><ul><li>Credit card usage and misuse by employees </li></ul>
  29. 29. Other Methods <ul><li>More complex methods of embezzlement require access and knowledge </li></ul><ul><li>Office pilferage </li></ul><ul><ul><li>Postage, copies, time cards, long-distance calls, medical supplies, medications </li></ul></ul>
  30. 30. Embezzlement through Accounting Adjustments <ul><li>Using computer adjustments to bury embezzlement </li></ul><ul><li>Bad debt expense account used to hide stolen amounts (debits) </li></ul>
  31. 31. Embezzlement through Accounting Adjustments
  32. 32. Embezzlement through Accounting Adjustments
  33. 33. How to Detect Embezzlement <ul><li>Request list of patients in collection </li></ul><ul><li>Compare names on list to your bad debt or write-off list </li></ul><ul><li>Review all accounts on hold </li></ul><ul><li>Investigate any discrepancies </li></ul>
  34. 34. How to Detect Embezzlement <ul><li>Standard policies for all non-contractual adjustments and subsequent testing </li></ul><ul><li>Use computer security to limit employees authorized to use specific adjustment codes </li></ul>
  35. 35. Identity Theft <ul><li>The fastest growing crime in the U.S. </li></ul><ul><li>How secure are your computers and patient records? HIPAA </li></ul><ul><li>Can your employees easily remove patient records from your office? </li></ul>
  36. 36. Identity Theft <ul><li>Do employees have remote access? </li></ul><ul><li>Run report history and see what has been extracted </li></ul>
  37. 37. Protect Your Credit
  38. 38. What else can you do? <ul><li>Practitioner/employer should set a good example </li></ul><ul><ul><li>Use of petty cash, for example </li></ul></ul><ul><ul><li>Establish policy of enforced accountability </li></ul></ul><ul><li>Use a complete practice management software system </li></ul><ul><ul><li>Helps document records, evidence, </li></ul></ul><ul><ul><li>and losses </li></ul></ul>
  39. 39. What else can you do? <ul><li>Investigate claim activity for patients who haven’t been seen recently or who are unfamiliar </li></ul><ul><li>Consider lockbox </li></ul><ul><li>Use passwords and log-ins to control who can make account adjustments </li></ul>
  40. 40. What else can you do? <ul><li>Require each employee to log on individually when working with records or data </li></ul><ul><li>Utilize EFT whenever available </li></ul><ul><li>Segregation of duties </li></ul><ul><ul><li>No single employee should handle any transaction from beginning to end </li></ul></ul>
  41. 41. What else can you do? <ul><li>Fidelity Bond </li></ul><ul><ul><li>$100,000 minimum or one month’s collections </li></ul></ul><ul><ul><li>Add legal and accounting rider </li></ul></ul><ul><ul><li>Serves as deterrent to financial crime because bonding companies prosecute perpetrators </li></ul></ul>
  42. 42. What else can you do? <ul><li>Employee background checks </li></ul><ul><ul><li>Incorporate on application </li></ul></ul><ul><ul><li>Watch </li></ul></ul><ul><ul><li>Employment screening service </li></ul></ul><ul><ul><li>References </li></ul></ul>
  43. 43. What else can you do? <ul><li>Office of Inspector General </li></ul><ul><ul><li>List of Excluded Individuals/Entities (LEIE) </li></ul></ul><ul><ul><li>No federal payment will be made by any Federal health care program for any items or services furnished, ordered, or prescribed by an excluded individual or entity </li></ul></ul><ul><ul><li>No program payment will be made for anything that an excluded person furnishes, orders, or prescribes </li></ul></ul>
  44. 44. What else can you do? <ul><li>Eliminate all signature stamps </li></ul><ul><ul><li>If not, contact stamp vendor to obtain inventory of ordered stamps </li></ul></ul><ul><li>Require staff to take vacations </li></ul><ul><li>Cross-train staff so multiple employees know how to balance books </li></ul><ul><ul><li>Rotate job responsibilities periodically </li></ul></ul>
  45. 45. What else can you do? <ul><li>Watch for suspicious behavior/lifestyle </li></ul><ul><li>Give employees a way to report fraud </li></ul><ul><li>QuickBooks </li></ul><ul><ul><li>Turn on Audit Trail function </li></ul></ul><ul><li>Have certified public accountants set up record keeping and test for reliability and accuracy </li></ul><ul><ul><li>Practice assessments </li></ul></ul>
  46. 46. <ul><li>This PowerPoint was presented as part of the SuccessEHS 2011 Customer Conference. </li></ul><ul><li> </li></ul>