Everyone has seen a headline that reads, Doctor’s trusted employee charged with stealing. Fraud and embezzlement is a problem faced by all businesses, but it particularly hurts when it occurs within a medical practice. It can affect the trust and welfare of patients and create tremendous legal and financial problems, particularly if the fraud involves Medicare or other public programs. It’s a problem that never goes away, but there are steps that can be taken to greatly reduce the likelihood it will happen.

Areas Susceptible to Fraud

As defined by the Association of Certified Fraud Examiners (ACFE), occupational fraud and abuse is “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” 

The three elements of the fraud triangle are opportunity, pressure, and rationalization. It is important to ask which areas within a practice pose greater opportunities, pressures, and rationalization for fraudulent behavior. Greater opportunities often exist among those employees who deal with cash receipts and cash disbursements on a daily basis. Another area of great concern is billing, including issuance of patient refunds. Cash receipts, cash disbursements, and billing schemes within a medical practice often include but are not limited to:

• collecting co-pays, but not recording the transaction or not crediting the payment to the patient’s account;
• stealing cash from bank deposits;
• tampering with checks, which includes forging authorized signatures on company checks, forging the signature endorsement of the intended payee, voiding checks, or altering the payee designation (often the case with patient refund checks);
• submitting false invoices to the practice for services not rendered or a fictitious vendor;
• expense reimbursements; and
• abusing the practice credit card.

All of the above can severely damage the financial success of a medical practice and its credibility with patients, insurers, vendors, and colleagues. Therefore, it is crucial for physicians, managers, and employees to identify red flags within the practice.

Red Flags of Fraud

Red flags essentially are warning signs. They do not necessarily mean that an employee or manager is engaged in fraudulent activity. Red flags are defined as a set of conditions that vary from the norm and can be easily identified by observing the behavioral characteristics of employees.

As reported in the ACFE’s 2010 Report to the Nation on Occupational Fraud and Abuse, “… the most common red flags displayed by perpetrators were living beyond financial means (43 percent of cases), experiencing financial difficulties (36 percent), excessive control issues with regard to their jobs (23 percent) and an unusually close association with vendors (22 percent).”

Additional red flags include an employee’s refusal to take vacation or sick leave; lack of segregation of duties (particularly in areas more susceptible to fraud); high employee turnover; unreasonable responses to questions; significant, unusual, or highly complex transactions at or near year-end; missing documentation; and unusual variations in financial data/ratios in receivables and accounts payable. Once red flags are raised, further prompt investigation is required.

Measures to Deter Fraudulent Behavior

Medical practices, especially smaller practices, often lack proper internal controls to effectively deter fraud and embezzlement. Physicians are not trained to be financial managers as pointed out in The CPA’s Guide to Medical, Dental, and Other Healthcare Practices published by the American Institute of Certified Public Accountants. However, they can take steps to implement the following safeguards that will put a medical practice on the right track to reducing its exposure to fraud and embezzlement.

Proper segregation of duties. This is the most important safeguard of internal control; however, it is often hard to accomplish in smaller medical practices. In those situations in which one person is responsible for multiple accounting functions, review by someone independent of the person performing those functions is a vital control.

Continuous monitoring, review, and evaluation of internal controls. It is one thing to have controls in place and another to determine whether those controls are effectively designed and working properly. Continuous monitoring, review, and evaluation of controls also send a clear message to employees that the practice is pro-active in its anti-fraud efforts.

Bonding Insurance. This serves as an insurance policy, which provides employers a form of protection against financial losses incurred as a result of fraudulent and dishonest acts of an employee or group of employees.

The potential for fraud and embezzlement is a constant possibility within medical practices. Monitoring for red flags, both internally and externally by CPAs and other professional advisors, can aid in prevention and detection.

Lucy R. Carter, CPA, is a principal at Nashville accounting firm Carter, Lankford CPAs, PC. Ashley Lang, CPA, is the accounting and auditing supervisor for the firm. www.clcpas.com

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