Be aware of signs of employee theft

Measures such as dividing job responsibilities and accountant reviews can help deter, catch thieves.

Issue: May 1, 2005

ByJay P. Slagle, CPA, MHSA, CHE

The office manager of a primary care practice in Council Bluffs, Iowa, was arrested in August 2004 for allegedly stealing as much as $100,000 from her practice over several years. Her arrest made the front page of several local newspapers in Nebraska and Iowa, and it is unlikely that she will be hired for a similar position for years to come.

A more common situation occurred a few years ago at an ophthalmologist’s office, where the administrative physician belatedly discovered that his office manager was signing accounts payable checks to provide unauthorized raises to herself and other employees. She was terminated immediately, but no criminal charges were filed and the thefts were never reported publicly.

The ophthalmologist’s office manager had been fired from her last supervisory position at another specialist’s office for the same problems, and she will likely do it again in her next job. In fact, there are probably employees in your own practice who, given the right mix of motivation and opportunity, have stolen or would steal money from you.

Sobering facts

According to Sandy Lane, a health care consultant at Omaha-based Lutz & Co., the average organization loses $9 per day per employee to fraud and abuse. The most costly abuses occur in organizations with less than 100 employees, a size in which most medical practices fall, because those organizations have not emphasized the types of controls and reviews that are most likely to prevent fraud.

According to Ms. Lane, the most typical indicators of fraud in a medical practice are:

Lack of written policies and standard operating procedures;
Disorganized operations;
Unrecorded transactions or missing records;
Bank accounts not reconciled on a timely, regular basis;
Bank checks written to cash;
Handwritten checks in a computer environment;
Continual or unusual fund transfers among company bank accounts;
Deficient screening procedures for new employees;
Employees living beyond their means;
Vacations not taken; and
Frequent or unusual related party transactions.

In addition to these factors, medical practices are even more at risk than other businesses because physician owners often take a hands-off approach to the business side of their practice. In this environment, a trusted office manager either has free rein to do as he pleases or is too inexperienced to identify employee theft occurring below him.

Common types of theft

Based on Ms. Lane’s experience in reviewing the aftermath of business losses, the most common methods of employee theft are skimming, larceny and fraudulent disbursement.

Skimming involves stealing company collections before they have been posted to the accounting system. Pocketing a cash co-pay or patient payment is the most typical form of skimming, and ophthalmology practices with optical dispensaries are particularly susceptible to these thefts. The best prevention for skimming is to require receipts to be recorded in a carbon-copy receipt book, with another employee verifying in writing that the cash drawer receipts agree to the receipt book at the end of each day.

Larceny involves employee theft after a payment or product has been posted to the accounting system. The cash receipts poster in your office may short your deposit by a $100 bill, and she will not be caught unless your accountant (internal or external) is reconciling posted payments to bank deposit amounts. A more difficult dilemma is how to prevent your staff from stealing optical frames or contact lenses since inventory controls tend be to weak and customer theft is more common in an optical shop.

According to Ms. Lane, fraudulent disbursements represent the most costly type of employee theft. This category includes check tampering, forging, false billings, fictitious employees and bogus expense reports. The two biggest errors that practices make in this area are allowing employees to sign accounts payable and payroll checks and not having another employee or accountant review checks and expenses for propriety. Another risk comes from the ubiquitous corporate credit card offers that office managers routinely receive. In the Council Bluffs case, the office manager opened several corporate credit cards for her personal use, and then she wrote company checks to pay off the balances. If your office manager has an approved corporate credit card, a shareholder should review the monthly statements to ensure the card is being used appropriately.

Stemming the tide

The best way to prevent employee theft is to strengthen internal controls and divide job responsibilities. While job division may be difficult in smaller offices, it is crucial. The person who reconciles your bank accounts should not be posting receipts, writing checks or submitting payroll information, and each person’s work should be routinely reviewed for theft.

Margaret Hershiser of the Omaha law firm Koley Jessen suggested that a key step to preventing employee theft occurs even before the employee is hired. Ms. Hershiser recommended thorough background and reference checks when hiring a new employee, even if those checks rarely produce anything useful. If a prospect asks you not to contact an employer because “they don’t know I’m looking,” you can always check with the employer after the employment offer has been accepted.

This approach should work if you do two things well. First, in addition to asking applicants about their felony or misdemeanor record, revise your application form so that applicants must also indicate whether they have ever been accused of or terminated from a position due to employee theft. Second, during reference checks, even if previous employers will not give much information, they will generally tell you when the employee’s last day was and answer the question “is this employee eligible for rehire?” If you find that your new hire has a spotty history, Ms. Hershiser recommended that you immediately contact your labor attorney for guidance.

Every few years you should ask your accounting firm to prepare an internal control and fraud risk review to assess what you need to do differently to safeguard your assets. Many physicians assume that accountants perform this as part of their regular bookkeeping or audit function, but the two areas have little overlap. To gain more assurance, you may ask your accountant to perform more regular reviews of different parts of your practice. While it will be too expensive to perform a complete fraud review at each visit, the accountants may be able to detect fraud and their regular presence may discourage would-be thieves.

An accountant well-versed in internal control and fraud risk assessments will provide you with an exhaustive checklist of procedures and controls that can be used to prevent employee theft. Many of these suggestions provide more complexity and costs to your practice, and it is important to have an in-depth discussion about what recommendations are realistic based on your practice size and employee structure. Do not make the mistake of waiting to implement better controls until you decide someone is not trustworthy; the majority of employee theft is committed by employees who have the complete trust of the physician owners.

Once your accountant has reviewed your internal controls, you should contact your business insurance broker to purchase employee theft insurance for the company. The broker will typically have to complete an abbr eviated internal control checklist as part of the underwriting process, and you will be able to accurately respond to his questions with your accountant’s report in hand. Employee theft insurance premiums vary widely but, as a reference point, our practice is paying $1,500 per year to obtain $600,000 ($3,000 deductible) of coverage for employee dishonesty and $300,000 ($1,500 deductible) of coverage for forgery.

The need for accounting oversight within your practice is a strong argument for placing a degreed accountant, preferably a CPA, in your management ranks. Your salary costs may increase, but hopefully they will be offset by lower losses from employee theft.

Stay involved

Even with regular accounting reviews and employee theft coverage, the most important step in preventing employee theft is actively involved physician owners. Physicians do not have to review deposit slips, but they need to be aware when practice receipts are not matching patient volume and when crucial controls are no longer being followed. It is your practice, your future and your money that is being stolen, so it is essential you remain involved.

For Your Information:

Jay P. Slagle, CPA, MHSA, CHE, is the administrator of Midwest Eye Care (MEC), a 10-MD, 3-OD eye care practice based in Omaha, Neb. MEC has four full-service metropolitan locations, 20 outreach clinics in rural communities and a two-room ambulatory surgery center. Mr. Slagle can be reached at 4353 Dodge St., Omaha, NE 68131; 402-552-2806; fax: 402-552-2367; e-mail: jslagle@midwesteyecare.com.