$1 million embezzlement points out need for better practice safeguards
$1 million embezzlement points out need for better practice safeguards
Use this practice’s lesson as a warning
Ten minutes after Sue Jones began her new position as practice administrator, the office manager handed in her resignation. Within eight days, Jones discovered major financial discrepancies that she says appeared to total about $70,000. Further investigation showed the former office manager had siphoned off nearly $1 million from this Midwestern specialty practice over a 10 year period.
Jones not her real name spoke to Physician’s Marketing & Management on the condition of anonymity for herself and her practice. She and the 10 physicians for whom she works wanted to sound a warning to others.
How much can you spend on office supplies?
Jones’ initial investigation into the financial discrepancies showed extraordinarily large amounts of money going for supplies $70,000 over nine months instead of a more typical $15,000. "I just compared the outlays to the statistics compiled by the [Medical Group Management Association (MGMA)]," says Jones. "It was totally out of line. So I looked more closely."
Jones found huge expenditures for computer systems. There were other tricks, too. Among them:
• Making checks out to false vendors. The office manager never produced an invoice with any of the checks, and the physicians blindly signed them.
• Doing multiple payrolls. The manager would produce payroll one day for one doctor to sign, and the next day have a new set of checks for another doctor to sign. Checks for other employees were then destroyed;
• Producing checks for real vendors, then altering the "pay to the order of" line. The banks never caught these altered checks.
Victims of success
Jones says the physicians were, in a way, the victims of their own success. Over the course of seven years, the practice grew from two to 10 physicians. It was also a time of great change in the health care industry in the practice’s region managed care was just coming in, which meant there was constant change in the revenue coming into the office.
But the physicians also made some key mistakes something the office manager even commented on after being caught and convicted. At her sentencing, says Jones, the manager apologized to the physicians she had worked for 11 years. "But she said that they made it so easy it was their own fault."
The physicians did make some serious mistakes, says Marilyn Happold-Latham, MBA, a health care consultant with the Portland, OR, accounting firm of Yergen & Meyer. "You should never have a situation where every physician can sign checks," she says.
The physicians also assumed that since this woman had worked for them for 11 years, she was trustworthy. "Don’t assume that you know your employees," says Happold-Latham. "A person could be working for you for 10 years and stealing the whole time."
And this practice also allowed the person handling the money and writing the checks to balance the checkbook every month. "There was no one looking at the statements and saying, Gee, this looks odd.’"
There are simple steps any practice can take to protect itself, Happold-Latham says.
Split up the revenue-handling duties.
If you have enough people, have a minimum of three staff members divide up the cash and receipt handling duties one person handling incoming cash and checks, one person posting these to your accounts receivable, and one person making the daily bank deposit.
Endorse all incoming checks immediately.
Every office should invest in a "for deposit only" stamp with your bank and account information on it. For the $10 or $12, says Happold-Latham, it ensures that a check cannot be pocketed and later altered.
Copy all incoming checks.
Once received and stamped, the checks should be immediately copied. "The person who posts the payment to accounts receivable should never see the cash or checks," Happold-Latham says. Instead, they should post from copies of checks and receipts. "A check journal is not enough. It’s too easy to transpose numbers, and it doesn’t provide proof of a check coming in and who it was made out to. Photocopies leave the best trail.
Balance your cash daily.
Happold-Latham says the person who takes the cash or copayments should balance the cash drawer at the end of the day. That means providing receipts from a receipt book that makes carbon copies whether patients want them or not.
Never keep a signature stamp in the office. Happold-Latham says if you use one of these for records of any type in the office, you are risking that stamp being used for checks. Don’t do it, or at least, keep it under lock and key with only the physician holding the key.
Send bank statements to a physician’s home address.
"This means one physician can thumb through the statement and returned checks to make sure no one is writing checks to him or herself or to phony vendors," Happold-Latham says.
Have regular audits.
If employees know that every six months an auditor will come in to look at the books, it can provide a real deterrent, says Happold-Latham. Indeed, this is one step that Jones’ practice has followed up on. Every other month, the outside accountant comes in to go over the books with the physicians. And every two years, a different auditor is brought in to do a thorough audit of the books.
Question your patients.
Happold-Latham says that practices that operate on a heavy cash basis such as plastic surgery or chiropractics should be extra vigilant. "There is so much more cash coming in. Physicians and administrators should question patients about whether they are happy with billing."
One practice with which she worked had a manager asking patients for cash payments and imploring those patients not to say anything to the physicians. "She got away with more than a million dollars in 10 years."
Foster a business interest among the physicians.
Jones says this is the most important thing you, as an administrator, can do for your practice. "They need to know what reasonable expenditures are," she says, recommending that they become familiar with the MGMA reports on compensation, production, and costs. The reports are available from the MGMA by calling (303) 397-7888. (See related story, p. 166.) Physicians should also know who your regular vendors are and what is generally spent with each. "And they should never sign a check for a vendor without seeing the accompanying invoice," Happold-Latham warns.
Prosecute when necessary.
Jones’ practice filed both civil and criminal charges. The former manager was found guilty and sentenced to nine months in jail. Although ordered to repay the money, she is not employed, and outside investigation of her finances showed that the money is gone. But Jones says it still sends an important message to others when you prosecute, and Happold-Latham agrees.
All the more reason to prevent problems in the first place. "A lot of money goes through medical offices," Happold-Latham says. "Some employees figure doctors make so much money, they won’t mind if some is missing. They won’t even know it is gone." (For a test to see if you are at risk, see box, at left.)
"This manager wasn’t really sophisticated and didn’t hide her actions well," Jones says. "It didn’t take any accounting genius to do this. You have to let your physicians know this. Even if they went to school to practice medicine, not manage money, they have to be knowledgeable and interested. You have to engage them in a conversation about whether they think embezzlement can happen."
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