How to prevent internal fraud in your practice

Some of the most heartbreaking cases I’ve handled over the years have been in the medical field.

There’s something inherently tragic about a doctor who opens his or her practice with the intention of helping people heal, recover and feel better, only to realize that despite their altruistic efforts and Hippocratic Oath, they were victims of fraud. For many practitioners, it’s the last thing they ever expected to happen to them. Unfortunately, dishonest employees exist in every industry, and the medical field—which includes chiropractic—is no exception.

Who is the thief in your practice?

It doesn’t matter if the business is a small two-person practice or a publicly traded company; there are three common characteristics that all fraudsters share:

• A likable, charismatic personality that lulls people into trusting them. In every fraud case I’ve handled, the thief is always one of the employer’s top three most-trusted, tenured employees.
• A work ethic that seems unparalleled. That employee who comes in early, stays late and never takes a vacation may fear to leave their job duties to another person who might discover their theft.
• A display of extravagant personal items that seems unusual based on the employee’s known salary, such as expensive clothing, a new car, or jewelry.

Other elements common to fraudsters, as identified by renowned criminologist Donald Cressey, are attributed to the Fraud Triangle:

Pressure. First, the employee harbors a secret, non-shareable financial problem. This could be an inability to pay their bills, a gambling problem that has spiraled out of control, or a fear that their job is in jeopardy.

Rationalization. Second, the fraudster can justify their theft. The majority of employee criminals are first-time offenders. In fact, they don’t even view themselves as thieves. Common rationalizations include a plan to pay the money back, or a feeling they were entitled to take it in the first place.

Opportunity. The third leg of the triangle, and the only one employers have any control over, is the opportunity. The fraudster is someone who, because they are trusted, has access  to company funds and the ability to steal in such a way as to not be caught.

How employee theft happens

Employee theft is especially prevalent in health care settings for multiple reasons. For one, many private practices are small businesses: a single doctor and a handful of staff may mean that employees must wear multiple hats.

For two, the sheer number of cash-in and cash-out transactions means there are numerous opportunities for fraudsters to manipulate the practice management system (PMS) or the accounting system (such as QuickBooks) to cover up the theft. In smaller practices, it may be that billing and bookkeeping are delegated to one person, so the person who collects the co-pays and deductibles is often the same person who records payments, issues invoices and makes the bank deposits.

Common occupational fraud schemes

Occupational fraud falls into three categories: asset misappropriation (which is the most common), financial statement fraud, and corruption. In a chiropractic office, the most common fraud schemes are asset misappropriation schemes; most typically:

Cash theft. If the flow of cash into the practice is not monitored, it’s often the asset the fraudster steals first. Accounts receivable workers have many ways they can skim money. For example, if an employee is responsible for recording receipts and payments, he or she can keep the account from aging by posting the payment and not depositing the funds. Manipulating insurance adjustments is another way fraudsters can pad their pockets; namely, by accepting a patient co-pay, stealing the money, and writing that amount off as a negotiated portion of the bill.

Check fraud. One of my former clients, a private-practice doctor, had a longtime trusted employee write checks to herself over a decade- long period, in total stealing nearly $300,000 from her employer before she was caught. Businesses that use a signature stamp or authorize employees to sign checks on their behalf can be especially at risk.

Payroll schemes. Submitting false timecards, altering paid time off, or not repaying paycheck draws are just a few types of payroll schemes employees can commit to pay themselves more money than the practice intended.

You can prevent employee fraud

Although no measure can completely eradicate employee fraud, there are simple internal controls that you can implement to reduce its likelihood.

• Establish the tone at the top. No amount of policies or procedures can replace the importance of management fostering a culture of honesty. In an honest culture, everyone understands the importance of maintaining an ethical workplace, as evidenced by leadership’s commitment to antifraud activities. Part of this also means encouraging whistleblowers and investigating every tip.
• Conduct employee background checks. No one wants a dishonest worker; that’s why it’s critical to check references and verify employment for any employee who will have access to company funds. Be sure to obtain written consent before running anyone’s criminal history, as it is required in most states.
• Segregate accounts payable and receivable. It is essential that more than one person keep an eye on the checks and balances. The person who accepts payments should not also have the authority to “write off” balances. Same for the bank deposits: Assign that job to an employee who does not accept or record payments.
• Establish an expense reimbursement policy. For example, require authorization for any purchase over a certain amount (e.g., $100), and require original receipts for reimbursements.
• Review bank statements and cancelled checks. This takes just 30 minutes a month and can immediately uncover fraud. Ask the bank for paper statements and printed images of cancelled checks. Conduct a quick audit of money in and money out, verifying the payees are authorized for the correct payment.

Understanding potential fraud scenarios and taking proactive steps to reduce their likelihood is more than a best practice—it’s part of judicious business operations. Not only that, but it allows chiropractors to focus on the true mission of their businesses: to elevate the health and well-being of their patients.

Tiffany Couch is CEO and founder of Acuity Forensics, a nationally recognized forensic accounting firm. She is also the author of The Thief in Your Company, a book that explores the financial and emotional impact of fraud on organizations of all sizes. She can be contacted at 360-573-5158, tcouch@acuityforensics.com, or through acuityforensics.com.