Avoid Employee Theft: Implement Internal Controls

I magine picking up your local paper and reading this scenario, “The police have announced a criminal investigation into losses at a local dermatology practice. Sources close to the investigation revealed that $225,000 is unaccounted for, and it is believed to be the result of employee embezzlement. The ongoing forensic investigation indicates that internal controls were not adequate to prevent and/or detect the theft.” This might seem unlikely, but without a system of controls in place and the proper monitoring of those controls, the situation described above could happen to your practice and make headlines in your area. Medical practices need to be aware of the possibility of employee theft in their offices. According to the Association of Certified Fraud Examiners’ (ACFE), the per-employee losses from fraud in the smallest businesses are 100 times the amount of their largest counterparts. If your office is lacking in internal controls, you are leaving the door open for theft. And if you leave a door open, as the old expression goes, someone will eventually walk through it. There are generally two requirements for employee theft to occur — opportunity and personal characteristics. Opportunity is access to a situation where theft can be perpetrated. Personal characteristics are having moral standards flexible enough to justify the theft. Proper Controls Let’s review some controls that you can implement in your office to help control the risk of theft. Perform Adequate Employee Prescreening. Medical practices rarely spend the money to check work references, criminal records or professional recommendations of potential hires, or require applicants to undergo drug screening, psychological testing and other vetting procedures. Undesirable applicants know this and thus gravitate to small businesses like your office. There was a recent study that showed that about 7% of employees have a history of workplace theft and fraud. This small, but costly, group knows that the degree of scrutiny into their past by a smaller business owner will be minimal; all too often, they are right. Use Caution with Trust. The second factor for employee theft involves the human element. When employees have worked for you for a long time, it’s natural for you to trust them. Most of the time, believing in your co-workers is well founded, but not always. It’s a good idea to have your outside accountant occasionally perform a review of the accounting functions, even if it is not part of an actual audit. Also, make sure your key employees take their vacation time. Key employees should be out of the office for at least five consecutive days during the year. While an employee who is never able to take more than a few days off at a time seems dedicated, he or she may in fact have something to hide. It is hard for an employee to cover his or her tracks, if he or she is not in the office. Never having faith in your employees is a bad thing, but so is complete trust. The goal is to strike a balance between the two. Or, as Mark Twain said, “Trust everybody . . . but make sure you cut the cards.” Segregate Duties. Segregation is the bedrock of employee theft prevention. The reason is straightforward enough: It is one thing to steal by yourself, but quite another to enlist the aid of a coworker. It would be ideal to have a separate person performing each of the following duties; cash receipts, cash disbursements, invoicing/billing and purchasing. In addition, have all of these duties supervised by the office manager or controller. At this point you may be saying to yourself, “That’s not possible. We only have one person in our accounting department and he/she does everything!” In the real world, it is a lot harder for a small business to segregate the accounting duties than it is for a larger company, but it’s not impossible. The receptionist, office manager, or maybe even a medical staff member can be assigned small but important accounting tasks to obtain the proper segregation. And of course, you as the owner may need to get involved. Your Role in Theft Prevention It’s said, “When it comes to small businesses, all employee theft starts with the owner.” Theft is much more likely to occur when you have been too trustful of your key employees or too distracted, either building the practice or enjoying its success. To minimize the chance of employee theft, you, as the owner of your practice, need to be aware that employee theft is a real possibility and follow these guidelines. • Receive the company’s unopened bank statements directly. Review the bank statements each month with special attention paid to the cash receipts and disbursement transactions. Ask yourself if the amounts are reasonable. Many banks now will copy the actual checks and deposit slips as part of the bank statement. Those are handy because the processed checks can’t be altered back in your office. • Occasionally review the daily production and make sure it is being posted to the accounts receivable or daily cash totals. • The superbills should be numbered and filed sequentially; that way they can be accounted for. Theft usually starts small, so a good place to deter theft is with good cash controls. • Monitor the write-offs to your accounts receivable by occasionally doing a review of your contractual adjustments and write-offs to bad debts. • Familiarize yourself with the vendors used by the business, as well as the volume of transactions on a monthly basis. • Develop an awareness of the financial records generated monthly and review these records on a timely basis for accuracy and completeness. • Ensure that bank reconciliations are performed monthly. Prevention is Key It is much better to put systems in place to deter theft, than to try to detect it once it’s happening. Having the employees know that you take internal controls seriously is very important. Employee theft usually starts small and grows as the employee gets bolder or more desperate. By implementing the above controls you can minimize the potential for a loss and not end up as a headline in your local paper.