Karen L. Mosteller, CPA, CHBC

Recognize the Red Flags of Fraud and areas of

vulnerability

Examine checks and balances that should be

implemented

Establish processes and procedures needed for

fraud protection

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The Association of Certified Fraud Examiners released the following information in a 2012 Global Fraud Study: • Occupational fraud and abuse costs global

organizations more than $3.5 trillion annually • The average organization loses about 5% of its total

annual revenue to fraud and abuse committed by its own employees

• The median loss caused by fraud is $160,000 • The median loss in medical practices is $200,000

Recent articles on fraud have revealed the following:

• 31% of all businesses with <100 employees have fraud occurring

• 87% of managers are willing to commit fraud if it would make their organizations look better

• The most common contributing factor to fraud in medical practices is inadequate internal controls

• Once begun, a fraud scheme continues in the workplace an average of 18 months before being detected

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The Fraud Triangle

Pressure

Opportunity Rationalization

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Pressures that motivate employees to commit fraud include the following:

• Financial Pressures • Vice Pressures • Work-related Pressures • Other Pressures

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Common financial pressures associated with fraud are:

• Greed • Living beyond one’s means • High personal debt • High medical bills • Unexpected financial need

REMEMBER: Very few fraud perpetrators inform others when they are having financial problems.

The second element of the fraud triangle is a perceived opportunity to commit fraud, to conceal it and to avoid being punished.

Opportunities that allow fraud to be committed: • Lack of controls that prevent and detect fraudulent

behavior Having an effective control structure is critical.

• Lack of disciplinary action Forgiving or dismissing dishonest employees sends a message to others in the practice that fraud perpetrators will not suffer significant consequences.

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Perpetrators don’t commit fraud unless they can rationalize it as being consistent with their own personal code of ethics.

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Common rationalizations used by fraud perpetrators include:

• The company owes it to me • I am only borrowing the money and will pay it back • Nobody will get hurt • It’s for a good purpose

Employee frauds are most often committed by:

A. New Hires

B. Long-standing employees

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Employee frauds are most often committed by:

A. New Hires

B. Long-standing employees

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• 30% of employee fraud is committed during the first 3 years of employment.*

• 70% of employee fraud is committed by employees with 4 - 35 years of service.*

*Source: Fraud Examination, 3rd Edition By W. Steve Albrecht

This is the age group of middle managers that have worked themselves into positions of trust.

• The largest group of perpetrators by age are people 36 to 45 years old.

• Why?

Remember: Employees you don’t trust usually do not have the opportunity to commit fraud.

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Typical characteristics of perpetrators:

• Dissatisfaction with job • Living beyond means • Compulsive behavior (drugs / alcohol / gambling) • Rarely take vacations • Major stressors in personal life (children in college/

bankruptcy / illness / divorce) • Control issues / unwillingness to share duties • Consider “beating the system” an intellectual

challenge • Self-serving motives • Focused on material gains

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• Diminishing cash flow when receipts are strong.

• Receipts do not seem congruent with patient visits.

• Increasing Accounts Payable and Accounts Receivable balances.

• Patient and insurance company complaints about recording of payments.

• Significant number of year-end adjusting journal entries.

• Poor accounting records.

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Identifying…

Weak Practice Areas

What is an Operational Review?

• Analysis of internal operations and activities of a practice to identify areas for continuous improvement

• Measuring the success of the practice’s internal goals,

objectives, detail plans, and performance metrics • Should answer the question, “Is management using

resources in the most efficient and economical manner to achieve the most effective results?”

An Operational Review is typically performed by

a Certified Pubic Accountant (CPA).

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Process Phases: Planning

Information Gathering & Review of Work Flow

Development of Findings & Recommendations

Outcome & Recommendations

• The purpose is to identify possible critical problem areas that should be analyzed in more depth

• At the end of the planning phase, the reviewer should be familiar with:

- The practice’s objectives - Problems - Physical layout - Relative significance of various responsibilities

80/20 Rule: • 20% of problems cause 80% of critical impact, and • 80% of problems cause 20% of critical impact

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The planning phase includes:

• Initial survey(s) • Creation of organizational chart • Determination of areas for further review in the

work program

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Operational areas to be reviewed:

• Management

• Planning & Budgeting

• Personnel & Staffing

• IT & Software

• Policies & Procedures

• Office Supplies Purchasing & Inventory

• Medical Supplies Purchasing & Inventory

• Accounting

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• Accounting System

• Accounts Receivable

- Billing Process

- Cash Receipts Process

- Refunds Process

- Collections • Accounts Payable

• Payroll

• Petty Cash

• Month-end Reports / Bookkeeping

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This is the key area of fraud deterrence

• Implement the concept of economy, efficiency, effectiveness

• Eliminate / combine functions to improve flow • Balance work loads • Strengthen education and training • Maintain schedules • Practice good housekeeping • Implement effective planning and budgeting systems • Exercise performance measurement and continual

review and analysis

The operational review documents will include:

• What the operational review team accomplished

• What was found during the course of the review

• The extent of operational deficiencies

• What operations the personnel have done thus far to correct the situation

The following should be discussed for each review finding:

• Condition What was found

• Criteria What it should be

• Cause Why it happened

• Effect What resulted

• Recommendation How to correct it

Recommendations should not only be implemented, they must be

maintained monitored measured again

Remember the focus is Continuous Improvement

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Situation

Check-in/check-out handles all payments without a formal receipt process. Cash co-pays and payments are pocketed rather than making a record of the transaction and entering them into the cash drawer.

Solution

Check-in/check-out creates receipts signed by patients at time of collecting co-pays and payments, then stamps checks “For Deposit Only” or uses an electronic check reader. They close the day by preparing a day end close reconciliation recap, balancing it with the cash drawer and then preparing a deposit slip.

The bookkeeper then reconciles the deposit slip to the amount posted in the billing system. A courier delivers the deposits to the bank.

The bookkeeper compares daily deposits per the bank to the posting register from billing and the deposit receipt from the practice courier.

The practice should also retain signed copies of the patient receipt from check-out, documenting the amount paid and the method of payment. 27

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Situation

Medical supplies are ordered by the same person who checks them in upon arrival and stores them. Several people make supply requests and multiple orders are placed throughout the week. New supplies are stored in an unlocked closet. Solution

Utilize an inventory order form with quantities and place only 1 order per week. Upon arrival, someone other than the person who ordered the supplies should receive and check in the order and store the materials in a locked closet. The packing list and order form are then given to the bookkeeper for recordkeeping and invoice payment.

Situation

The bookkeeper approves all invoices for payment, is responsible for writing checks, gets the doctor to sign checks and then mails the payments. The bookkeeper also receives the unopened bank statements, makes journal entries and reconciles the bank statements.

Solution

The bookkeeper approves invoices for payment and writes checks. The administrator then approves the payments and gets the doctor to sign the checks. The administrator then has an office assistant mail the checks. The administrator opens bank statements and reviews check signatures for tampering.

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Situation

The payroll clerk is responsible for setting up new hires as well as removing terminated employees from the system. After one employee is terminated, however, the payroll clerk intentionally keeps his information in the system and continues issuing payroll checks in his name. By looking at previous cancelled checks accessible in the file cabinet, the clerk forges the terminated employee’s signature on the backs of the checks and signs them over to herself.

Solution

The administrator / supervisor is responsible for setting up new hires and removing terminated employees from the system, and for distributing paychecks. Also periodically reviews the list of employees against the payroll checks.

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Karen L. Mosteller, CPA, CHBC Kmosteller@markham-norton.com

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