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Using specialized software to detect fraud

By David A. Anderson, CPA, MBA & David H. Glusman, CPA

Fraud is a growing problem in our society – in general as well as in medical practices and other health care providers. With the advent of billing software, computerized office accounting systems and other electronic capabilities, some areas of fraud can be more easily detected while other areas may be more difficult to detect. In some cases, computers may actually be used to perpetrate fraud on an employer or company.

Medical practices are at risk from several types of fraud. These include improper billings, misappropriation of cash, kickbacks and vendor fraud.

Sometimes employees perpetrate fraud by rationalizing that they’re not really taking money from their employer, or that the employer is so big and so impersonal that it doesn’t really matter. Sometimes employees commit fraud because they’re under such tremendous pressure at home or in some other way outside of the office that they feel that there is no other way out of their predicament but to steal. Sometimes employees steal because they realize that there’s an opportunity that has come before them that they simply cannot resist. Some statistics show that, given the right opportunities, pressures or other outside factors, a significant percentage of the population would be willing to commit fraud.

Sometimes fraud begins in small increments, with the true intention on the part of the employee to replace the stolen funds in relatively short order. This usually does not occur, and the fraud continues with today’s theft being covered up by tomorrow’s theft, and tomorrow’s theft getting even bigger.

One of our clients experienced an employee defalcation that occurred over an 18-month period of time. The employee’s husband was ill and her health insurance was not covering all of the bills. She began to feel tremendous pressure as her savings began to dwindle while her husband’s illness progressed. Working in a relatively small office where she had access to the accounts receivable records, as well as making the deposits periodically, she was able to take patient’s checks, endorse them to a new fictitious bank account that she opened in her employer’s name at a different bank, and temporarily cover up the fraud by overwriting the accounts receivable records. It was only when a patient came in with a copy of her computer generated statement of account in hand, and asked the doctor directly why a payment from six weeks earlier had not yet been posted, that the doctor recognized the possibility that a fraud was ongoing in his office.

How would you know if your practice is experiencing any of these types of fraud?

You could commission a comprehensive fraud examination. However, this solution is expensive, and can only inform you whether or not fraud has occurred prior to the date of the examination. Using this solution, you would have to conduct such examinations on a regular basis to determine whether your practice has suffered from fraud.

There is a more effective and less expensive solution. You can use specialized computer software to analyze your financial and operational information in order to detect fraud. This specialized computer software comes in two different flavors: Data Extraction software and Financial Analysis software. This article will discuss both types of software and how they can be used to detect fraud.

Data Extraction Software

Data Extraction software is used to analyze information processed by a computer system. It allows you to “slice and dice” information in any way imaginable. Large quantities of information (thousands of patients, hundreds of thousands of procedures, etc.) can be sorted in various ways, compared to other data files, combined with other data files, exception tested, sampled, stratified, aged, and subjected to complex calculations and extractions. These analyses can be completed within a few hours or days rather than taking weeks or months. In addition, once these analyses have been created, they can be used regularly to analyze current operating information.

Examples of how Data Extraction software can be used to detect fraud in your practice include following:

* Analysis of billings to identify duplicate billings, overbillings, underbillings, false billings and improper location billings.

* Analysis of accounts receivable to identify improper write-offs and other unusual credits.

* Analysis of payments to vendors to identify fictitious vendors; vendors whose name, address or phone number matches that of an employee; vendors with only P.O. Box addresses; duplicate payments; and unusual patterns in check amounts.

* Analysis of purchases to identify inconsistent price fluctuations and excessive purchases (potential evidence of kickbacks).

Data Extraction software is relatively inexpensive. If you or one of your staff has a working knowledge of Excel, within only a few short training courses, you can create analyses that can be used to detect fraud.

Financial Analysis Software

While Data Extraction software is effective for detecting potentially fraudulent transactions, Financial Analysis software can be effective in detecting trends in financial statement accounts that could be indicative of fraud. The software takes monthly, quarterly or annual financial statement information and analyzes changes in amounts over time. Financial Analysis software also analyzes changes in relationships (ratios) between different accounts (for example, medical supplies expense as a percentage of revenues). You can use the results obtained from the Financial Analysis software to identify trends or ratios that are unusual or appear to be contrary to expectations.

Examples of how Financial Analysis software can be used to detect fraud in your practice include following:

* Analysis of billings and revenues by type or physician to detect unusual billing trends or unexpected realization rates.

* Analysis of expenses by account and department to detect unexpected trends or rates (a particular expense as a percentage of revenues).

* Analysis of purchases by vendor to detect unexpected trends or excessive business being directed to a particular vendor.

As with Data Extraction software, Financial Analysis software is usually inexpensive and relatively easy to use for someone proficient in Excel. Once analyses have been set up, they can be rolled forward and updated as financial information becomes available for each succeeding period.

Which software would work best for your practice? Ideally, your practice should use both types of software. The Financial Analysis software would be used on a regular basis to detect trends that could indicate fraud. The Data Extraction software would then be used to analyze detail transactions for evidence of the fraud.

However, if your practice is small and you only want to purchase one of the software packages, then the Financial Analysis software would be the recommended purchase. It would allow you to monitor revenue and expense trends for indications of possible fraud. If such an indication occurred, you could then choose to purchase the Data Extraction software to expand your analysis or bring in an outside expert (such as your accounting firm).

There are a variety of steps that may be taken in order to minimize the likelihood of fraud being perpetrated in your practice. Many of these steps are simple internal control procedures and rotation of personnel performing certain functions. The use of software can also assist in uncovering fraud. Furthermore, when computer software is being utilized by outside consultants on a periodic and surprise basis and staff recognizes that internal control systems are in place and adequately working, the likelihood of the occurrence of fraud is greatly minimized, and may even be eliminated.

Your medical practice could be at risk for fraud. Through the use of specialized software – Data Extraction software and Financial Analysis software – you can routinely analyze financial information to detect the presence of fraud in your practice. This relatively inexpensive and easy to use software can pay for itself many times over, and can assist in reducing the risk that your practice will suffer from fraud.

David A. Anderson, CPA, MBA, MSE is Director of Technology and E-Business Services, and David H. Glusman, CPA, DABFA, CFS is Principal of Margolis & Company P.C. in Bala Cynwyd, Pa.

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