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Fraud, Waste, and Abuse: How Much Is Your Medical Practice Losing?

Implementing a system of checks and balances can prevent fraud.

By B.J. Hoffman, CPA, CFE

The stalling of the United States’ economy has practitioners searching for cost-cutting measures. Often overlooked in the search for savings is fraud and waste, which plague both large and small medical practices. The fight against fraud presents management with a significant opportunity to enhance income.

A recent study by the Association of Certified Fraud Examiners indicates that professionals lose approximately 5% of revenue to fraud, waste, and abuse. A medical practice with a few employees and moderate income may well be suffering annual losses in excess of $10,000. These staggering costs directly impact net income.

To limit losses, doctors need to be aware of existing fraud schemes and preventative measures. Overwhelmingly, however, many choose to ignore basic internal controls, jeopardizing assets and income.

Opportunity and Need: The Two Ingredients of Fraud

It is an unfortunate fact that most fraud and waste is perpetrated by trusted employees. Good people can do bad things, especially when faced with personal problems.

In an economic downturn, financial pressures can lead an otherwise honorable person to dishonest means. A spouse’s layoff, mounting consumer debt, prolonged illness, drug and alcohol abuse, or gambling problems call create a pressing “financial need” that results in fraudulent acts.

An individual’s pressing financial need will not always result in dishonest acts, of course. Those that might otherwise consider abusive acts are reluctant to proceed if there is a perception that the scheme would be detected. An effective internal control system is therefore your best defense against fraud. Without proper internal controls, exposures exist. The combination of an individual’s financial need with a perceived exposure can result in disastrous losses.

Effective Internal Controls: Checks and Balances

The concept of checks and balances lies at the heart of effective internal controls. Proper segregation of duties among employees is essential in a functioning control system. Generally, internal control systems separate three primary roles:

  • Asset custody (the physical access to checks, cash, inventory, etc.)
  • Accounting (the record-keeping over assets; general ledgers, cash disbursement journals, inventory lists, etc.)
  • Authorization (the supervision of operations)

Though small practices have limited numbers of employees, existing internal controls will be enhanced by proper job allocation.

As an example, many doctors’ offices employ a single practice administrator. A serious exposure exists if the administrator is responsible for opening incoming mail, depositing checks, preparing payments, handling accounting, and receiving and reconciling bank statements. The doctor is unnecessarily exposed to a heightened degree of risk because the administrator’s responsibilities include both asset custody and accounting functions. One way to limit the exposure would be to have the practitioner receive and review bank statements prior to the administrator. Small steps like these can help prevent enormous losses.

Convey the Message

Aside from the implementation of adequate internal control procedures, it is vital that you make employees aware that fraud, waste, and abuse are unacceptable. In broadcasting your resolve to fight waste, you should alert your staff that certain actions are deemed inappropriate.

This message can be communicated in a variety of ways. Fraud and ethics policies that are signed annually remind your staff that the office is a fraud-free environment. Anonymous telephone tip-line services for reporting unethical behavior serve as a deterrent to potential thefts. Rewarding employees for identifying and reporting waste and inefficiency also helps set an appropriate business tone.

Combining effective internal controls with a strong message from management significantly diminishes the threat to an organization’s assets.

The Denial Syndrome

Doctors tend to avoid consideration of fraud and waste. Many refuse to acknowledge the threat. Some doctors believe that the costs are immaterial, while others insist that the expense of implementing controls outweighs the benefits. Sadly, industry averages prove these notions wrong.

Fraud and waste may be present in the form of a bookkeeper’s embezzlement, employee theft of inventory, purchasing department kickbacks, cash skimming, unauthorized use of assets, fraudulent expense reimbursements, fictitious vendors and employees, or a litany of other schemes.

The dollars at risk to fraud are significant. Preventative systems and controls are often inexpensive, and tend to pay for themselves. In times of belt tightening and economic uncertainty, doctors may wonder if their practices can afford such internal controls. The real question is whether practices can afford to ignore the losses occurring each and every day.

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B.J. Hoffman is a Certified Public Accountant and Certified Fraud Examiner for Citrin Cooperman, an accounting, tax and business consulting firm. He is a partner in the Philadelphia office. B.J. can be reached at bjhoffman@citrincooperman.com or (215) 545-4800.

 

 

 

One comment

  1. great site, keep up the good work.

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