Physiatry Practice Management Resources

Implementing internal controls in your practice will help you stop embezzlement and keep what you earn.

Herbert Snyder, PhD, CFE, and Donna K. Dietz, PhD, CMA, CPA
Source: American Academy of Family Physicians

In health care, the word "fraud" often refers to the submission of improper claims on the part of a medical practice. However, there is another type of fraud - financial fraud, or embezzlement - that gets little attention in the industry but should be of great concern. A recent study of community health clinics found that more than 40 percent had experienced some type of financial crime during the previous five years. As bad as this sounds, the actual situation is probably even worse. It's estimated that up to 75 percent of embezzlement, fraud and related financial crimes go unreported. Additionally, several investigators, including accounting firm KPMG International, have found evidence that the incidence of financial crime is growing.

Preventing financial misconduct within your practice does not need to be an expensive or painful process, but it does require implementation of internal controls. This article describes six safeguards to employ, with advice for both small and large practices.

Check candidates' references and job histories

The process of safeguarding your practice begins before you hire an employee. Checking job candidates' references, job histories and other information on their resumes can identify those who have committed fraud at previous jobs. Often, employees who commit fraud are repeat offenders, so it is important to be thorough when you question their former employers.

Small practices. Make sure your employment applications require all necessary information, such as previous relevant job experiences and the names and contact numbers of former employers. Try to find the reason for any gaps in a candidate's employment history. These could be areas the candidate wishes to keep hidden. At a minimum, you should call to confirm that the previous employment was legitimate and that all professional licenses are valid.

Occasionally you can elicit further details when speaking with a former employer. For instance, let former employers know that the prospective employee will be in a position of trust, and ask them to comment on the past performance of the employee. Although many employers will be reluctant to make damaging remarks over the phone, they may be compelled to speak up knowing that they will be liable should the employee commit fraud again. You should inform your prospective employee that you'll be checking references; applicants with a history of financial misconduct are likely to withdraw.

Large practices. Because managing physicians are more removed from employees in larger practices than in smaller practices, large practices need to conduct more careful checks on their potential employees. It is particularly important to complete a thorough check on candidates applying for critical management positions or positions requiring high levels of trust, such as accountants. If your practice is large enough to have a human resources (HR) staff, they can conduct the employee checks. In practices without an HR staff, employee background checks can be outsourced to private companies that specialize in this service. Even though you would not be conducting the employee checks yourself in this case, make sure the company follows your guidelines.

Review individual expenses

Regularly reviewing expenditures and individual accounts can uncover unusual transactions. If you pay attention to account balances and review documentation before signing checks, you may discover financial misconduct earlier. These reviews will serve as a deterrent to those who might attempt fraud.

Small practices. Reviewing expenses doesn't necessarily mean signing off on every expense yourself, but you do need a process to make sure that every check signed is for a legitimate expense. In general, when a payment is made, two things must be documented: appropriate authorization for the purchase and verification that the goods actually arrived. Ideally, these tasks would be handled by separate individuals. For example, one staff member may be authorized to order supplies and sign the purchase order, but a different person should verify that the goods were received and sign the invoice. A third person can then sign the check, after reviewing all supporting documentation. If you do not have enough staff to separate these tasks, at least have a separate person sign the check and review all documentation.

Small practices should also review office accounts monthly. While this doesn't prevent all fraud, it can alert you to potential problems when expense or revenue accounts are larger or smaller than expected. This process is easier if you compare last year's revenues and expenses with the current year's, or if you compare budgeted revenues and expenses with actual results. Significant differences will highlight areas that you should investigate. Pay particular attention to large expenditures for services because services are more difficult to verify than supplies. Accounting software that is suitable for small practices can be configured to produce these reports each month.

Large practices. As with smaller practices, you should conduct independent, internal checks to ensure that money is being spent on legitimate, properly authorized expenses and that all revenue is accounted. Larger practices also should separate responsibilities for authorizing purchases, verifying receipt of goods and authorizing payment of invoices. Individuals with these responsibilities should not have any access to cash or checks.

When there are a large number of purchases, conserve time by delegating authorization of payments under a set dollar amount. For payments over that dollar amount, add your review and signature to the routine review process. You can notify the bank of this policy by having your checks pre-printed with the message "All checks over [set dollar amount] must have two signatures."

You may want to add an exception report to your routine review. Exception reports notify you when an account's activity exceeds a particular level or when the balance rises or falls above particular levels. Exception reports are needed only when unusual transactions occur. Most accounting systems can be configured to produce such reports. Use your judgment to set the limits. Limits that are set too low will result in many exception reports. Frequent exception reports lose their effectiveness.

These reports are only effective if you or your practice manager actually read them. Exception reports will not deter financial misconduct if employees know that you never look at them. It is a good practice to sign the reports as they are reviewed, particularly if you delegate some of the review responsibilities to your practice manager. This provides evidence of strong management oversight.