One of the most troubling thoughts for any business owner is questioning whether their employees might be stealing from them. For the many who have unfortunately been in this position, fearing that a trusted employee has used their position to commit fraud or steal has kept them at night. But knowing they could have caught it sooner — or prevented it altogether — is the stuff of nightmares.
Just how pervasive is fraud and embezzlement within private healthcare practices? Simply put, very.
According to the Association of Certified Fraud Examiners 2022: Report to the Nations, the typical fraud case lasts 12 months before detection and causes a median loss of $117,000.
To help prevent and minimize fraud and abuse at your private practice, you must understand three things: why embezzlement and fraud occur, what internal controls are, and which are the most effective internal controls you can put in place at your private practice.
Why Does Embezzlement and Fraud Occur?
Each individual case is unique, but the fraud triangle lays out a compelling template for why embezzlers decide to steal and why they think they can get away with it.
The fraud triangle comprises three elements: incentive, rationalization, and opportunity. When these three pieces are presented to an employee who has the means and motivation to embezzle, the likelihood of fraud significantly increases.
The most effective way to reduce that likelihood is by eliminating as many points of the triangle as you can. How? By implementing strong internal controls.
What are Internal Controls?
Internal controls are processes and procedures that managers and practice owners establish to ensure the integrity of their accounting and financial information and transactions.
These controls are important for any organization to have in place but are vitally important for a healthcare practice for two reasons: One, the number of people handling financial transactions from start to finish is typically fewer in private healthcare practices than in other types of industries. Two, medical professionals typically lack adequate training on the financial side of owning and operating a business.
Five Internal Controls to Protect Your Healthcare Practice
Implement Segregation of Duties
Arguably, the most important internal control your practice can have in place is the segregation of duties. This internal control not only is vital to maintain operational effectiveness among your staff but also ensures that no one can manage a financial transaction from start to finish by themselves.
Having multiple people involved in the everyday financial transactions of your practice increases the chances that errors are caught before they’re made and limits the chances that fraudulent transactions can take place.
Segregating the duties that your staff is responsible for protects them, as well. It keeps individuals focused only on the tasks that each is trained to complete and is experienced in managing. This minimizes potential risks by reducing the chances that their work is questioned while removing instances where they might have to defend themselves for something they potentially didn’t, or couldn’t, do.
If your practice does not have the staff to adequately adopt segregation of duties, it’s still important to have at least some internal controls in place to reduce opportunities for misconduct. These can be as minimal as having a manager or owner review and approve of all financial transactions at the end of the day.
Regularly Review your Internal Controls
Having a procedure in place to routinely review your practice’s internal controls and accounting processes will ensure that you quickly recognize when policies aren’t being followed and can make changes to correct any lapse in process. Periodic reviews also give you and your staff opportunities to learn and remind themselves how your financial practices and processes should operate.
These reviews also support operational efficiency, enabling management to identify problems and correct lapses before they are discovered in an external audit.
Conduct Background Checks on Prospective Employees
As we mentioned earlier, financial impropriety in the medical industry is pervasive. As the 2022 Report to the Nations highlights, the healthcare industry reported 130 cases of occupational fraud with a median loss per case of $100,000. Additionally, 70% of these cases had fraud occur because of corruption or fraudulent billing.
One method to mitigate this is a basic background check on potential hires. If a person you’re hoping to hire has a history of embezzling from a previous employer, private practice, or dentist’s office, wouldn’t you like to know that?
Implementing background checks as part of your hiring process will vary in cost, but a seasoned human resources specialist can provide guidance on the best fit for you and your practice.
Purchase Order Authorizations and Verification of Receipt
A common embezzlement technique involves using company funds to make purchases, secretly receiving the goods, and then selling them privately for a profit. If your employees can make and receive purchases without oversight, it might be time to mitigate these risks with effective internal controls.
Purchase-order authorizations are a critical internal control measure that prevents any one person from using practice funds to fraudulently purchase goods without the approval of another person within your practice. Whenever possible, having checks and balances in your processes can help to reduce fraud and abuse.
To further solidify this measure, have a dedicated person who is not the original purchaser verify that the items received match the purchase order correctly. This step ensures that the practice only receives goods approved for order.
Reviewing Bank Reconciliations
It’s easy to glance at your monthly bank statement, spending just a few minutes checking the beginning and ending balance. However, dedicating time each month to carefully reviewing each transaction can help ensure that all purchases are approved and legitimate.
Bank reconciliation is the process of comparing a practice’s internal financial records with corresponding bank statements to ensure that all transactions are accurately recorded and accounted for.
This internal control can identify discrepancies, errors, and unauthorized transactions, maintaining the integrity of your practice’s finances.
Implementing Internal Controls for Your Healthcare Private Practice
Implementing internal controls for your healthcare practice is one of the best measures you can take to protect your financial and data integrity. If you aren’t sure where to start, your best bet is to look for an experienced outsourced CFO, or professional advisory firm that has experience managing private healthcare practices.
Rehmann, for instance, provides comprehensive internal control solutions to healthcare practices of all sizes and specialties. Whether you’re a single-location dental office or a physical therapist with multiple locations and hundreds of employees, our team is equipped with the tools and know-how to help achieve financial integrity.
The people most often charged with handling financial transactions in healthcare practices are typically medical professionals who lack significant training or experience in the financial side of owning or operating a business. Having an experienced partner in your corner can shore up your practice’s financial defenses.
Rehmann’s healthcare and risk advisory teams are uniquely able to help in countless ways. From improving the practice you work to grow daily to building your financial legacy, we are ready to help you achieve financial stability and support your passion for delivering patient care.
To learn how Rehmann can help you and your healthcare practice succeed, contact us at [email protected].
