How to prevent employee fraud

February 15, 2008

The best defense is a good offense, say these CPAs.

Employee fraud can take many forms within a physician practice. But the accounts payable operation, because of the sheer volume of transactions, poses an especially big risk. If it isn't tightly controlled, someone intent on committing fraud can easily slip an improper vendor invoice or other fraudulent document through the cracks, thereby draining precious practice resources. Even an otherwise honest staff member may be tempted to float himself a "short-term loan" if he should fall on hard times.

To minimize these opportunities, you need to beef up the security of your accounts payable system. Establish well-thought-out internal control policies and practices, with checks and balances. Give each staff member a written job description, with a well-defined set of duties and a clear sense of how those duties fit into the overall system. Avoid having a single person handle the entire accounts payable operation; dividing up the duties makes it more difficult for any one individual to cheat. Finally, consider hiring an internal audit specialist to evaluate your internal controls, especially if your practice or practice environment has recently undergone significant change.

The policies and procedures you develop will help you safeguard practice assets, limit liability, and make your financial information system more reliable and accurate-provided you follow them. Here are some key fraud prevention measures you can start today.

Validate purchases and expenses. Did you receive the product or service you were supposed to receive? Are the quantity, brand, and other specifications correct? A practice partner or office manager should always check, by comparing original vendor invoices, purchase orders, and receiving reports. All should be marked "paid," along with the check number. Investigate any transaction in which the same person authorized the purchase, approved the vendor invoice, and made the payment.

Be wary of "impatient" vendors. Legitimate vendors won't ask you to rush a payment, since they understand your need to maintain internal procedures and controls. A vendor who pressures you to circumvent those controls may be in collusion with an employee set on misappropriating practice funds. Also, in larger practices, be wary of vendors who insist on dealing with the same accounting or administrative staff member or whose bills are always paid by the same person. If you suspect vendor-employee collusion, verify that the company has a valid business office, street address, and phone number.

Verify that your bills alone are being paid. If your accounts payable staff uses one checking account to pay a group of bills, it's not that hard for someone to slip in her personal telephone, utility, or credit card bill. Be alert to this possibility-and on the lookout for bills that include products or services delivered elsewhere.

Scrutinize canceled checks. Legitimate vendors deposit checks into their business accounts, so make it a habit to review both sides of canceled checks. A check that appears to have been cashed rather than deposited should raise alarms. So, too, should checks that have been deposited into personal rather than business accounts and checks bearing unfamiliar endorsements. A check payable to a vendor but endorsed by one of your employees, of course, is a sure sign of trouble.

Track vendor billing patterns. If you're used to receiving 12 invoices a year from Acme Supply Company and you now have 14 or 15 payment entries, find out why. An unexplained jump in the number of payments could signal not only employee fraud but also related vendor kickbacks. If your billing records suggest that you may be paying two companies for the same service, investigate immediately.