How to stop theft in your back office

December 17, 2018

Follow these simple tips to detect-and prevent-financial fraud in your medical practice. 

It’s unfortunate, but even in today’s era of two-factor authentication and hyper-alert security, we still hear stories of physicians being defrauded by their employees. To help protect yourself from financial fraud, consider adopting these five approaches in your practice.

Cross-train your employees.

The most common place for fraud to occur is in the back office of small businesses where only one person handles the cash and books. Train more than one person on the cash conversion cycle. Rotate people through the various processes, too, so that no single person operates in a silo. When multiple people know the process, they can check each other’s work for mistakes and anomalies. Cross-training employees helps to create an open and transparent environment. It also reduces the chance of theft by assuring no one person wields too much power. Ultimately, it would be best if you also knew the process, so you can be an effective leader and fiscally responsible business owner.

Know the line items on your reports.

Make sure you receive and regularly review financial statements. Spend time with your office manager or accountant to understand what each line item represents. If they cannot wholly explain each line item, then it might be time for a new accountant or an external audit. Refer back to past reports to see how the numbers compare. Ask questions if you see a line item growing, but it makes little sense. 

Create a budget-and use it.

Budgeting is more than planning for the future. A budget can also be a tool to detect fraud. Compare your productivity reports with the income statements to see how they measure up. Do the cash receipts match the productivity reports from a few weeks or months ago? Do the expenses stand in line with the productivity reports? If the cash coming into your practice isn’t in line with your budgeted forecast model, alarm bells should be ringing. The same alarms should sound if expenses are above the forecast model.

Understand the effects of timing on your cash flow.

Most small businesses use the cash-basis accounting method rather than the accrual method because of the ease and simplicity of the accounting system. With a cash-basis system, cash is recorded or booked when the money comes into the business and when it leaves.

However, with an accrual system, revenue is booked when it is earned, not received. Also, with an accrual system, the expenses are booked at the same time as the revenue because of what is called the matching principle. In a cash-basis system, revenues and expenses become uncoupled.

When you examine the income statement of a business using a cash-basis accounting system, what you see is the cash that was earned weeks before that has now been received and recorded. The expenses associated with the revenue generating activity were paid a long time. If you aren’t aware of the uncoupling effect of the accounting method in your practice, it can become easier for someone to “slip in” some expenses or skim a little off the revenue top. 

Conduct background checks.

Always, always, always do a thorough background check on all your employees, particularly those who handle your money. The background check should review both criminal and financial records. It doesn’t matter if the candidate is a family member of one of your partners: Always conduct a thorough background check, preferably using a reputable third party.

David J. Norris, MD, MBA, is a practicing anesthesiologist in Wichita, Kan. He is the author of The Financially Intelligent Physician: What They Didn’t Teach You in Medical School and a frequent speaker on physician finances. Read more about David at www.davidnorrismdmba.com.