J. ALBERTO MARTINEZ, MDCAROLINA CLAVIJO

P R A C T I C E A D M I N I S T R AT O R

BORIS FOXMANP R E S I D E N T O F N B A C C O R P, C PA F I R M

How to Get Embezzled

Discussion Topics

How it happened at VOThe scheme/ Search of evidence and aftermathNew controls at VOHow common is theft in medical practices?What are the greatest areas of vulnerability?How and why do honest people steal?How to assess potential employees.How to mitigate risk.Final remarks on prevention, by Boris Foxman

How it happened at VO

Employee “EE” hired directly by DR 12 years+ ago. Lead optician 9 years- promoted them to manager officially, but always in control of all optical operations.

EE: strong sales skills, attractive and innocent appearance… The 6’s C’s of the ideal sales person: caring, charming, commendable, considerate, cordial & courteous.

EE very close to DR, it felt like a family. EE was allowed to employ family members for the optical. A case of

“complete trust”.

How it happened: Red flags we missed

DR gave full authority to EE to handle inventory, sales pricing & discounts, ordering, hiring and training others.

Red flags: Constant tardiness in reporting, constant late

hours, few vacations taken, for 10+years min. audits of EE work and processes, total control of sales, ordering, pick ups, money collection & posting, unproportionate A/R balance, Net profit in P&L some years max 10% and as low as 3%. EE with very unstable personal life.

How it happened: Discovering the embezzlement

EE was manipulating other opticians with “cash incentives” and commissions in advance. They could mainly do “ sales” but all posting was reviewed or done by EE later in the day, of course to be altered.

Opticians were instructed to keep “double accounting” in separate books.

EE was immediately let go.

The clever scheme

80% of all transactions in 2 different systems are manipulated

Security settings in software gave EE rights permission to alter all transactions and enter adjustments.

Pay plan “ scheme” unveiled more details.Fraud of cash and checks (even after fired)EE has a “business account”Some Credit cards sales were used to cover cash

transactions paid from pat. and not recorded in the system.

EE had plenty of time to get “sophisticated” in methods.

The search of evidence & aftermath… for now

Find hard evidence, seek witnesses and document, document & document

Estimate of $250,000+Montgomery County Police/State Attorney’s officeFelony Type G: 2-10 years in jail/order of

restitution Claim to insurance- Insuring your business against employee theftChange of Policies and Procedures

But Overall…..Loss of sense of trust

New Internal Controls at VO

Extended analysis with accountants of current areas at risk, change of policies and procedures.

Centralized payments at front desk. Opticians sale and post in but send pat. to FD to make payments. Limited employee access and rights.

Dual verification: both logs from FD and optical are reconciled daily.

Audits from External Accountants 4 times per year for all areas of the practice.

New Internal Controls at VO

System of Checks and Balances-Daily Receipt Log – Balances with deposits

Inventory control every 2 months and monthly physical count

Spot check lab invoices to match jobs

Written protocols for internal and external discount policies ( for employees also)

Protocols with vendors, inventory of trials and centralized CL ordering through ABB optical group.

Some of our hiring mistakes….

Your gut feeling can be wrong more often than you realize.

Don’t hire for necessity, and if you must - do it in a for a lower level position

Check & document references, have a script of questions and always include the infallible“ will you hire again”

Department of Labor currently estimates that the average cost of a bad hiring decision can equal 30% of the

individual’s 1st year potential earnings. A bad hire with an annual income of $30,000 can equal a potential $9,000

loss.

Employee screening: Do it yourself vs. have a company do it for you

Credit report for single use: Experian for free. It gives you valuable insight into an individual's finances. Job applicant fairness act in MD- in writing and must have “bona fide job related reason to check credit.

Criminal check: There is not a single national database that contains all criminal records in the U.S. - Check by county and obtain permission in writing.

HireRight/Infocubic: cost of pre-screening packages between $30 to $100. Results 1 day to up to week.

REALITY

Medical practices lose $25B annually*

Practices lose an average of 5%–10% of revenue to fraud each year.*

86% of perpetrators are first-time offenders*

MGMA study of 945 practices found 83% (782) practices had been victims of employee theft.**

3 of the 4 practices with a loss of $100,000 or more were from groups with <10 physicians.**

UTOPIA?

“ It is better to trust and be disappointed once in a while than not to trust and live in fear all the time”

How do I reconcile a philosophy that increases my inner peace with the reality of the marketplace?

How do I fulfill my goal of making Visionary Ophthalmology a “conscious corporation” And still have a viable business?

What is a conscious corporation?

Purpose beyond profit

Humanized leadership

Corporate consciousness--- contribution

These areas account for

about 70% of theft.

supplies or equipment

Noncash

Cash Receiptstaking cash before or after it

is recorded on the books (co-pays, refraction fees)

Disbursementsforging checks, submitting invoices for

fictitious goods, submitting inflated invoices

Petty Cash

Payrollcreating a fictitious employee, unauthorized bonuses or inflatedpay rate

10%

10%

10%

Greatest Areas of Vulnerability

70%

Right set of circumstances for honest people to steal:

How and why do honest people steal?

Rule of thumb among forensic accountants and auditors:

10-10-80 Rule:10% of employees will always steal,10% will never steal,80% will steal under the right set of circumstances

Financial pressure: Could be an addiction, loss of household income, medical bills, debt, accident, or greed

Rationalization: Begins with “just borrowing”

Opportunity: Perception of borrowing or stealing without getting caught

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How to Assess Potential Employees

*MGMA Study

The Challenge:

All potential employees must be screened:

86% of perpetrators were terminated*62% were not prosecuted*

Verify past employment and references

Check criminal history

Check civil history

Driver license violations

Credit checks (76% of practices did not perform credit checks*)

Employee screening: Do it yourself vs. have a company do it for you

Credit report for single use: Experian for free. It gives you valuable insight into an individual's finances. Job applicant fairness act in MD- in writing and must have “bona fide job related reason to check credit.

Criminal check: There is not a single national database that contains all criminal records in the U.S. - Check by county and obtain permission in writing.

HireRight/Infocubic: cost of pre-screening packages between $30 to $100. Results 1 day to up to week.

How to Mitigate Risk: Trust but Verify

Screen job applicants thoroughly.

Assess high-risk areas: co-pays, mail receipts, disbursements, patient refunds, payroll.

Segregate duties. Never have same person doing deposits and postings.

Conduct unscheduled audits: create a perception of detection by monitoring employee work and testing compliance.

Be alert to disgruntled or stressed employees.

Outsource bookkeeping duties.

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What can you change today?

Allow only the physician owners to sign checks.

Maintain a receipt book for all cash payments.

Endorse all checks “for deposit only” to the business account immediately upon receipt.

Balance funds in cash drawer and payment log daily.

Employees ordering supplies should be different than the employee receiving or paying for them.

Examine payroll records on a regular basis.

Delegate the responsibility for receiving checks/cash to someone other than the person who records incoming funds to the ledger.

Solution:

LIVE IN FEAR ALL THE TIME?

Hire and utilize external auditors that will look at your practice unemotionally and prevent/uncover embezzlement.

This way Visionary Ophthalmology can continue to grow and fulfill its ultimate purpose: Contribution.

LBF International Tax LLC

Motivation for embezzlement      Approach to handling cash and finances in

generalDefining good and reliable accounting

systems

Boris Foxman

“An Ounce of Prevention is Worth a Pound of Cure”