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    Debbie A. Casaus, FACMPE


    Medical practice administrators’ daily tasks — managing staff, overseeing physician schedules, interacting with patients — may interfere with the regular review of the practice’s financial information. This can be costly if the review is put on the back burner for too long.

    Analyzing financial information can be time-consuming and overwhelming for an administrator even if the practice is small; however, even the smallest practice can encounter fraudulent activities.

    According to the Association of Certified Fraud Examiners, 5% of annual revenue is lost to fraudulent activities, which, even for a small practice, can be thousands of dollars. A timely, accurate review of financial reports and budgets compared to actuals, charges, payments, adjustments, as well as payroll reports, is critical to the financial health of a medical practice.

    When financial reports are reviewed on a daily, weekly and monthly basis, fluctuations in charges compared to payments, declining revenue and increased accounts receivables can all be signs that inappropriate activity may be taking place. The sooner the reviews and investigations are made, the sooner a perpetrator can be caught.

    Payroll records tend to be reviewed on a biweekly basis, and the review should be just as thorough as the review of any other financial report. Payroll fraud can take place on various levels, which can include padding actual hours worked, working unauthorized overtime, clocking in or out for other employees and clocking in, then leaving the premises before starting to work.

    Administrators may think that payroll records aren’t prone to fraudulent activity because most employees have direct deposit. However, there is a vast array of fraudulent activities that can happen through payroll fraud. Perpetrators are becoming increasingly clever in their efforts. Some have gotten away with fraud for years without being caught, diminishing their fear of repercussions.

    Examples if payroll fraud

    • In a large radiology group with more than 30 physicians and 75 employees, the perpetrator contacted the third-party payroll company outside of regular business hours to report fake bonuses for various employees. Unbeknownst to any of the leadership staff, those checks were sent directly to the perpetrator. However, the phone calls were being recorded and monitored. When the suspicious activity was reported to the chief financial officer by the payroll company, the perpetrator was then called into the CFO’s office, asked to listen to the recordings and provide an explanation. The perpetrator was unable to respond and was terminated immediately.
    • In another case, the physician owner of a small cardiology practice contacted the practice’s CPA firm to say he felt something “weird” was going on with the financials and wanted the firm to investigate. The firm completed review of several payroll documents including paystubs, W2s and 941 reports — quarterly reports a payroll company is required to provide to its clients, which contain information on wages and federal income tax for the entire staff and taxable social security and Medicare wages. The firm discovered that the payroll taxes the practice paid were substantially higher than what they should pay for the number of employees. The perpetrator had issued extra paychecks for himself and had the company pay both sides of state and federal taxes, meaning that employees and the practice had to pay a certain portion of both federal and state taxes. The state portion for employees was approximately 6.2% of their salary and the federal portion varied depending on the salary and state; though the range is normally between 18% and 22%. Over a span of 10 years, the perpetrator had stolen more than $200,000 from the practice in both false salaries and taxes that were not paid out of his paycheck, resulting in higher take-home pay.
    • In a large ambulatory surgery center with more than 30 physicians and more than 90 employees, the perpetrator manually added hours to employees’ timecards who were out on leave, including maternity and FMLA leave. When timecards were printed and presented to the managers for approval, the perpetrator had removed the timecards with false hours, so the managers were not aware there were additional unaccounted hours. Prior to submitting the payroll for processing, the perpetrator changed the direct deposit information for the employees with false hours to the perpetrator’s bank account. Over a year and a half, the perpetrator stole more than $35,000. Additionally, the perpetrator convinced employees to let her process their tax returns. She then deposited their refund checks to her account and then cut them a personal check.

    Once payroll fraud has been discovered, the administrator may feel betrayed, distrust employees and sometimes experience extreme guilt for not auditing the records more closely and catching the perpetrator much sooner.

    Employees affected by payroll fraud will be reluctant to trust the practice, its leaders and any new payroll processes. The physician owners are likely to be skeptical for a long period of time after fraud is discovered and will need to be assured that the proper procedures are being strictly followed to protect the practice.

    Reacting to payroll fraud

    While it’s natural to feel anger and shock after discovering payroll fraud, it’s important for the practice to investigate fully to mitigate damage and begin to restore trust. This includes questioning the perpetrator to find out why he or she embezzled and then submitting a report on the fraudulent activity to the officers of the practice. The officers must then decide whether they are going to contact legal authorities and/or attorneys.

    It’s helpful to take the following steps when navigating this process:

    1. Discover how the fraud took place, how long it lasted, who was affected by it and how much was stolen from the practice. The research must be thorough and done on a granular level to ensure that all money and property is accounted for and that every person affected is made aware of the fraud and how it will affect them. Proof of the embezzlement must be documented by the discoverer, which should include information such as date of the discovery, type of activity, who or what was affected, whether the activity was ongoing or a one-time event and how much was embezzled.
    2. Present documentation to the officers, physicians, attorneys and any other concerned party for review.
    3. Determine whether embezzlement is covered by the practice’s general liability insurance and consider the legal ramifications, such as potential lawsuits by employees and possible tax penalties.
    4. Once the information is provided to the officers, physicians and administrators, and thoroughly reviewed by attorneys and the officers, payroll records will need to be reviewed to make tax adjustments. Revised W2s will need to be created and distributed to employees. If applicable, affected employees may need to file an amended tax return.
    5. If the officers, physicians and attorney(s) decide to file charges against the perpetrator, a police report will then be required. If enough evidence is provided, an arrest warrant may be issued to the perpetrator.
    6. If the decision is made to move forward and pursue legal action, the perpetrator will be contacted by the attorney(s) and informed of the practice’s decision to pursue legal action. The legal ramifications may include requiring the perpetrator to pay back the amount stolen via bank account garnishments and/or tax refund garnishments, as well as the possibility of serving jail time.

    Catching a perpetrator

    Often, it takes a phone call from a payroll company or other third-party entity that handles finances for a practice to learn of suspicious activity. It may also be prompted by an employee who questions the amount on his or her W2 compared to what was made throughout the year.

    As noted in the first payroll fraud example, maintaining phone call recordings is a good way to monitor potential fraudulent behavior. It’s also a good idea to compare paystubs, W2s and 941s with previous paystubs to assess the amount of state and federal taxes being paid. Administrators and other senior staff should also review payroll reports — including payroll registers and timecards — as well as checking each employee’s bank routing number and account number.

    Instituting new policies and procedures

    In cases of payroll fraud, new policies and procedures should be instituted to eliminate or minimize the risk of future fraudulent activity. Examples include:

    • Switching payroll systems and requiring that any changes to any payroll record are presented to the CFO for approval. No phone calls related to payroll should be permitted for any reason without authorization from the CFO.
    • Outsourcing the payroll to a reputable payroll company, hiring a CPA firm to audit and review financial reports and requiring the physician owner to sign off on all payroll reports prior to being submitted for processing.
    • Changing the payroll report generation process by adding page numbers for each timecard. Requiring managers to sign off on payroll and then having the administrator conduct a second-level review before submitting for final processing. Payroll records can then be audited by a higher-level corporate officer on an ongoing basis.

    Being proactive is the best defense against malicious activity, so all medical practices should administer clear, concise training on the review of financial documents, including payroll reports, and have a procedure in place to address suspicious activity.

    When training staff to review payroll reports, practices should ensure that they are reviewing finite details, beyond just hours worked and overtime. Training them to do so will not only benefit the practice but will help staff recognize all the ways payroll fraud can be perpetrated.

    Every practice should educate its staff on fraudulent activities experienced by other practices. Researching and understanding how perpetrators have attempted and gotten away with fraud will go a long way in reducing and even avoiding payroll fraud in your practice. 

    Editor’s note

    This article was edited from a Fellow paper submitted toward fulfillment of ACMPE Fellow accreditation requirements. Learn more about ACMPE certification and accreditation at mgma.com/acmpe.

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