Internal Controls August 4, 2019

Learning Objectives Why internal controls are important Overview of the Internal Control process: a) control environment b) accounting systems c) control procedures Internal Controls Questionnaire Case discussion Front Row Physicians Fraud & Embezzlement 2

Internal Controls Internal Controls are important because they are instrumental in : managing revenues controlling expenses managing assets and asset purchases Strong internal controls provide measureable assurance of: the efficiency and effectiveness of ongoing operations the reliability of financial statements

In any organization, Internal Controls are as important as the Customer! What do I need to control? How do I get organizational buy-in for the need for internal controls? How do I know that internal controls are adequate and functioning as designed? What might be the consequences of not having adequate internal controls? 4

Internal Control Control Environment Internal Accounting Control System Internal Control Procedures 5

Common Embezzlements Employee discards patient encounter forms and keeps the patient’s copay (cash only). Patient’s insurance plan is not billed and employee shows patient as a no show in system. Billing Department employee creates a company with a name similar to that of the practice, e.g., CST, Ltd. vs CST. Employee endorses checks payable to the practice using the office stamp but then deposits them into their own company. Employee then does a balance adjustment to write off the balance as either an uncollectible or as a normal discount or deduction. Employee in in charge of purchasing fixed assets (e.g., computers) makes a big purchase, telling the check signer they are for new computers for various departments. Employee orders extra computers or equipment and either takes them home or has computers delivered to another address that appears to be a part of the practice. Employee creates a fake vendor and generates a fake professional looking invoice. Employee includes the invoice among a stack of legitimate invoices for authorized approval. Employee endorses the resulting check with office stamp and deposits it into their own company. 6

Red Flags to Watch For An employee who become defensive when questioned about the area(s) they’re responsible for, especially in billing, purchasing and accounts receivable. Employees who take a long time to get back with information or answers to your questions. Getting data or financials always late, or the employee asking for time to prepare something when time shouldn’t be an issue, e.g., printout from QuickBooks or other accounting system. An employee responsible for financial or billing activities never takes off time and keeps their work close to the chest, not allowing others to help or learn. An employee who unexpectedly resigns when management makes financial or operational changes to increase oversight. 7

Internal Control Questionnaire Fill out the Internal Controls Questionnaire: General Internal Control Environment Cash Cash Receipts Purchases & Expenses Credit Card Purchases 8 8

FRONT ROW PHYSICANS Identify any problems that you noted with Front Row Physicians’ current system of accounting for cash and checks. How would the development of an internal control system benefit the practice? Describe the changes you would make.

FRAUD: CAN IT HAPPEN? 10

The Fraud Triangle Fraud Triangle Pressure Rationalization Opportunity 11