1. Employee theft and embezzlement: Could this happen at your practice? Barr, Anderson & Roberts, PSC CPAs and Business Advisors Matthew S. Smith, CPA, CFE 2335 Sterlington Rd, Ste 100 Lexington, KY 40517 Email msmith@barcpa.commsmith@barcpa.com Phone (Direct) 859-977-2403 Fax 859-268-6165 Statistics were obtained from the 2012 Report to the Nations on Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners (ACFE) and available to the public for free at http://www.acfe.com/rttn.aspx. http://www.acfe.com/rttn.aspx

2. Financial reporting fraud makes the news but asset misappropriation fraud is the more common threat

3. Agenda Objectives  To inform dental practice professionals of all experience levels about the constant threat of fraud in dental practices.  To help dental practice professionals recognize the need for fraud prevention measures in dental practices. Outline  Overview of occupational fraud  Common methods of fraud & steps to use to reduce risk  Other ways to reduce fraud risk Please ask questions at any time throughout the presentation!

4. The problem: ALARMING FRAUD STATISTICS Based on the incidents in the report, an average of 5% of annual gross revenues was lost to fraud Median loss to small businesses (less than 100 employees) caused by occupational frauds was $147,000 & medial loss of health care industry was $200,000. Typical fraud scheme lasts 18 months before being detected Median loss of organization without anti-fraud controls much higher and duration of fraud much longer than an organization with anti- fraud controls (for example: with fraud training $100,000 & 12 months, without fraud training $155,000 & 24 months)

6. Common methods of Fraud & ways to reduce risk: Check tampering Average loss from check tampering fraud is $143,000 and this type of fraud accounted for a quarter of small business frauds Example: Office manager asks dentist to sign a blank check so he/she can go to Wal- Mart to buy office supplies, but instead writes it to him/herself and records the payee in QuickBooks as Wal-Mart. As he/she is the one reconciling the account, and no one reviews the cleared check images, no one but him/her knows. Suggested preventative methods include: 1. Do NOT use a signature stamp 2. Once signed, checks should be mailed as soon as possible. 3. Reconciliation should be performed as soon as bank statement received and reviewed by someone independent of accounting function. 4. Verify payee in addition to check # and amount when reconciling. 5. Checks should be secured and prenumbered.

7. Common methods of Fraud & ways to reduce risk: Cash receipts Skimming involves stolen cash before it is recorded on the company’s books. Larceny involves stolen cash after it is recorded on the company’s books. Combined these account for over 37% of frauds incurred by small businesses Example: Employee at front desk collects co-pay or other payment from patient and keeps for him/herself. Employee records an equal amount as an adjustment into the billing software to avoid an invoice/statement going to the patient. Suggested Preventive Measures Include: 1. Employee opening mail should not have access to accounting records and should restrictively endorse (e.g., stamp “For Deposit Only”) all incoming payments. 2. Deposit funds daily and, if cash is received, pre-numbered receipts should be used. 3. Consider using electronic funds transfers from insurance payers and/or use of a bank lockbox. 4. Payments received should be separately listed by the employee opening mail from the employee receiving cash and compared to the deposit slip. 5. Employees handling cash or maintaining financial records should be bonded to minimize losses.

8. Common methods of Fraud & ways to reduce risk: Vendor/invoice Fraud 32.2% of small business fraud cases involve billing (the most common of all methods) Examples: a. Bookkeeper purchases personal items and submits invoice. He or she then writes a check from the practice for payment. b. Practice manager forms a “shell” company and submits invoices from this company for services not actually rendered and/or supplies not actually received to the practice for payment. Suggested Preventative Measures: 1. Owner should only sign checks for known vendors and the checks should be presented for signature along with documentation for verification. 2. Periodic comparison of vendor addresses to employee addresses or other comparison to identify relationship between vendor and employee. 3. Watch for vendor invoices with PO Box addresses and vendor invoices with vague or little details about the purchase or the company.

9. Common methods of Fraud & ways to reduce risk: Payroll Fraud Involves claiming hours that were not actually worked & adding ghost employees to the payroll Unauthorized payments from payroll cash account. Using a payroll service provider ensures check calculations will match information provided from payroll department and integrity of payments. Timesheets should be carefully reviewed by manager/supervisor before being approved. Simple comparison of budgeted payroll to actual may identify any potential issues.

10. Common methods of Fraud & ways to reduce risk: Expense Reimbursement fraud Involves employee requesting reimbursement for personal items or for fabricated expense items 1) Detailed expense reports should require the following: Receipts or other supporting documentation Explanation of the expense including business purpose Time period expense occurred Place of expenditure Amount 2) Company should have an enforced expense reimbursement policy with clear definitions of reimbursable expenses and their limits with management approval.

11. Other ways to reduce risk: Fraud TRAINING, fraud hotline & open communication Over 1/3 of small business frauds are discovered by tip, and almost half of these tips come from employees Employee fraud training helps the entire practice be aware of what to look out for. Fraud hotlines should be available and allow for employees at any level to report suspicious activity. Hotlines should be maintained on an anonymous basis with no risk of reprisal. Internal open communication should be informal, oral, clear, friendly. Peer relationships should be encouraged to be cooperative, friendly and trusting.

12. Other ways to reduce risk: Management style Widely Accepted Rule of Thumb 10% of employees will always steal 10% of employees will never steal 80% of employees will steal under the right set of circumstances (honest people who cross the line) Example of “80% employee”: Billing clerk’s husband loses his $60K/year job and suddenly the family has to live on her $25K/year job. When taking the practice deposit to the bank, she takes $100 out of the deposit telling herself she will pay it back when her husband finds work. She alters the deposit in the accounting software, switches the $100 from a payment to an adjustment in the billing software. Eventually her husband finds work and AT BEST she stops and doesn’t repay, but more likely, she just continues the theft as no one has noticed. At $500 a week, she costs the practice over $25K a year. Tone is set from the top down. Management must set a good example by: Being honest Allowing input from all levels Following internal code of conduct Using clear communication

13. Other ways to reduce risk: Segregation of Duties Definition: The authorization, custody of assets, and recording or reporting of transactions should be done by separate personnel. As you noticed in the previous specific fraud examples, most occur due to a lack of internal controls. Basic suggested measures to implement and follow: If possible, the individual that writes/prepares/prints checks should not receive the bank statement or reconcile the bank account. The accounts payable clerk preparing payment of invoices should not also sign checks. Staff with access to the billing records should not collect payments or open the mail.

14. Other ways to reduce risk: oversight Almost 50% of frauds in small businesses are detected by management review, accident, account reconciliation, internal audit or document examination. Owner oversight in key areas is extremely important. Review or have a 3 rd party review your transactions periodically for irregularities. The small amount of time and money this costs could end up preventing an extremely costly and time-consuming situation in the future.

15. Other ways to reduce risk: Background Check Some types are frequently used, but not as effective as other measures 87.3% of perpetrators had never been charged or convicted and with 83.7% had never been punished or terminated Of the three background check types (Employment History, Criminal Check & Credit Check), the credit check is the least often performed yet the two most common red flags are “living beyond one’s means” and “financial difficulty”

16. Other ways to reduce risk: Other Prevention Tips Mandatory vacations Fraud training for employees Implementing a Fraud Policy Surprise audits of specific areas

17. RED FLAGS – behaviors present in frauds ACFE Study (only listed those present in >10% of cases)  Living beyond means 38.1% (also most common in ADA studies)  Financial difficulties 29.2%  Unusually close association with vendor/customer  Control issues/unwillingness to share duties  Family problems/divorce  Wheeler-dealer attitude  Irritability, suspiciousness or defensiveness ADA Study  Addiction problems (also in ACFE study)  Patient complaints about irregularities in their accounts/billing  Day sheets and/or accounts rarely balanced (but a good reason was always offered!)  Did not take vacation days or time off and/or worked extra hours (especially when there was no supervision) (also in ACFE study)

18. Questions/comments “An ounce of prevention is worth a pound of cure.” Thank you for your attention. We are more than bean counters! Contact Information: Matthew S. Smith, CPA, CFE msmith@barcpa.commsmith@barcpa.com 859-977-2403