I Have Discovered Payroll Embezzlement is Taking Place in my Practice: What do I do Next?

I Have Discovered Payroll Embezzlement is Taking Place in my Practice: What do I do Next? FOCUS Submission date: August 7, 2017 This paper is being submitted in partial fulfillment of the requirements for election to Fellowship in the American College of Medical Practice Executives

American College of Medical Practice Executives Professional Paper Topic and Outline FOCUS Title: I Have Discovered Payroll Embezzlement is Taking Place in my Practice: What do I do Next? Introduction Medical Practice Administrators are faced with challenges on a daily basis. They must Maintain the ability to multi-task while keeping their fingers on the pulse of one of the most important aspects of the practice, which is the financials. Financial information comes with a very broad definition yet a very intricate review must be maintained as often as possible to ensure policies and procedures are being followed and that no inappropriate activity is taking place. Administrators, daily tasks that must be completed include managing staff, overseeing physician schedules, interacting with patients, etc., and may cause the focus on the financials to get lost in the daily shuffle. This can be dangerous to a practice if the review is put on the back burner for too long. Financial information which needs to be reviewed can be time-consuming and overwhelming for the administrator even if the practice is small; however, even the smallest of practices can encounter fraudulent activities which can be detrimental. According to the Association of Certified Fraud Examiners, 5% of annual revenues are lost to fraudulent activities which, even for a smaller practice, can be thousands of dollars. A timely, accurate review of financial reports such as budgets vs. actual, charges, payments, adjustments, as well as payroll reports, is critical to the financial health of the medical practice. When financial reports are reviewed on a daily, weekly and monthly basis, fluctuations in charges vs. payments, declining revenues, increased accounts receivables, can all be signs that 2

inappropriate activity may be taking place. The sooner the reviews and investigations are made the sooner a perpetrator can be caught. Reviewing financial reports to identify abnormalities within the practice leads to the identification of the focus of this paper which will be payroll embezzlement. Payroll records tend to be reviewed on a bi-weekly basis, and the review should be just as thorough as any other financial report. Payroll fraud can take place on various levels which could include padding actual hours worked, working unauthorized overtime, employees punching in or out for other employees and punching in then leaving the premises before actually starting to work. The research methodology used in this paper will include several online articles which focus on topics surrounding payroll embezzlement. In addition, several facts will be presented from interviews with administrators who have experienced embezzlement or some form of malicious financial theft involving payroll in their practices. These interviews will include details of the activities and the granular level of information on the creativity of the perpetrators and what they attempted to get away with. The intent of this focus paper is to provide historical information regarding payroll fraud that other practices have experienced and to provide helpful, beneficial and critical information to other practice managers and administrators to assist them in avoiding this type of fraudulent activity from happening in their practice. When other practice managers and administrators can research and review the payroll fraud that other medical practices have experienced, they can use the information to their benefit to expand their own knowledge base. They will know what to look for in their own reports, as they may have overlooked the intricate details that perpetrators intentionally try to keep from managers. Although payroll fraud is a detrimental event for any company, practice administrators and managers can learn from the experiences of colleagues to help avoid the tragedy of payroll embezzlement from happening in their practices. Even more importantly, they will learn the processes and procedures that other practices have implemented to keep their 3

payroll processes efficient and fraud-free. Background Understanding the complexities of reviewing financial documents is a skill that must be acquired, developed and practiced regularly by every administrator and is mandatory for the success of any size medical practice. Without this very important skill, a practice can be subjected to rapid loss of revenue, legal ramifications and a multitude of other problems that are guaranteed to hinder the success of the practice. Payroll records may be an area that an administrator may think has little room for fraudulent activity as most, if not all, employees are on direct deposit. However, there is a vast array of fraudulent activities that can and do happen through payroll fraud. Perpetrators are getting more and more clever in their efforts to steal as much money as they can. They often have little to no fear of being caught and facing the consequences, which could include criminal charges. Some can and have gotten away with the fraud for years without being caught so their fear level diminishes as their bravery increases. Once a perpetrator has access to payroll systems, employee bank account information and employee personal information, the deceptive creativity can begin to take form in their mind. This is where the act of fraud begins to unfold and can become full blown once the perpetrator puts his/her actions and malicious ideas into play. Many factors are involved in payroll fraud and have the possibility of handicapping a practice, as well as the employees, based on the amount stolen and how quickly the money can be replenished to the practice. Once payroll fraud has been discovered, the administrator will face feelings of betrayal, distrust and sometimes extreme guilt for not auditing the records more closely and catching the perpetrator much sooner. Employees who were impacted by the payroll fraud will be reluctant to place their trust back in the practice, its leaders and any new 4

payroll processes. The physician owners are also bound to have skepticism for a long period of time after the discovery of fraud and will need to have reassurance that the proper procedures are in place to protect the practice and are being followed strictly. Statement of the Problem Discovering that payroll fraud has taken place in a practice will cause immediate feelings of anger, shock, disbelief and a sinking feeling amongst the physicians, leadership and staff. When the trust that had been placed in someone that the practice felt was truthful and honest is shattered, blame can be an immediate response. There is also the need to interrogate the perpetrator to find out why they did what they did. A thorough investigation must first be done on the fraudulent activity and reported to the officers of the practice. The officers must then make the decision if they are going to contact legal authorities and/or attorneys. The next step is to discover how the fraud had taken place, for how long, 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 every penny is accounted for and that every person impacted is made aware of the fraud and how it will affect them. Concrete proof of the embezzlement must be documented by the discoverer, which should include information such as date of the discovery, what activity was discovered, who or what was impacted, was the activity on-going or a one-time event and amount of the embezzlement. Documentation would then need to be presented to the physicians, officers, attorneys and any other party that is a part of the investigation. The next problem is figuring out if the embezzlement is covered by the practice s general liability insurance, what legal ramifications, such as potential law suits by employees and possible tax penalties will come from the embezzlement. Will a police report be necessary for the investigation and does the practice attorney(s) need to be contacted? Once the information is provided to the officers, physicians and administrators, and thoroughly reviewed by attorneys and financial officers, payroll records will need to be individually reviewed for tax adjustments. 5

Revised W2s will need to be created and distributed to the employees. If applicable, employees affected may need to file an amended tax return. If the physicians, officers and attorney (s) decide to file charges against the perpetrator a police report will be then be required and if enough evidence is provided, an arrest warrant may be issued to the perpetrator. If the decision is made to move forward and pursue legal action, the perpetrator will need to be contacted by the attorney(s) and informed of the practice s decision to pursue legal action. The potential ramifications from that legal action may include requiring the perpetrator to pay back the amount stolen via bank account garnishments, tax refund garnishments, as well as the possibility of serving jail time. Payroll fraud can result in thousands to millions of dollars in lost revenue for a medical practice if not caught early and acted upon. The author selected participants from a variety of professional networks and conducted a survey of administrators, office managers and a CPA via phone and email interviews regarding their experiences, if any, with payroll fraud in their medical practices. Of the participants asked, two administrators, one office manager and one CPA participated in the survey. The survey (Appendix A) contained the same six questions regarding payroll fraud. Of the questions asked, each of the respondents gave the details of the payroll embezzlement that he/she had experienced. The first question presented to each manager, administrator or CPA was if they had ever experienced payroll fraud in their medical practice. Of the five interviewed, two had been fortunate enough to had never experienced any form of payroll fraud. Two managers and one CPA unfortunately had experienced payroll fraud at some point in their careers. The details of the fraud for each person surveyed varied but each episode appeared to have been clearly thought through and executed by the perpetrator with the intention that he/she would never be caught. Some of the malicious activity lasted just a few months where others went on for nearly ten years. Each activity involved a person that the physicians, as well as the staff members, had grown to trust and had no idea another employee was stealing from the 6

practice. Following are the details of the events that took place at each of the practices. The first interviewee worked for a large radiology group with over 30 physicians and 75 employees. He explained the activity that took place in his office as follows: The perpetrator had been contacting the payroll company outside of regular business hours (mostly in the evening) and reporting false bonuses for various employees. The perpetrator then had the checks sent directly to him/herself unbeknownst to any of the leadership staff. Unfortunately for this perpetrator, the phone calls were being recorded and monitored. When the suspicious activity was reported to the CFO by the payroll company, the perpetrator was then called into the office, asked to listen to the recordings and provide an explanation. The person was unable to respond and was terminated immediately. The second interviewee worked for a CPA firm. He explained the activity that took place in a small cardiology practice as follows: The physician owner contacted the CPA firm and reported that he felt something weird was going on with the financials and felt it was necessary to have further investigating done. After the CPA firm completed reviewing several payroll documents including paystubs, W2s and 941 reports (quarterly reports that a payroll company is required to provide to their clients, which contain information such as wages and Federal income tax for the entire staff and taxable social security and Medicare wages) the CPA discovered that the payroll taxes that the practice paid appeared to be substantially higher than what they should be for the number of employees. The perpetrator had been issuing extra paychecks for him/her self and having the company pay both sides of the state and federal taxes meaning that employees are required to pay a certain portion of both Federal and State taxes out of their salary and the practice is required to pay a portion. The state portion for an employee is approximately 6.2% of their salary and the Federal portion can vary depending on the salary and state but the range is normally between 18 22%. Therefore, over a span of ten years, the perpetrator had stolen over $200,000 from the practice in both false salaries and taxes that were 7

not paid out of his/her pay check which made his/her take home pay much greater than it would be had he/she paid the required taxes. The third interviewee worked for a large ambulatory surgery center with over thirty (30) physicians and over ninety (90) employees. She explained the activity that took place in her practice. The perpetrator had been manually adding hours to employees timecards who were out on some type of leave such as maternity leave, FMLA leave, etc. When the time cards 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 hours unaccounted for. Prior to the payroll being submitted for processing, the perpetrator would go into the payroll system and change the direct deposit information of the employees with false hours over to the perpetrator s bank account. Therefore, the employees with false hours would never see money deposited into their accounts. Over a period of a year and a half, the perpetrator had stolen over $35,000. An additional level of malicious activity that took place with this perpetrator was that they would convince employees to allow him/her to process their tax returns as long as they agreed to have the refund checks deposited into the perpetrator s account and then he/she would then cut them a personal check. The second question on the survey was what caused the belief that there was fraudulent activity taking place. Of the five interviewed, the responses were as follows: The phone call from the payroll company indicating that suspicious activity was taking place sparked the investigation because employees were never given bonuses outside of the end of year time frame. The second response was prompted by the physician feeling like the revenue should have been higher than it was considering the patient volume and procedures for the year. The third response was prompted by an employee questioning the amount on his/her W2 for the year and expressing concern that he/she had not made as much money as was reported on the W2. The third question on the survey was what steps were taken to catch the perpetrator. 8

The first interviewee stated that the phone call recordings were listened to by more than one senior official within the company to ensure that each recognized the perpetrator s voice. The second interviewee indicated that two years of paystubs, W2s and 941s were carefully reviewed and compared to previous paystubs, W2s and 941s. The review clearly indicated that malicious activity was taking place as the amount of state and Federal taxes that the company had paid vs. what the perpetrator should have paid was far greater than what it should have been based on the salary of the perpetrator. The third interviewee indicated that all payroll reports including payroll registers and time cards were reviewed in intricate detail by the administrator and other senior staff as well as reviewing each employee s bank routing number and account number and compared to the perpetrator s account number. The fourth question on the survey was that once the fraud was discovered, what information was gathered and presented to the physicians/board members as proof of the activity? The first interviewee indicated that all fictitious bonus amounts were recorded and presented to the physicians and board members as well as the supporting documentation from the payroll processing company. The second interviewee indicated that the spreadsheet containing all of the discrepancies from the W2s, paystubs and 941s and amounts were presented to the physicians. The third interviewee indicated that the spreadsheet which contained amounts, employees affected and dates of incorrect payroll submissions was provided to the physicians, board of directors, corporate attorneys and corporate heads. The fifth question on the survey was if a police report was filed against the perpetrator. The first interviewee indicated that they did not file a police report and were satisfied with simply terminating the employee. The second interviewee indicated that a police report was filed. This was part of the investigation that resulted in the perpetrator being sent to prison. The third interviewee indicated that a police report was filed which was later used in the legal litigation with the perpetrator. Lastly, the final question on the survey asked what processes were put into place to 9

eliminate or greatly minimize the risk of fraudulent activity taking place in the future. The first interviewee changed the payroll system and required that any changes to any payroll record had to be presented to the CFO for approval. No phone calls related to payroll would be permitted for any reason without authorization from the CFO. The second interviewee immediately outsourced the payroll to a reputable payroll company, hired a CPA firm to audit and review financial reports and required the physician owner to sign off on all payroll reports prior to being submitted for processing. The third interviewee changed the way the payroll reports were generated and included page numbers for each time card. They also required managers to sign off on payroll and then submit to the administrator for a second level review before submitting for final processing. Payroll records would then be audited by a higher level corporate officer on an on-going basis. History shows that payroll fraud is prevalent in the healthcare industry and growing at an alarming rate. It is projected that during a five year (5) year period of time, over eighty (80) percent of all medical practices will experience embezzlement in one form or another. Physicians, administrators and office managers should be aware that any and all levels of fraud can and do take place by the most clever of thieves. These thieves can be wolves in sheep s clothing so thorough background checks and investigations with former employers should be a mandatory process when hiring new staff that will have access to payroll records, systems and processing. It is also estimated that seventy (70%) of perpetrators have committed embezzlement with previous medical practices which indicates that these thieves are out there and ready to take on their next victim at the first opportunity. The good news is that according to the Association of Certified Fraud Examiners, 39.1% of occupational fraud is caught by tips from others, 16.5% from internal audits, 13.4% by management review and several other various ways ranging from accidental discovery to personal confessions. There are various warning signs that a physician or administrator should always be on the look-out for but following are some of the most obvious activities that might or should cause 10

concern. If an employee noticeably begins increasing their lifestyle with expensive personal items, yet the employee has not been given an increase in salary to substantiate the increase in lifestyle, i.e., shows up in a brand new BMW yet his/her salary is $40,000/year. An employee who processes payroll insists on having his/her door closed while processing payroll or insists on working late hours on the day payroll is processed. The employee expresses that they are having financial difficulties at home and are unable to make ends meet. These are just a few warning signs to look for. A clever thief will lie, cheat, convince, manipulate their way through embezzlement but close attention should always be paid to any activity that causes suspicion. Being proactive is the best defense against malicious activity so all medical practices should have clear, concise training on the review of financial documents including payroll reports and have a procedure in place for immediate action if any suspicious activity is found. Training for reviewing payroll reports should include granular level reviews of items such as routing numbers and bank account numbers as these items tend to be overlooked by most managers and administrators simply because they re not trained to be looking at reports on that detailed a level. Most managers and administrators are trained to look for hours worked, overtime, etc. so training them from the beginning of their career with the practice to watch for such finite details will set the practice up for success, as well as the success of their careers in medical practice management. If a physician owner knows and trusts that his manager/administrator is reviewing and looking for malicious activity in all financial areas of the practice from the highest level down to the most detailed level, he/she can have the reassurance that the practice is being managed carefully, lawfully and with integrity. The physician can then dedicate his/her time to the health and treatment of their patients. Open communication is key to protecting the practice. The old adage of if your intuition tells you something doesn t feel right, ACT ON THAT INTUTION! still stands to be tried and true. In conclusion, every medical practice is susceptible to payroll fraud regardless of size, location or specialty. Perpetrators are everywhere and show no concern for their reputations 11

being destroyed, the possibility of being sent to prison, or tax fraud ramifications and legal prosecution. Every practice should educate itself and its staff on the various forms of fraudulent activity that other practices have experienced and fallen victim to. Researching and understanding the history of the creativity that perpetrators throughout the country have attempted and gotten away with will serve to benefit both physicians and administrators. It will keep them aware and actively reviewing, dissecting and reporting any type of suspected inappropriate activity. Even having the best policies and procedures in place cannot guarantee that a practice will not fall victim to payroll fraud but by minimizing the susceptible areas and maintaining an active oversight of all financial aspects of the practice, the threat can be greatly reduced and possibly avoided. 12

Appendix A Survey A survey was conducted via phone and email of five medical practice administrators or managers along with one CPA in May of 2017. The following 6 questions were asked of each participant: 1. Have you ever experienced payroll fraud in your career as a medical practice manager/administrator? 2. If so, what caused you to believe there was fraud taking place? 3. What steps did you take to catch the perpetrator? 4. Once fraud was discovered, what information was gathered and presented to the physicians? 5. Did you file a police report? 6. What processes did you put into place to eliminate or greatly reduce the risk of the fraud taking place in the future? 13

References Phairas, Debra (2014, August 19). A Physician s Guide to Avoiding Embezzlement. Retrieved from http://www.healthcarefinancenews.com/blog/physicians guide avoiding embezzlement Greene, Craig L. (2017). Focus on Employee Fraud, Payroll and Personal Expense Frauds. Retrieved from https://www.mcgoverngreene.com/archives/archive_articles/craig_greene_archives/focus Employee_Frauds Payroll.html Garrett, Matthew (2013, September 10) Payroll Fraud A Big Threat and How to Avoid It. Retrieved from https://www.forbes.com/sites/matthewgarrett/2013/09/10/payroll fraud a bigthreat and how to avoid it/#55235708746f Nelson, Joe, The Sun (10/8/2014) Former Patton State Hospital employees charged in $800,000 payroll fraud case. Retrieved from http://www.sbsun.com/general news/20141008/formerpatton state hospital employees charged in 800000 payroll fraud case Loria, Keith, PT in Motion (May 2015) Embezzlement? That Could Never Happen in My Practice. Retrieved from http://www.apta.org/ptinmotion/2015/5/embezzlement/ Frost CPA, CVA, Carl N. Frost & Company, P.C. Embezzlement in the Medical Practice Are You at Risk? The Employee Profile, Methodology and Processes. Retrieved from http://www.frostcopc.com/editor uploads/documents/embezzlement article.pdf Association of Fraud Examiners: Report to the Nations on Occupational Fraud and Abuse Retrieved from http://www.acfe.com/rttn2016/detection.aspx 14