Litigation + Valuation Perspectives

Demystifying Valuation, Economic Damages + Forensic Accounting

Fraud in the Workplace – True Stories “The Doctors Were In, But Their Cash Was Out”

Almost 50% of occupational frauds involve the accounting department or upper management. More than half of fraud cases involve a fraudster over the age of 40. Approximately 48% of perpetrators have worked at the organization for five years or less. The majority of occupational frauds are committed by employees and managers – as opposed to owners and executives. Over 40% of all frauds are perpetrated by employees who earn less than $50,000 per year at the time of the fraud. Most fraud cases are perpetrated by males.

This is a story about fraud. It was perpetrated on a group of four physicians who practiced together in Phoenix, Arizona several years ago. I shall refer to the physicians group as “the Association.” The doctors’ CPA firm, for which I headed up the audit department at the time, performed various non-audit services for the physicians.

One year, we suggested to the physicians that we should do an evaluation of the physicians’ accounting and financial internal control procedures. The four doctors, of whom I will simply refer to as Doctors A, B, C, and D, were in favor on the internal controls review – that is, except for Dr. C.

Dr. C did not think it was necessary to review the accounting and financial controls of the Association since they had their bookkeeper, Constance, taking care of the Association’s accounting for the past eight years. Constance, said Dr. C, was the most trusted accounting employee he had ever had. He mentioned that Constance was so trustworthy that he had her doing his own personal accounting and banking. Dr. C was adamant that an internal control review would be a waste of my CPA firm’s time – and the doctor’s money. Doctors A, B, and D, however, overruled Dr. C and voted to have the study done. Dr. C fumed.

We conducted our review of the Association’s internal controls. When we were done, what we had to report to the doctors would be shocking to them – especially Dr. C.

Constance, who was in her early 40’s, had stolen about $8,000 from the doctors over a two year period. In addition to her bookkeeping duties, Constance prepared the daily bank deposit slips, went to the bank to make the deposit, and prepared the monthly bank reconciliations. She would, quite frequently, take an even $100 or $200, sometimes more, from the daily bank deposits, put the money in her bank account, and cover the deposit shortfall with “adjusting” entries into the patient accounts receivable ledgers.

The doctors never reviewed Constance’s work. They never questioned her, at least as far as the accounting and financial records of the Association went.

The doctors did have, what they thought, was some form of internal control over payments received from patients. They were wrong.

The Association’s receptionist would open up the daily mail. Whenever she came across a patient payment, she would appropriately list the received check on a daily log of cash receipts. The receptionist would then make two photo copies of the daily cash receipts log and give one copy to Constance, and one to the managing doc at the time. This was good stuff. The problems with this cash control procedure, however, were several. The receptionist filed her copy of the daily cash receipts log in her cabinet – never to compare the list with any bank deposit slips, or the deposits on a bank statement. The managing physician filed his copy away – never to compare it with any bank deposit slips, or the deposits on the bank statement. Constance too, filed her copy away – never to look at it again – period. In addition, the doctors never randomly reviewed the bank reconciliations prepared by Constance, nor did they ever randomly review the activity in the patient ledgers.

The doctors were stunned to find out what Constance had been doing to them. Dr. C, especially, was shook up.

Some ways the doctor could have prevented the loss of cash would have included the following:

  • Having one of the doctors, or an employee not responsible for the daily bank deposits, at least on a random basis, compare the cash receipts log with the deposit slips and, ultimately, the deposits per the bank statements;
  • having one of the doctors, on at least a random basis, review the bank reconciliations and the patient account ledgers.

Although the doctors terminated Constance after that, they decided not to press charges against her once they found out why she was taking the money. It seems that Constance had a young son who was in ill health and in need of medical help for which she could not pay, even with the insurance plan the doctors provided for her. Constance was the only parent in the family. The irony of the case was that, had Constance told the doctors of her plight, they would have gladly given her the funds to take care of her young son.

Don Bays, CPA/ABV, CVA