There are many factors that contribute to the growth and improvement in the financial performance of a medical or dental practice. One very important factor requires management to pay close attention to where money could be leaking out of the practice, whether those leaks are due to errors or fraud.
Professional practices of all sizes can nip potential malfeasance in the bud with implementation of proper internal controls. Internal controls are particularly important for small practices.
What does the term “internal controls” really mean?
Internal controls are the policies and procedures that management puts in place to achieve its financial and operational goals to:
Protect assets from accidental loss or from fraud
Ensure the reliability of financial information
Ensure compliance with federal, state and local laws affecting the operations of the practice
Promote efficient and effective operations
We recommend that professional practices begin by implementing the following six internal controls designed to protect cash:
1. Segregate financial/accounting duties, rotate responsibilities and require employee vacations so that no one person can control a transaction from beginning to end.
Proper separation of duties is enough to deter many would-be fraudsters, since getting around it requires collusion between two perpetrators. In addition, careful monitoring of financial processes and internal controls creates a perception of detection and will help to close gaps in your financial systems and processes. We recommend separation of duties for the following functions in a professional practice:
Preparing payment posting batch
Posting payments to billing system
Deposit to bank
Approval of write-offs and adjustments to accounts receivable
For small practices, owner participation may be required for one or more of the above duties to provide necessary separation of duties.
2. Reconcile bank deposits recorded in the practice accounting system to the total payments recorded in the practice billing system daily. Whether your practice handles billing internally or through an outside vendor, receipts and deposits should be reconciled between the two systems daily. Without this reconciliation, the practice cannot be assured that all payments collected are deposited into the bank account. This reconciliation should be performed by someone other than those collecting payments, preparing deposit slips and posting payments. In addition, schedules should be reviewed to make sure that all patients seen each day have made proper payments.
3. Reconcile bank accounts promptly after month end and monitor bank account activity daily (should be monitored by an owner or a manager). Vigilance is important, since, for example, commercial bank customers have just 24 hours to notify the bank of an unauthorized Automated Clearing House (ACH) transaction. For added internal controls, someone other than the bookkeeper should prepare the bank reconciliations, and bank statements should be downloaded directly from the bank’s web-site.
4. Assign responsibility for oversight of petty cash. Petty cash is one of the most vulnerable areas, especially if no one is reconciling that account. These days, the petty cash fund might not even be needed, since most expenses can be paid by credit card or check. But if the practice does need a small amount of cash on hand, restrict the fund to no more than $100 and assign one person responsibility for reconciling that account every night. Implement clear rules about how the funds can be used. For example, cash should only be used for practice costs, such as postage due amounts. It should not be used to make change for customer payments, nor for personal expenses of owners or employees.
5. Conduct background checks for EVERY employee who handles money.
6. Make sure checks are signed by an owner or a manager, but not by a bookkeeper. Check signers should carefully review the payee names to make sure the payee is on a list of approved vendors. Invoices should be attached to the check and reviewed by the signer. Statements are not proper documentation for checks. If a manager, rather than an owner, has check signing privileges, checks over a predetermined limit should require two signatures. Only owners or managers should have the ability to transfer funds electronically, and transfers should only be allowed between specific practice accounts.
Stop cash from walking out the door
Strong internal controls are in everyone’s best interests. Physician and dental practice owners and practice managers work too hard to see revenue walking out the door. Make sure your accounting policies leave no room for fraud. Talk to your accountant about the internal controls that can help protect your practice bottom line.