How to prevent theft, embezzlement

Substantial theft and embezzlement do occur in veterinary practices regularly. Opportunities for both abound.

Every 12 months or so, we read of a huge loss some practice incurred and how it transpired.

As a veterinary practice owner/manager, how can you mitigate losses? Before we discuss specifics, let's review what constitutes the practice systems that the accounting profession calls internal controls. The integrity and strength of these systems significantly impact the practice's economic health.

Protecting assets

Internal controls are the built-in safety features that safeguard assets and mitigate liability. These administrative systems include the methodologies and personnel assignment for maintaining records and custody of practice assets.

Your CPA might describe internal controls in terms of reconciling the computer statement of deposit and cash collected with what is counted from the till each day. But the theory of internal controls applies to much more than cash-receipt accounting and oversight.

The efficacy of controls affects every aspect of your practice — from employee hours to maintenance of laboratory equipment to collection of receivables to sending patient reminders.

To underscore the importance of internal controls, consider the assets making up a typical practice:

» Cash and cash equivalents

» Investments

» Drug and medical-supply inventory

» Prepaid expenses

» Medical and professional equipment

» Office equipment and furniture

» Computer equipment

» Practice vehicles

» Real estate

» Computer software

» Patient and client records

» Other records and documentation

» Good will

Strong internal controls revolve around the principle of segregation of duties. In other words, the more that record-keeping can be segregated from maintenance of an asset, the better. If a person is responsible for maintaining the record and the asset, there is greater potential for procrastination, oversight abdication or worse.

For example, if the person who receives an inventory shipment (control of the asset) is the person who pays the bill (control of the record), it is conceivable that large amounts of inventory could be stolen unless checks and balances are in place. Often, these systems are virtually non-existent in veterinary practices.

Controlling risk

In designing a system for internal control, you must determine the acceptable level of risk for the practice owner/administrator. The risk assumed will dictate the system established. Think of it like buying an insurance policy — decide on your level of comfort and come to terms with the system's weaknesses (and potential losses). Internal controls can be so tight they are too costly to maintain or they paralyze operations.

A practice manager/owner who maintains all inventories under lock and key will suffer the discontent of doctors unable to access the drug they need for patient treatment.

No system will be able to catch all defalcations or thefts. Materiality is an issue. If some risks are small and the possibility of loss is negligible or acceptable, controls can be loose. When a loss becomes material, such as the misplacement or theft of a case of expensive flea-preventive product, a higher level of control is necessary. Controlled risk becomes an educated risk, which balances the commercial realities of policing individuals with the benefits derived.

Owners are responsible to keep the highest level of integrity for internal controls. It is not the responsibility of your accountant, attorney or insurance agent to monitor practice assets or to detect loss, fraud and defalcation.

Realistically, it is not even the responsibility of a practice manager, because the owner must maintain some oversight and control over that individual. However, we assume the practice manager was engaged to provide systems of internal control, oversight and maintain accountability to the owner.

Management engages the assistance of professionals but assumes ultimate responsibility. Review of your accounting records will sometimes show weaknesses. But, do not rely exclusively on that information. Ratios that are askew may have valid reason from factors other than theft or embezzlement and may come months after the fact. It is management's responsibility to review practice operations contemporaneously and assure assets are used for the purpose intended.

Occasionally, discrepancies occur. When they do, they are analyzed and reconciled.

Ask appropriate questions

Appearances are important. If employees perceive internal controls are in place, that could be a deterrent to theft. For example, when you require daily cash reconciliations that compare the cash reported on the deposit slip to the cash reported on the end-of-day summaries receipt book, prior experienced overages and shortages seem to disappear.

Such frequent reconciliations are required for very liquid, desirable assets that have a high predisposition for theft. The daily reconciliation does not negate the possibility of theft, but it is quickly noted, along with the appropriate inquisitions. You quickly avert a more substantial loss and potential major risk.

Restrict access

Limit accessibility to practice assets only to those who have a business purpose in using them. Blank checks, for instance, should be stored off-site or in a safe. Distribute small numbers as needed to the person preparing checks. Blank checks should be inaccessible to anyone else.

Large caches of inventory purchased in bulk at the beginning of a season (heartworm or flea-and-tick products) can be stashed in a central supply, accessible only to a small number of people who disburse the caches to other areas of the hospital.

An independent viewpoint

Analysis of internal controls in your practice and assessment of the inherent risk can occur through your CPA. Such an analysis demands an investment. Many practitioners are unwilling to pay more than a nominal amount for the service until a loss has occurred.

In general, CPAs offer internal-control studies to clients in a separate management consultation. Because every practitioner has a different tolerance for risk, a study of internal controls for each should be tailored to the situation. The practice administrator, manager and accountant or consultant should map out a plan of investigation of existing internal controls to determine where the greatest risk exists.

Dr. Heinke is owner of Marsha L. Heinke, CPA Inc. and can be reached at (440) 926-3800 or via e-mail at MLHeinke@aol.com