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Stealing Cash with a Smile_Module2
Stealing Cash with a Smile
The Affable Courier Who Pocketed $250,000
BY KENNETH C. CITARELLA, J.D., CFE, AND MINDY EISENBERG-STARK, CFE, CPA
July/August 2010
Fraudsters pay close attention to how systems work in a business. Thatʼs how they find their
opportunities to steal. The story of how a successful medical practice lost at least $250,000 in an
employee embezzlement scheme illustrates that when internal controls fail, the devil might indeed be
lurking in the details.
Here are the details of a classic “from the deposit” cash theft scheme from the
Occupational Fraud and Abuse Classification System – the ACFEʼs “Fraud Tree.” (See the 2010
“Report to the Nations.”)
Westchester Medical Associates (WMA) was a nine-physician, five-office
medical practice in Westchester County, N.Y. Its offices, which provided a wide a
ay of services,
were managed from an executive office at a separate location. The practice worked hard to apply
good internal controls consistently in each office. All personnel clearly understood WMAʼs
straightforward money-handling procedures. (All the names of businesses and individuals are fictitious
to protect the privacy of the victimized practice.)
CONTROL PROCEDURES FOR PATIENT CO-PAYS
In any medical office, income a
ives in two ways: payments made by a patient at the time of service
(often an insurance company co-pay) and payments from insurance companies, government
programs, and other third-party payers. This article will focus on how a single omission in internal
controls made possible a serious embezzlement that went undetected for years.
Every WMA office
handled patient co-pays according to the same prescribed procedures. The receptionist recorded
each patientʼs visit in a spiral notebook. The date and office designation was written on the top of each
page in the notebook. There were columns for the patientʼs name, the time of a
ival, the physician to
e seen, the patientʼs insurance ca
ier, the amount of the co-pay, and how the co-pay was tendered.
This record was called the daily co-pay log. Cash, checks, and credit cards were accepted. At the end
of the day, at least two people double-checked that every patientʼs visit had been recorded properly.
The staff also verified the amount and type of each co-payment tendered. Totals for cash, check, and
credit card co-pays were entered at the bottom of each sheet, along with a grand total and the initials
of both verifiers.
After the dayʼs receipts were tallied, the page was photocopied and that copy and all
cash and checks received that day were placed in a clasped manila envelope and secured in a locked
drawer. Credit card payments were handled electronically, so those werenʼt included in the
envelope.
A WMA-employed courier would collect the envelopes at each office every morning – or
sometimes every other day depending on the patient volume – and take the proceeds to the bank.
When this courier a
ived at each office, the receptionist would open the locked drawer and remove
the clasped envelope. Together they would recount the entries on the page and verify that the co
ect
amounts of checks and cash were present in the envelope. The courier then would prepare the bank
deposit ticket, using blank forms from the bank. With the bank deposit ticket filled out, the courier
would remove the customer copy of the form and attach it to the copy of the daily co-pay log, and
these documents were sent to the executive office for filing.
At first blush, WMAʼs procedures appeared
easonably secure. But appearances can be deceiving.
THE PROBLEMATIC COURIER
When WMA first contacted the Westchester County District Attorneyʼs Office about a concern, the
practice had just fired its courier, Charlie Smith. Charlie, a well-liked employee, had started out at
WMA as an insurance company negotiator. If WMA didnʼt agree with a third-party payerʼs settlement
offer, Charlie would try to secure a more favorable resolution. A few times when WMAʼs previous
courier was on vacation, Charlie had offered to help out. When that courier resigned, Charlie
volunteered for the position, got the job, and added those responsibilities to his existing role as a
negotiator. He had been serving as WMAʼs courier for about three years when another employee
uncovered his scam.
THE SCAM
When Charlie had stepped up as a substitute courier, he had observed something about the practiceʼs
operations that no one else at WMA realized. As mentioned before, the executive office received
copies of the bank deposit tickets for each office. WMA also received monthly bank statements
showing all the deposits made during the month including how much money was deposited by the
courier each time he went to the bank with the co-payments. Neither the office management nor
WMAʼs accounting firm ever reconciled these independently created records. Charlie realized that
WMAʼs failure to identify a readily available internal control was his opportunity to steal.
Once he
ecame the practiceʼs official courier, Charlie followed all the procedures for verifying the cash and
checks received at each office. He dutifully received the clasped envelopes from the receptionists,
ecounted the receipts with them and completed the bank deposit tickets, leaving the customer copies
attached to the copies of the daily co-pay logs. But then he exploited the weak link in the system:
Charlie never deposited the cash; those funds went into his pocket. He simply completed a new bank
deposit ticket at the bank that reflected only the amount of the checks. These he deposited into the
WMA account. Charlie then destroyed the customer copies of the falsified deposit tickets that the bank
had stamped as received. Safe in the knowledge that no one would compare the bank statements with
the daily co-pay logs, Charlie pocketed all of the co-pay cash, totaling at least $250,000, for three
years. The exact amount of the theft was never determined.
THE SCAM EXPOSED
Despite some telltale signs in Charlieʼs behavior, his fraud lasted a considerable length of time before
it was discovered. Whenever someone at WMA had a birthday, Charlie would buy lunch for the entire
staff. He rarely took time off. If he knew he would be out, he would argue against having someone else
act as the bank courier, claiming he would handle it upon his return.
As time passed, another
employee began to distrust Charlieʼs generosity with gifts and his insistence on being the sole courier.
Only with the most reluctant approval of management was she permitted to search Charlieʼs desk one
day when he was out of the office. She discovered several genuine bank deposit slips, which included
oth cash and check payments, that Charlie had neglected to destroy. His scheme unraveled.
ACCOUNTING SYSTEM FAILURES
The accounting firmʼs insufficient reconciliation of the bank statements against internal records was a
glaring deficiency in the system. In comparing the monthly bank statements to WMAʼs checking
account records, WMA was only able to discern that the amounts deposited and drawn on the
checking account were properly recorded by both the bank and WMA. If the accountants had bothered
to go back a little further to the daily co-pay logs and compare those with the bankʼs statements,
another story would have unfolded.
The accountants made an assumption that the deposit amounts
shown on the bank statements were the co
ect amounts to be deposited. This is a classic example of
the difference between ordinary accounting and preventive or dete
ent forensic auditing, which
accepts nothing at face value and tests the facts behind every reported transaction. The accountants
left their clientʼs income streams unprotected for years. If even once during a three-year period they
had asked for records backing up the deposited amounts shown in the bank statements, the scheme
would have been detected.
Moreover, we as investigators wondered how it was possible for the
accountants to not notice the almost total absence of cash deposits once Charlie became the courier.
The banking statements gave separate totals for cash and check deposits every month. Cash
deposits had appeared every month during the tenure of the prior courier but only extremely rarely
during Charlieʼs time in that job.
How the accounting firm understood its duties with WMA is a matter of
speculation that we didnʼt pursue in the course of the investigation. The firmʼs frightening ignorance of
WMAʼs operations made the accountantsʼ “expertise” i
elevant to the investigation.
To make matters
worse, WMAʼs accounting system made it impossible to calculate the extent of the larceny.
Theoretically, the patient records should contain accurate information on what co-pays were paid for
each visit. Yet, sometimes patients paid an inco
ect amount – usually too much. And those e
ors
wouldnʼt be detected until the insurance settlement payments a
ived. When these situations occu
ed,
the patients were given credit for the excess payment. Those credits, however, were recorded in the
accounting system as if they were new payments from the patient.
For example, suppose a patient
paid a $30 co-pay on June 1. In July, her insurance company makes a settlement payment indicating
she should have paid a $20 co-pay. WMA now has $10 more than it should have, which should be
credited to the benefit of the patientʼs account. So WMA would record that extra $10 in the accounting
system as new money received from the patient in July. The $30 co-pay effectively became a $40 co-
pay to give the patient the $10 credit.
By design, the WMA accounting system failed to properly record
what actually had transpired, and it had inco
ect totals for patient co-pays. The businessʼ accounting
system would never be in harmony with its co-pay logs. Thus, the WMA accounting system couldnʼt
provide an accurate record of the co-pays received. Had the accounting system at least recorded
patient payments co
ectly, the size of the larceny could have been calculated by comparing actual co-
pay receipts with the counter deposits at the bank. (Third-party payer settlement checks were almost
exclusively electronic credits, so they didnʼt present a complication.)
We were left with the arduous task
of collecting and totaling by hand all the co-pay logs from each office for the time that Charlie was the
courier. The one saving grace was that the bank statements separated monthly totals for cash and
checks, and all the cash totals were