Internal Control in Your O&P Practice: Why Do You Need It?
January 2008 Issue
After "Jim"* ( names have been changed to protect identity ) had passed his boards, he opened a healthcare practice and brought his old college friend "Bob" in to manage the business. Although Jim was the sole owner, Bob was well compensated. The practice grew to a staff of more than 50 and prospered. Then, for no obvious reason, profits took a downturn. Rob Benedetti and Joyce Perrone of PROMISE Consulting Inc., Pittsburgh, Pennsylvania, were called in to investigate.
The charges were at a correct volume based on industry standards and payments were commensurate, Benedetti and Perrone found. However, expenses were tracking considerably higher over the years. Was it Jim's extravagant tastes? "Nothing really jumped out at us," Perrone recalls. "We advised Jim to watch his spending if he wanted a profit at year's end."
Crumbling from the Inside
Later it was found that Bob had dated and subsequently broken up with another employee, who saw her opportunity for revenge. She asked the consultants to look deeper at the credit cards, car insurance, and mortgage payments. Then the pieces started to come together. Bob had obtained a credit card from the same company Jim's business used. Since Bob was in charge of the checkbook and had signing authority, he wrote checks for all business purchases. A few weeks later he would write checks to the same company for his personal purchases, thus sneaking them through at the company's expense. "When we looked at the summary report, we just thought Jim was spending wildly," says Perrone. "But when the details came out, it was clear that Bob had been robbing the company for years!"
Bob was fired, and he moved to another state-but that wasn't the end of the saga. Bob's brother still worked for the practice and cut checks that Jim signed. Suddenly payments for nonexistent products were going to a bogus company-secretly owned by Bob.
Finally, the mess was cleaned up, but not before a considerable amount of loss, hurt, and betrayal had taken place.
Could something like this ever happen to your business?
"There's nothing out there that is absolutely foolproof to prevent stealing," says Benedetti. "But you can set up enough guardrails to stop most people from stealing or simply doing sloppy work." These guardrails involve internal control.
Internal Control: What Is It?
Although the concept often means different things to different people, a key accounting group, the Committee of Sponsoring Organizations of the Treadway Commission (COSO), sponsored by five major professional accounting associations and groups, defines internal control as "a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in these categories: effectiveness and efficiency of operations; reliability of financial reporting; andcompliance with applicable laws and regulations."
A simpler description that is more applicable to small companies is offered by Eric P. Gelb in an online article titled "Internal Controls" at www.smartbiz.com : "Internal controls are established to guard against losses resulting from employees' oversights and fraud.... Internal controls are essentially checks and balances within a company. Their objective is to prevent fraud, limit financial losses, and reduce errors and omissions on the part of key employees." The basic strategy is to segregate, as much as possible, duties involved in any one accounting or administrative process, thus limiting any single person's control over an entire area, according to Gelb.
However, according to Perrone, internal control also has a positive component. It's not all about prevention of errors and theft; it can result in a cleaner, leaner, more efficient and profitable operation. "When you start analyzing your processes in order to develop checks and balances and feedback, you also often see how you can make your processes more efficient, more streamlined, without a lot of bunny trails leading off the track," says Perrone. "You become more efficient and thus more profitable, not just in fabricating and fitting devices, but in all aspects of your business."
An O&P company owner is generally a clinician, and thus is essential for generating the company's revenue, points out Benedetti. "He needs to be seeing patients, not sitting behind a desk." So, what to do? PROMISE advises creating a reporting structure that enables the owner to view regular snapshots of where his company is going financially. Reports can include such items as charge captures, payments, and a simple profit-and-loss statement. A reporting structure also stimulates responsibility on the part of staff members, since they realize the owner is aware of what is happening on the business end of the practice.
PROMISE preaches a segregation of administrative and accounting duties as much as possible. "This is not always easy in a small company where people wear several different hats," Benedetti acknowledges. "But there are ways to set it up so that the person who is preparing a disbursement is not the same one who cuts the check and may not be the same one who actually signs the check. And you want to segregate the duties in accounts receivable as well-there's opportunity for fraud there."
In his online article, Gelb advises business owners to personally approve new vendors and see that goods are received and counted, making sure that large orders are correct as to quality and quantity. Gelb urges owners to personally sign each check and review the invoice, receiving ticket, and purchase order, which prevents collusion among vendors, purchasing agents, and accounts payable managers.
Although for busy O&P company owners, Benedetti and Perrone suggest reviewing regular reports in lieu of signing every check and reviewing every administrative action, they agree with the basic concept that the owner must take an active, regular, hands-on part in administrative and financial functions of his company.
What about You?
Could you be unintentionally providing temptation for fraud or error? Perrone and Benedetti note some owner actions that can inadvertently cause problems. For instance, if you give bonuses based on how much money your practitioners bring in, could you be providing an incentive for them to upcode? If you hammer at your billing staff too much about accounts receivable, is this pressuring them to write off some A/R to make the picture look better? Balance is the key.
What about your own standards? President Harry S. Truman said, "The buck stops here." As a business owner, the buck stops with you. You set the example. What you do sends a message to your employees. Of course, most likely you, along with most other O&P company owners, have a positive attitude toward your patients and high ethical standards. However, if you ever do have a poor attitude toward your patients or if you waver in ethical decisions, you could be setting the stage for serious problems.
"As the leader, you're being watched, and you have to set a good example at all times," says Perrone. If you start cutting corners in the quality of work or components, you are sending the message that your company is not always of the highest moral or ethical fiber, she points out. She gives another example: Suppose a referring physician asks you to put a brace on a patient in the hospital and not bill the hospital, which clearly does not meet Medicare guidelines. "If you do it because you don't want to lose this referral source, you are sending a message to everyone in your company that it's okay to do illegal things if it keeps the referral source."
Overcoming Human Error, Flawed Processes
Although Perrone and Benedetti have come across some cases of fraud resulting from too much control given to only one or two persons over closely linked financial activities, they note that far more loss has occurred simply from human error, inadequate training of staff, flawed procedures, and employees simply taking a careless approach to their work. "These can be such things as employees writing off some A/R to make their part of the accounts receivable look better, not checking packing slips to see if they match the invoices, or paying bills willy-nilly, because they just want to finish and go home," says Benedetti.
When accounts receivable is simply written off, that's as much of a loss as someone fraudulently writing and cashing a check, Perrone adds.
Jim Clifton, COO of BridgePoint Medical, Lexington, Kentucky, offers some words of wisdom regarding accounts receivable. BridgePoint is an O&P company in acquisition mode that offers an innovative business model: O&P business owners sell a controlling interest in their companies to BridgePoint and retain between 25-49 percent ownership in their company, becoming owners-operators who receive a market-based salary plus a share of the profits. BridgePoint takes care of administrative and accounting functions, freeing practitioners to concentrate on seeing patients and referral sources, Clifton explains.
Before discussing a possible acquisition with the owner, BridgePoint makes an assessment of the business. What administrative problems does BridgePoint commonly see in O&P companies? As one might imagine, A/R heads the list. "There needs to be a procedure for working with the financial needs of the patient," says Clifton. "Generally speaking, the patient will need to carry at least part of the cost. When you educate patients in the total process at the beginning, outlining the care needed, the plan for that care, and the patient's financial responsibility, you have started on the right foot for collecting your payment. Once the cat is out of the bag-the patient walks out with the deviceand you havent collected the payment-it's very hard to put that cat back in the bag again."
Working with insurers is the other side of A/R, and Clifton stresses the need for a documented process. Outstanding claims need to be reviewed on a regular basis, whether daily, weekly, or at least monthly, to keep on top of collection efforts.
Other Sources of Error and Loss
People are often simply overwhelmed and the office may be understaffed, notes Benedetti. People start taking shortcuts to simply get the job done. Owners and managers themselves sometimes don't know administrative functions should be performed, he adds. "One bad habit begets another, which leads to the whole organization operating on a much lower level than it should and could."
Of course, there are the shining stars who have an inner motivation to work and achieve excellence. "Your best people, the conscientious, detailed-oriented ones, will keep working around a flawed system," Perrone adds. However, this is a loss too, since these conscientious, capable people are expending time and energy that could be better used.
Too often, business owners don't dig down and analyze why a problem is occurring, Perrone says. For instance, if a business is having problems with accounts receivable, the owner may simply decide to get a new computer system rather than analyze the companys A/R processes. The owner may deal with other problems by just throwing more money and manpower into the situation or by firing people--and the problems don't go away. A good set of internal controls often can help to isolate and identify the true cause of a problem, Perrone points out.
All's Well Do-You Still Need Internal Controls?
There are many capable, proven, trustworthy employees and profitable businesses with good working atmospheres. Do they still need internal controls? Yes, according to the experts. They assist in identifying system flaws and in developing smooth, efficient processes that optimize employees' time and talents. Also, even for trusted persons, something could change in their lives to provide temptation to commit fraud. For instance, someone who has worked for you for 20-30 years could marry someone with expensive tastes, or develop an expensive habit, or have a financial emergency. Sometimes a trusted employee could take money for an emergency and have good intentions of replacing it-but is unable to do so.
Gelb sums up, "Even if your company just opened for business, internal controls will help you better manage your enterprise, gain greater control over your cash flow, and reduce risk of loss due to error and oversights."
Rob Benedetti and Joyce Perrone of PROMISE Consulting Inc. will be presenting at the 2008 Annual Meeting of the American Academy of Orthotists and Prosthetists February 27-March 1 in Orlando, Florida. Rob Benedetti can be contacted at 412.599.1113 or email@example.com ; Joyce Perrone can be contacted at 412.599.1112 or firstname.lastname@example.org . Jim Clifton can be contacted at 800.694.9820 or email@example.com .
Miki Fairley is a contributing editor for The O&P EDGE and a freelance writer based in southwest Colorado. She can be contacted via e-mail at firstname.lastname@example.org .
DOJ Advises on Internal Controls
The U.S. Department of Justice (DOJ) provides some guidelines for internal controls. Although the guidelines are for small business owners reorganizing under Chapter 11 of the U.S. Bankruptcy Code, the information is helpful for any small business owner.
Under the heading, "Are Your Business Assets Vulnerable to Theft?" the DOJ includes this advice:
Segregation of Duties: Related duties should be assigned to different people whenever possible.
Bank Reconciliations: Receive bank statements unopened and scrutinize for unusual activity.
Receipts and Other Assets: Safeguard valuable assets.
Disbursements: Review the appropriateness of payments.