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Internal controls are a system of checks and balances that help ensure clients pay for the goods and services they receive, and the practice's assets are safeguarded.

Internal controls are a system of checks and balances that help ensure clients pay for the goods and services they receive, and the practice's assets are safeguarded. Internal controls are necessary to deter employee fraud, embezzlement, and theft, as well as fraud and dishonest behavior against the business from the outside. In short, internal controls are designed to minimize errors. In accounting, internal controls are the ounce of prevention that are worth a pound of cure.

Who hasn't noticed money mysteriously disappearing from the practice? Or noted exceptions in the controlled-drug log? Wondered if inventory periodically walks out the back door? Seen a large number of adjustments, discounts, and write-offs on year-end reports? Veterinary practice management consultant Mark Opperman, CVPM estimates that one out of 10 veterinary practices lose $10,000 or more each year from embezzlement. There are only two types of veterinary practices: those that suffered embezzlement – and those that know they suffered embezzlement.

You're a prime target. Small businesses, with their inherent risk of embezzlement attract thieves. Large business can more easily establish checks and balances by distributing tasks among employees. In a large company, the employee who mails the monthly client invoices isn't the same person who opens the mail, and posts payments to the accounts receivable system. Yet another person writes-off accounts receivable. Achieving this segregation-of-duty in a small business is far more challenging.

The practice manager who insists on implementing a solid internal control system, and on all employees following that system, contributes greatly to the success of his/her practice. That manager will quickly note discrepancies that merit further investigation, help ensure that the practice invoices for all delivered products and services, and discourage theft/embezzlement. That manager will abolish internal control weaknesses, thus steering the practice away from harm. The practice manger failing to implement and follow an effective internal control system does a disservice to pets, pet owners, the practice owner(s), and all other health care team members. He/she is an accident waiting to happen. Surely his/her practice will under-perform – falling well short of its potential. Implementing strong internal controls need not be costly, difficult, or time consuming.

Basic internal controls

Mark Opperman, CVPM estimates conservatively that each doctor fails to charge for more than $64,000 each year. And since it takes $5 gross to yield $1 net, each doctor is effectively giving away $320,000 of production! His book, The Art of Veterinary Practice Management includes many outstanding forms (including the three mentioned below) your practice might find useful. See "For More Information" below for ordering.

Use a manual travel form. Ideally, an exam room assistant can complete this form – and not the attending doctor. The exam room assistant should circle or highlight everything done in the exam room.

Use an in-hospital tracking form. Attaching this form to a clipboard hung on the pet's kennel will increase your odds of invoicing for services rendered and products delivered to hospitalized cases.

Use a surgical usage sheet. With nonelective procedures, substantial income is often lost in the surgery suite. Omitting charges for suture material, additional anesthesia, fluids and drugs adds up.


Think your practice is immune to embezzlement? Don't be so sure. Security experts estimate that as many as 30 percent of all employees steal and that another 60 percent would steal if given sufficient motive and opportunity. Consumer shoplifting pales in size to employee theft. But despite the prevalence of employee theft, many practice owners and managers take a lackadaisical approach to internal controls. While internal controls cannot prevent theft/embezzlement, they can discourage or mitigate theft/embezzlement.

Common forms of employee theft

Cash-drawer raids

A basic principle of internal control is that no one person – however much trusted – should handle all phases of a transaction from beginning to end. For example, entering the transaction, collecting the money, recording the daily receipts, making the daily bank deposit, and reconciling the bank statements should never be one person's responsibility. Wherever possible, there should be a segregation of duties to prevent this occurrence. Animal hospitals are particularly vulnerable because the smaller number of employees makes segregation of duties more difficult and internal controls are often relaxed for cost savings.

Cash transactions are your most serious risk because a thief can quickly and easily divert cash. According to a 2000 Idexx Informatics database of more than 500 veterinary practices, on average, 11 percent of gross comes from cash transactions. If your percentage deviates significantly, review your cash controls immediately.

An extremely low cash-receipts percentage may signal a problem. Even if you think "all our clients pay with credit cards," conduct a thorough investigation. To fight fraud on this front

  • Reconcile the cash drawer. The cash drawer must start and end each day with the same balance – say $100. The morning receptionist must count the cash drawer before processing the first client transaction. The evening receptionist must close the cash drawer with the same amount. Following this simple procedure will immediately bring to your attention cash overages or shortages. Make sure employees bring overages and shortages to your immediate attention.

  • Report discrepancies. A practice owner should review the end-of-day reconciliation (daily) and make sure it agrees with the daily deposit.

  • Enter transactions in the computer. Every transaction – including those for employees and in-hospital use – must be processed through the computer. If it's not in the computer, it won't show up on the end-of-day report.

  • Insist on a receipt. Without a receipt, the owner won't know if a staff member entered the transaction into the computer. Implement a protocol that requires staff members to print a receipt for every transaction. Anyone who asks clients, "Would you like a receipt?" should be reprimanded.

  • Stamp it. Upon receipt, each check should be immediately endorsed "for deposit only."

  • Account for cash at each shift change. This responsibility belongs to both the people leaving and the people arriving.

  • When possible, have two staff members handling the money.

  • Conduct random checks. If you suspect, foul play, occasionally add or subtract a specific dollar amount to or from the cash drawer at various times during the day. If that exact dollar amount doesn't show up as a cash overage or shortage at today's end-of-day count or tomorrow's beginning-of-day count, you may have a thief on your hands.

  • Verify daily deposits. Bank deposits should be prepared and delivered daily – it's not a good idea to leave the daily receipts in the practice overnight. A practice owner may delegate these tasks but must ensure the daily deposit always agrees with the end-of-day reconciliation. Simply compare the bank deposit slip to the end-of-day report. Also compare each deposit slip to your bank statement during the month-end bank reconciliation – we've seen more than a few altered deposit slips!

  • Confront suspects quickly. You may want to consult a labor lawyer first. Given clear evidence, your lawyer likely will recommend immediate termination and will give you legal guidance. But don't delay – If you know of a single suspect transaction but fail to take action, you'll set a precedent that you either accept or ignore embezzlement at your practice. Of course, owners who routinely raid the cash drawer, walk out the door with valuable drugs and no receipt, and who consistently fail to review the end-of-day report and daily deposit are also sending a clear message to employees.

Credit scam

In this fraud, the client pays by cash, check, or credit card and receives a receipt. Later, the culprit voids, credits, discounts, refunds, adjusts, or writes-off the transaction – and pockets the equivalent in cash from the cash drawer. How do you detect this crime? Follow the steps above and:

  • Review end-of-day reports. Assuming a client invoice was created, a void, credit, discount, adjustment, write-off, or refund should leave a footprint on the end-of-day report. Each exception should be properly authorized by a practice owner. Similarly, examine any fee exception report. This report details any transactions that were more or less than the stated fee. So if you charge $50 for a procedure, but the fee exception report shows transactions charged at $10, either someone is giving an 80 percent discount, or pocketing the extra $40. No matter how big your practice, security demands that an owner review these reports daily.

  • Limit access. If your hospital's practice management system doesn't offer adequate exception reporting, either buy a new system or establish strict password controls. That way, only practice owners can initiate voids, credits, discounts, adjustments, refunds, and write-offs. Ask your software vendor for advice. Change passwords periodically.

Inventory displacement

Does every item you purchase make it onto the shelf – or is a "trusted" staff member holding a weekend truckload sale? Some tracking tips

  • Don't pay for what you don't receive. A trusted employee should ensure that you're invoiced only for those items actually received.

  • Conduct surprise counts. Test-count popular high dollar items – pet foods, flea control, heartworm preventives – three or four times a year. Compare the quantity on the shelf with the quantity listed in the computer, and confront your staff about any discrepancies.

  • Scrutinize expenses. Compare drug and supply expenses as a percentage of gross income from year to year. Major differences should be explicable.

Purchasing fraud

Even if practice owners don't prepare their own outgoing checks, they should be the only ones authorized to sign them. Other recommendations:

  • Demand proof. If you can't verify an expense by an invoice or statement, don't pay it. Never pay an unknown vendor.

  • Mail bank statement to the owner's home. The owner opens the envelope and ensures his/her signature appears on each check, and that each payee is valid.

  • No cancelled checks? If your bank no longer encloses paid checks with your monthly statement, consider engaging a third party to prepare your monthly bank reconciliation. Never allow the person who prepares checks for the owner(s) signature to balance the checkbook!

Other things to consider

  • Insist on employee vacations. Be very wary of anyone who refuses to take time off, including any partners or hospital managers. Fraud often requires the criminal's physical presence in the practice, so many frauds become apparent during an employee's absence.

  • Consider credit checks. You may want to conduct a check on all current employees and future applicants. People who struggle financially are far more likely to embezzle.

You are at risk

It's no fun to discuss embezzlement, but we make no apology for dire warnings. We've seen it all – spouses stealing from each other, partners cheating each other blind, trusted hospital managers with a dark secret, receptionists enjoying a lifestyle not commensurate with their income. For a real-life story of veterinary embezzlement, see "Don't risk embezzlement," Veterinary Economics, February 2001, authored by Alice Villalobos, DVM.

As a small business manager, you may not be able to prevent all practice theft. But you can take aggressive steps to deter employee deceit. The secret is to not become too trusting – exert healthy skepticism as a sound defense.

For More Information

The Art of Veterinary Practice Management; Mark Opperman, CVPM; 1999 Veterinary Medicine Publishing Group.

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