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The ugly truth: Why veterinary practice cash isn't flowing
A new survey shows the many ways theft hurts your veterinary practice
Although you would never knowingly hire thieves as employees, money pressures at home—especially in this economy—can result in your team members committing crimes against your practice. You can reduce cash flow woes is to start paying attention to potential shrinkage and embezzling, shoring up prevention systems and asking questions.
Fraud is a real problem in veterinary practices. Theft occurs at some level in every practice—no exceptions. And many times, the most trusted employees perpetrate fraud generating the largest losses. According to the Association of Certified Fraud Examiners 2010 Report to the Nations on Occupational Fraud and Abuse, the typical business loses 5 percent of its annual revenue to fraud. In this worldwide study, 60 percent of the 1,843 cases studied were from the United States.
Even worse, veterinary practices are more susceptible to fraud compared to other professional service businesses due to several factors. They have relatively few employees to assign divided responsibilities. Their owners appear to be very trusting. They deal mostly in payment at time of service. They store large stocks of mostly unsecured and highly valuable inventory.
My own firm conducted a survey of 183 veterinary practices to understand the magnitude of fraud in the veterinary industry. We found out a lot:
> 67.8 percent of practices surveyed had been the victim of fraud, theft or embezzlement
> 60.5 percent of the fraudsters were identified but not prosecuted
> The average duration of fraud was 12.2 months
> In 38.3 percent of the cases, fraud was discovered through an internal controls audit.
When does fraud occur?
What motivates someone to commit fraud? The motivations are as diverse as the people who commit them. We do know that fraud is more likely to occur when the following three elements are present:
1. Incentive/pressure. Greed and lack of money are two obvious factors, but pressure may stem from a variety of reasons: personal or family medical bills; addictions to gambling, drugs, shopping or other triggers; the loss of a spouse's job and more.
2. Perceived opportunity/weak systems. Thieves don't believe they'll be caught. The weaker the practice's checks-and-balance systems (internal controls), the greater the perceived opportunity to escape detection. When owners aren't involved in the day-to-day operations—or one team member has an inordinate amount of responsibility—the potential for fraud and theft is compounded.
3. Attitude/rationalization. Perpetrators must be able to justify their theft in their own minds. One common rationalization is the belief that there are no other options to the person's financial difficulties. Another is perceived mistreatment by the employer, which evolves into internal dialogue along the lines of "I deserve it—they've cheated me." Sometimes, when individuals begin committing fraud, they see it as "borrowing" with an initial, sincere intention of future repayment that never pans out.
Why veterinary practice?
It's challenging for small practices to implement strong internal controls. Vital job duties can't be properly segregated when bookkeeping and administrative functions reside in only one or two employees who likely have responsibility for valuable assets like cash, checks, credit cards and inventory, and who also manage computer systems and data input. However, in large practices, more transactions occur every day, so there are more opportunities for theft.
Practices of all sizes were represented in our survey. Two practices had less than $150,000 in gross revenue during 2009, while 28 practices (15.6 percent) had revenue exceeding $5 million. Practices with gross revenue of between $1 million and $2 million comprised the largest part of the sample (35.6 percent), followed by practices with revenue between $2 million and $3 million (23.3 percent).
The people who commit fraud in veterinary practices come from all ages and income levels. The following are a few of our key findings:
> 69.3 percent of the fraudsters had been employed in the practice for 3 years or less. However, 7.6 percent were employed for more than 10 years.
> 38.7 percent of the fraudsters had an income level between $20,000 and $35,000. However, 5.9 percent had income of greater than $75,000.
> The most common job position of the fraudsters was receptionist (33.6 percent), followed by technician assistant (12.1 percent), and veterinary technician (10.3 percent). Even veterinarians were reported, including associates and partners.
Duration of fraud
According to the 2010 Report to the Nations on Occupational Fraud and Abuse, survey participants reported that frauds lasted a median of 18 months before being detected. The respondents to our survey reported that fraud occurred for a shorter duration, on average.
According to our survey:
> 19 practices reported that the fraud occurred for an unknown duration
> Six practices reported that the fraud was a single occurrence
> The average duration amongst the remaining 90 practices was 12.22 months.
However, it's important to recognize that some schemes lasted for many years before detection finally occurred. The resulting losses were stunningly large.
Where was the fraud committed?
According to the ACFE report, asset misappropriation schemes were the most common form of fraud, representing 90 percent of cases. Our findings were similar. Roughly 50 percent of respondents indicated that fraud was committed in the area of cash, while 43 percent indicated that fraud was committed in the area of inventory.
Other areas in which fraud was committed at the practice included:
> Treating friends' animals for free or deeply discounted
> Theft of other employees' cash or personal effects
> Stealing controlled substances
> Redeeming vendor rewards for personal gain
> Misappropriation of production credit from other service providers.
Identifying the perpetrator
A majority of the survey respondents who were victims of fraud (60.5 percent) identified the fraudster, but did not prosecute. The thief or embezzler is then free to continue stealing from his or her future employers. However, 27.4 percent of respondents indicated that the fraudster was identified and prosecuted, sending a strong message that stealing is a serious crime.
How was the fraud discovered?
In our survey, the most common way fraud was discovered was in an internal control audit (38.3 percent), underscoring the importance of regularly reviewing your procedures. Other common ways that fraud was discovered include: owner suspicion leading to investigation (36.5 percent), missing records and/or destruction/tampering (20.9 percent) or a tip or complaint was investigated (15.7 percent).
Join me next time for more on fraud and how to prevent it.
Dr. Heinke is owner of Marsha L. Heinke, CPA, Inc., and can be reached at (440) 926-3800 or via e-mail at MHeinke@VPMP.net.
For a complete list of articles by Dr. Heinke, visit dvm360.com/heinke