fraud red flags

Praise the Lord and Pass the Internal Control

Do you go to church? Have you ever been to a church? I’m not asking because I’m worried about your soul. Have you ever wondered what happens to the collection that is taken during the service? You should find out. If you tithe, do you carefully check your record of tithes against the statement sent to you by your church? If not, you need to start.


If the objective of this newsletter series is achieved (and assuming you read my newsletters BEFORE you delete them) you will all become so fraud -savvy I will eventually write myself out of a job. Maybe I should think this over.

I realize that your business probably doesn’t have the type of problem illustrated by this case.  However, if you know someone who might benefit from this information, please forward this newsletter to them.

 This story was donated  by a contact in law enforcement.

I’m not going to assume that  you know what a methadone clinic is.  According to Wikipedia,  “A methadone clinic is a clinic which has been established for the dispensing of methadone, a schedule II narcotic analgesic, to those who abuse heroin and other opiates.”  I’m not going to be a smart-ass and say that the business-type is the first red flag.  We would assume that the employees of said clinic don’t necessarily have the motivation to obtain funds illegally. But there are all sorts of motivations — a topic for another newsletter.

The only front office employee at this clinic was receiving  payments from patients and diverting some of the cash to his wallet.  When patients came in, their name, patient number, service date and time would be logged into the accounting system.  The perp  (I love cop-speak) would delete the patient visit and payment from the accounting system and pocket the cash.  There were  so many procedural no-no’s found in this situation my head spun. In fact, I think the only thing that was right was the mission of the clinic.

The first actual red flag probably wasn’t considered a red flag, it may have even seemed a blessing:  the clinic’s patients only paid in cash.  And what business is going to say “Sorry!  Your cash isn’t accepted here because one of our employees might steal it “?   Cash is cash is cash and when a business accepts cash as a payment there needs to be extra accountability. The red flag? CASH.  Why do mail order companies ask you to not send cash in the mail?  Because eventually, someone is going to open the envelope. You fill in the blanks. It’s CASH!

Cash can be the cheapest form of currency for a business because it incurs no processing fees, NSF, or collection fees.  But it can be a pain because it’s impossible to track and therefore,  it’s easy to steal (NOOOOO, you think, not MY employees!)  There’s no electronic record, check number, or copy in the bank vault.  When a business takes in a lot of cash payments, it must have additional checks ( pun intended) and balances.  For instance, don’t let the same person collect the cash AND enter the payment into the accounting system.  An employee who handles cash probably shouldn’t have  log-in credentials for the accounting system.

The other red flag?  Doses dispensed > income.  The owner noticed that methadone doses dispensed were plentiful but income was not.  This might have been a “notice” in hindsight.  My details here are a little sketchy.  But the owner either noticed the inconsistency and didn’t act,  or he noticed it after  the fraud was uncovered.  Either way, SHAME ON HIM for either 1) looking and not acting; or 2) not looking; or 3) looking AND NOT KNOWING WHAT HE WAS LOOKING AT.  No excuse. Sheeeesh.

DEFINING MOMENT (for the perp)
One of the patients called in after  his visit and asked for a receipt for his payment.  He must have talked to  someone other than the perp (who probably took the day off to spend his money).  They couldn’t find a record of the payment. They couldn’t find record of the service in the accounting system.  For all I know, they couldn’t find the patient’s name in the accounting system. But the pharmacy had a record of the methadone being dispensed.

I could write an encyclopedia on how this could have been prevented.  I’m sure the detectives who actually investigated this case DID school the owner.  The basics, since we don’t have time for everything:

  • They didn’t separate duties;
  • They didn’t carefully check behind an employee that had too much responsibility;
  • They weren’t smart about assigning log-in credentials. Every employee doesn’t necessarily need access to the accounting system.  NO ONE should be able to delete records;
  • They didn’t understand the controls available in their accounting software. They used QuickBooks but they didn’t use it well;
  • Someone wasn’t paying attention;
  • No meaningful account analysis was being performed;
  • Did they run an employee background check?  I don’t know.  It may have helped.

This little not-for-profit clinic paid the ultimate price: it lost $73,000 and had to close its doors. I don’t know what happened to the perp.  But even if he was arrested, prosecuted and found guilty, I’m sure he eventually got another job (or will).  Does your business run background checks on employees?

‘Til next month…..

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