The level of credit balances in accounts receivable are monitored by the central business office, management, and even the auditors. Considerable time is spent trying to determine the cause and resolution of credit balances. If the credits are unapplied cash, resources shouldn’t be spent trying to collect on a balance where payment has been received but not applied. If the amounts are due to a third party payer, recoupment of the amount should be anticipated. And, if the credits are overpayments by patients (which is not as rare as it may seem), refunds need to be issued. However, in the latter case, it is essential that appropriate controls over refunds be instituted, as the following case demonstrates.
Pamela Crawford*, accounting manager at Friendly Hospital*, received a phone call from an irate patient who wanted to know the status of the $25 refund that the patient believed was due to them from an overpayment on their account. Pamela quickly looked at the patient’s account online and cross-referenced the refund to the accounts payable system. Within minutes she was able to provide the patient with the check number, the refund amount and the date on which the refund had been mailed. The patient insisted that the refund had not been received. Yes, the address on the account was correct. Yes, the amount was correct. And yes, the payee listed in the accounts payable register was indeed the patient. But no, the check had not been received. Pamela checked the accounts payable system again, and noticed that the check had cleared the bank. Somewhat exasperated, she promised the patient she would follow up and ordered a copy of the cleared check from the bank.
When a scanned copy of the cleared check arrived in Pamela’s inbox, she glanced at it before calling the patient . . . and noticed something was wrong. The payee was not the patient, but Clark Matthews, the accounts payable clerk responsible for processing refunds. Surely there must be a mistake – Pamela approved every check run and verified the payee and amount per the register to the patient account. So, Pamela ordered several more scanned check copies from the same check run. Same result – payee on the cleared check was always Clark Matthews. Pamela’s shock turned to rage as she realized what must have happened. Clark ran a preliminary check register for Pamela’s review and approval. Then, he changed the payee in the system to himself and printed the checks. Finally, he went back into the system and modified the payee to reflect the original patient.
Pamela was furious – Clark was a trusted employee, and she had appreciated that he worked as hard as she did, meeting her at the office at 7 am, long before any other employees arrived, and often staying well after she left at 6 pm. Now it was becoming clear to her that the reason for his long hours wasn’t as admirable as she had once thought. Pamela noticed Clark was again hard at work today, even though it was only 7:30 am, and she stormed down the hallway to confront him with the evidence. Unfortunately, things did not go well at all, and the accounting department employees arriving for work that morning found smashed computers and a bloodied Pamela. Clark fled the county and it was later determined he had embezzled over $300,000 over the course of several years.
Clearly, most employee fraud does not end so dramatically. However, this case does demonstrate the importance of ensuring that appropriate controls are in place to help prevent misappropriation of patient refunds. While Friendly Hospital had appropriately segregated duties as it related to patient complaints (with calls going to the accounting manager rather than the business office or the accounts payable clerk) and had attempted to segregate duties as it related to initiating and processing patient refunds, a lack of understanding of the limitations in the controls over the accounting software allowed a significant amount of money to be misappropriated for quite some time.
And of course, if you suspect employee fraud, confronting the employee without others present is probably not the best course of action.
*Names and details have been changed.