Protecting Your Senior Living Organization from Fraud
Imagine this scenario: A senior living organization employs a bookkeeper who’s considered to be outgoing, likable and trustworthy. The bookkeeper has been in this role for several years and serves as the go-to for finance-related issues, including accounts receivables, accounts payables, payroll and general financial operations, with access to cash on hand as well as resources and investments maintained in depository institutions.
During the annual audit process, several issues are discovered, including accounts that weren’t properly reconciled and issues obtaining support for items requested. To resolve these issues, the auditors review journal entries posted during the year to potentially identify any unusual manual journal entries. The auditors identify a journal entry containing rounded dollar amounts posted to increase several unrelated expense accounts and reduce cash. At this point, it’s clear that something isn’t right.
The auditors’ next step is to investigate who received payment for the reduction in cash by viewing the actual check copies. The auditors request the bank statements directly from the bank to ensure the statements are original and not edited by the bookkeeper. Upon receiving the bank statements, the auditors identify multiple checks written to the bookkeeper and members of the bookkeeper’s family. The auditors compare the statements from the bank to the statements provided by the bookkeeper and determine the bookkeeper altered the statements so checks written to inappropriate payors appeared to have been written to a legitimate vendor.
How did this happen? Several contributing factors allowed this fraud to occur without detection. First, the individual responsible for signing checks wasn’t reviewing invoices and ensuring vendors and amounts were for appropriate business purposes. Second, the bookkeeper received the bank statements directly and had the opportunity to alter them. Whiteout, a scanner and a printer were all it took to change the payor on the bank enclosures, which contained images of the cleared checks. It was simple and unsophisticated but, most importantly, preventable and detectable.
This is just one version of the same story that has been told countless times. Fraud happens daily.
How can you keep this from happening at your senior living organization? Implementing and maintaining strong internal controls around cash disbursements, including proper segregation of duties, is one important safeguard. Below are five lesser-known cash disbursement controls that all senior living organizations should have in place, regardless of their business office’s size.
- Review your vendor list. When was the last time your organization reviewed your vendor listing? Organizations should regularly review the vendor listing for completeness and accuracy and document any changes.
a. Work with your software provider to restrict unauthorized users from creating or modifying vendors. Approval to set up a new vendor shouldn’t be determined by a user who can set up vendors.
b. New vendors should be scrutinized before setup. Use an online search engine to verify the legitimacy of vendors online and look them up on the Secretary of State’s website to make sure they’ve registered.
c. Your organization should deactivate vendors you’re no longer using.
A complete and accurate vendor list can help reduce the risk of remitting a payment to a false vendor. For more information about vendors, read “Fictitious Vendor Key to Alleged Embezzlement” on BKD’s forensics blog.
- Get rid of your signature stamp. If a signature stamp must be used, the authorized check signer should store it in a locked drawer and be the only person with a key. This key should be taken home nightly, not left in an adjacent cabinet or pencil cup or under the keyboard.
- Review and approve expense reimbursements. Organizations should review and approve expense reimbursements for employees at all levels prior to issuing a reimbursement check. Leadership-level expenses should be reviewed by the collective board or a designated board member. Support for expenses, in the form of detailed receipts, should be required for expenses above a threshold established by the board. Organizations shouldn’t disburse payment until they obtain all appropriate receipts, no exceptions. To formalize this process, create a clear and specific written expense reimbursement policy. The policy should include thresholds and approval requirements and list any expenses that aren’t eligible for reimbursement, e.g., alcohol, etc.
- Review check registers. Learn how to download your check register into Excel. Sort the register in different ways to check for gaps in sequence, duplicate payments, payments by vendor to determine if the number of payments made is as expected, payments by amount to determine if there are unexpected large checks written, checks written to employees or their relatives, rounded dollar amounts, checks written on weekends, etc. There’s a vast amount of data available in your accounting software that can help you identify unusual trends and circumstances to review further.
- Establish and maintain control of bank statements. This step is vital for fraud detection but rarely practiced. Ideally, the authorized signer should receive the bank statements directly. Upon receipt, this person should open the statement and perform an initial review before delivering to the individual who prepares the bank reconciliations. This initial review should include scrutinizing the electronic transfers and scanning the copies of all cleared checks to look for any check payors or amounts that appear unusual. Use our bank statement checklist tool to help you complete this review.
While there’s no guarantee that controls will effectively prevent or detect fraud, they’re an important safeguard to implement and review regularly. The controls listed above are universal for all organizations and don’t create an unnecessary burden in terms of time or resources. Implementing these and other common controls helps senior living organizations prevent cash misappropriation and protect the resources necessary to properly serve residents. We’ve created a questionnaire for you to complete regarding your organization’s cash disbursements control environment. If you answer “no” to any of the questions, your organization could be at risk.
Contact your BKD trusted advisor with questions about this publication’s content or for help establishing internal controls to bolster a strong anti-fraud culture at your organization.