Financial Wellness co-columnist Fritz Wood is a veterinary industry veteran with a special interest in finance. He works with Triune Financial Partners to connect veterinarians with experienced, independent financial planners. He is the former personal finance editor of Veterinary Economics and was a treasurer and board member at the American Veterinary Medical Foundation. He holds bachelor degrees in accounting and business administration from the University of Kansas.
Business is tough. Costs are rising, but revenues are not. Transactions and new-client numbers are flat, and so is the pet population. Unprecedented competition in the pharmacy world threatens a once-solid income stream. Dr. Google is ever more prominent.
Veterinarians are anxiously looking for solutions. When things aren’t going in the right direction, revisiting the basics is always a good idea.
I recommend you start at the beginning by reviewing your system of internal controls, or the lack thereof.
I believe there are two types of veterinary practices: those that have been stolen from and those that know they’ve been stolen from. While stopping theft completely may be impossible, the problem can be deterred and mitigated.
Theft Is Widespread
Which practice owner hasn’t suspected that money mysteriously disappeared? Wondered about vanishing flea/tick preventives and pet food? Noted exceptions in the controlled-drug log? Seen unexplained adjustments and discounts on end-of-day reports?
They’re rightly concerned. Eighty-six percent of respondents in an American Animal Hospital Association survey said employees had stolen from their veterinary clinic. Perhaps the other 14 percent had yet to notice.
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. No employee is fraud-proof. No practice is immune.
Practices are attractive targets. They are small businesses, often with trusting owners and minimal internal controls. Because of their size, practices usually have fewer checks and balances and less segregation of duties — assigning different people different tasks — than larger businesses do.
Internal controls are systems of checks and balances that help ensure that clients pay for the goods and services they receive. The practice’s assets are safeguarded.
Internal controls are necessary to deter employee fraud, embezzlement and theft. They are the ounce of prevention worth a pound of cure.
Certified public accountants are trained to evaluate internal controls. Invite your CPA to review your systems and processes.
Shocking but Common
The largest embezzlement case I witnessed firsthand was at the Fellowship of Christian Athletes. Over a seven-year period, the associate finance director, who had worked there for over 20 years, stole more than $1.1 million.
I’ve seen it all at veterinary clinics: spouses stealing from one another, partners cheating each other blind, trusted hospital managers with a dark secret, receptionists enjoying lavish lifestyles financed through crime. The one thing these practices shared: the false belief that “it could never happen here.”
As a small business, veterinary practices may not be able to totally prevent theft, but they can take aggressive steps to deter employee deceit. The secret is to not become too trusting. The typical embezzler seems an unlikely candidate: a long-time employee who appears to be loyal and trustworthy. Practice owners should always exert healthy skepticism, especially toward those they trust most.
Establishing and adhering to strong internal controls is not costly, difficult or time consuming.
Cures for the Common Fraud
1. The cash drawer raid
This is the most serious and urgent risk because cash is quickly and easily stolen. No one person, however much trusted, should handle all phases of a transaction. 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.
- The cash drawer must start and end the day or shift with the same amount (say $50 or $100). The morning receptionist should count the drawer before the first client transaction. The evening receptionist should close the drawer with the same amount. Cash overages or shortages must be reported immediately.
- A practice owner, not a manager, should review the end-of-day report and ensure it agrees with the daily deposit.
- Every transaction must generate a receipt, including those for employees and in-hospital use. Consider terminating any employee who fails to do so.
- Conduct random checks. Randomly add or subtract an odd-dollar amount to or from the cash drawer. That amount should show up as an overage or shortage.
- A practice owner, not a manager, should make the daily deposits.
- A practice owner, not a manager, should compare deposits on the monthly bank statement with the daily deposit slips.
2. The void, credit, refund, discount, adjustment or write-off scam
The client pays and receives a receipt. Later, the thief creates an exception — void, credit, refund, discount, adjustment or write-off — and pockets the equivalent in cash from the drawer. Everything balances at the end of the day.
- An owner should review the end-of-day report every single day, looking for unexplained exceptions.
- Password-protect these functions so only practice owners can initiate exceptions.
3. Your pharmacy is my pharmacy
Does every item purchased make it onto the shelf, or is a “trusted” employee a big seller on eBay?
- The cure:
- Use the inventory module of your practice management software system.
- Periodically conduct surprise counts of high-dollar items to ensure the quantity on hand agrees with the quantity per the computer.
- Consider installing
- video cameras.
- Over time, monitor your drug and supply expense as a percentage of gross income. Increases should be investigated and explained.
4. Purchasing shenanigans
Are games being played with your checking account?
- Only practice owners are authorized to sign checks.
- Sign checks only when adequate proof exists for the disbursement.
- Don’t pay for what you don’t receive. A trusted employee should ensure you’re invoiced for only those items actually received.
- Never pay an unknown vendor.
- Have bank statements mailed to an owner’s home address.
- Review the signature line of each cancelled check. If your bank no longer encloses hard copies of cancelled checks, consider hiring a bookkeeper to prepare your monthly bank reconciliation.
- Never, ever, allow the person who prepares checks for the owner’s signature to balance the checkbook.
- Require employee vacations and be extremely wary of anyone who refuses to take time off, including your partners and practice manager. Many frauds can’t be perpetuated when the criminal is absent.
- Consider a thorough background check on all current employees and future applicants. Those struggling financially are far more likely to embezzle.