Fraud: The Silent Killer Catching & Preventing It

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1 Fraud: The Silent Killer Catching & Preventing It Presented By: Mark Steinberg, CPA, CVA

2 Learning Objective Gain an understanding of recent trends in fraud through analysis of the Association of Certified Fraud Examiner's (ACFE) 2014 Report to the Nation and develop practical strategies to manage fraud risk.

3 Case #1 A CFO of a retirement home stole in excess of $300,000. He stole about $206,000 by setting up a bank account that used a variation of one of the company s medical supply vendors. He would then submit fake invoices in the name of the fake vendor and have the payments deposited into the bank account he had set up. He also submitted personal expenses to be paid by the Company. Those included $6,300 in landscaping and $16,000 in carpentry work at his home. $2,000 in snow cone services, $3,700 for moon bounce equipment for a family business that holds children s parties. $6,000 for cell phone bills, $3,200 for a plasma TV, and $3,000 in personal credit card payments. Finally a $24,000 payment to a woman he was having a affair with. The scheme began to unravel when the CEO received a red light ticket for a vehicle she did not know the Company owned. Turned out it was the CFO s vehicle that was bought and registered in the name of the Company.

4 Case #2 A 55 year old bookkeeper who worked for a nursing home for over 31 years stole at least $850,000 from the nursing home over a 10 year period. The accountant who worked with the FBI said it was among the most sophisticated fraud schemes he had ever encountered. The scheme involved money sent to the nursing home by insurance companies, to cover a percentage of the resident s bills. The bookkeeper entered lower percentages of coverage into the books then the insurance companies actually paid, then she would steal the difference. She used three different methods to access the funds, including electronic credit card transfers, checks written out to herself, and checks written out to cash. Two different accounting firms had conducted audits of the facility s books but never detected the missing funds. A second bookkeeper hired by the facility first spotted the abnormalities when the facility switched to new accounting software.

5 Case #3 Over a 4 year period of time a nursing home business office manager was able to embezzle $460,000 from 136 residents of the facility. As a business office manager, she was authorized to access and manage funds in two separate accounts including: the facility s general account, where the facility income was deposited and day-to-day facility expenses were paid; and the Resident Trust Fund (RFT) account, which contains funds presented to facility residents, deposited into the account and held until residents request funds for their incidentals. The scheme involved the manager transferring residents overpayments for room and board from the general account into the RFT account and later making cash withdrawals from the RTF account for personal expenses. The overpayments would occur because many residents pay out-of-pocket (private pay) for room and board and skilled nursing care while waiting for Medicaid or other insurance to be approved. In these cases the manager would not advise the residents or their representatives of the switch to Medicaid or the other insurance in a timely manner resulting in duplicate payments. The manager would often direct subordinateemployeesto make cash withdrawalsand turn the cash over to her.

6 Case #4 The administrator of a nursing home knew something was wrong when she saw the receipt: a $90 debit from a resident s trust fund account for a pair of designer jeans. Of all the elderly residents at the 100 bed nursing home, Amy Brown figured this one was especially unlikely to spend his savings on pricy pants. Turns out both of his legs had been amputated. The administrator poured over the trust fund books. There were receipts to back up every change, so audits had found nothing amiss. But she spotted receipts for things she knew residents would not buy North Face jackets, UGG boots, hair dryers, makeup, and even a baseball bat. Turned out an office staffer had been charging personal expenses to trust accounts of 83 different residents. The total of the embezzlement exceeded $100,000.

7 Case #5 The administrator and 6 other employees of a nursing home were able to embezzle thousands of dollars over several years. The embezzlement involved putting relatives of the employees involved on the payroll even though they never worked at the facility themselves. They would cut these payroll checks in the names of the phantom employees and give them out to the employees involved, who would then deposit them into their accounts. In addition to the payroll scheme they also would write checks from the resident trust fund account and deposit them into their accounts promising to pay the money back which they never did. They also stole over 3,700 prescription drug tablets.

8 Case #6 A Towson nursing home manager has pleaded guilty to a scheme in which he stole residents personal information to open credit card accounts, spending more than $170,000. The manager collected six credit cards in the names of the residents, and added himself as an authorized user on those accounts to make purchases.

9 Case #7 3 people were charged in 2016 with an unprecedented $1 billion health care fraud scam. They are accused of using dozens of Miami nursing homes to bilk tax-payer funded Medicare and Medicaid programs. This is the largest single criminal health care fraud case ever brought against individuals by the Department of Justice. An owner of 30 nursing homes and assisted living facilities, joined two conspirators and a complex network of corrupt doctors and hospitals to refer thousands of patients to their facilities even though the patients did not qualify for the services. Among the thousands of people cycled through the fraudulent network were, for example, drug addicts who were allegedly prescribed opioids including Fentanyl and Oxycontin and other narcotics in order to entice them to say in facilities where they did not belong. In addition they were also receiving kickbacks for steering patients to other community health care providers once the patient reached their Medicareimposed length of stay limit. Ironically the perpetrator had paid $15.4 million in 2006 to resolve civil federal health care fraud claims for similar charges.

10 Case #8 The United States has filed a False Claims Act lawsuit against Brentwood alleging the company submitted false claims to Medicare and Medicaid as a result of non-existent or grossly substandard care. Between January 2010 and December 2015, six Vanguard Healthcare nursing homes exhibited ongoing staffing and medical supply shortages, failed to practice standard infection control procedures, failed to deliver prescribed medications, failed to follow physicians orders in caring for wounds, failed to practice pain management, and gave unnecessary and excessive psychotropic medications to residents.

11 The Effects of a Changing Health Care Environment

12 What are some fraud risks in healthcare organizations? Employee payroll and benefits fraud Theft of equipment, supplies and drugs Patient identity or property theft Cash theft Vendor conflict of interest Fictitious vendors Coding/billing fraud

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14 Health Care is Different? Do Health Care organizations have significant fraud risk beyond billing fraud?

15 Industry of Victim Organization

16 Schemes Health Care

17 Is fraud worth worrying about?

18 The Cost of Occupational Fraud OBSERVATION: Almost half of all cases are greater than $200,000

19 How Occupational Fraud is Committed OBSERVATION: Asset misappropriation is most prevalent

20 How Occupational Fraud is Committed OBSERVATION: Although not as common as other frauds, financial statement is the costliest

21 Key Lessons: Asset misappropriation is most common. What do you have worth stealing? Corruption (bribes and kickbacks) is trending up. How do you manage the risk? Background checks Annual certification of business relationships Financial statement frauds remain costliest.

22 Duration of Fraud Schemes OBSERVATION: Catch it early and save money!

23 Initial Detection of Occupational Frauds OBSERVATION: Tip lines are the best way to catch a fraud

24 Source of Tips

25 Catching the Bad Guys You need a hotline regardless of whether you are public (required by SOX) or private. Open your hotline to customers and vendors. Almost half of all tips come from outside the organization.

26 Detecting is good, preventing is better. What internal controls are the most effective?

27 Effectiveness of Controls

28 What does a fraudster look like?

29 Perpetrator s Position

30 Perpetrator s Age

31 Perpetrator s Gender

32 Median Losses Based on Gender

33 Perpetrator s Department

34 Perpetrator s Tenure

35 The Number of Perpetrators

36 "Red Flags of Employee Behavior" Living beyond ones means Financial difficulties Control issues, unwillingness to share duties Unusually close association with vendor/customer Wheeler-dealer attitude Divorce/family problems Irritability, suspiciousness or defensiveness Addiction problems Unusual generosity Missing or incomplete documents Refusal to take vacations Past employment-related problems Complains about inadequate pay Excessive pressure from within organization Past legal problems Instability in life circumstances Excessive family/peer pressure for success Complains about lack of authority Conspicuous change in behavior (dominating, absolute behavior)

37 Behavioral Red Flags Displayed by Perpetrators

38 Before Approving Invoices from Vendors & Contractors Good Questions to Ask! How well do I know this vendor or contractor? Do I have first hand knowledge that they even exist? Do I know that they actually provided the goods or services identified in the invoice or other billing statement? Do I know that they are using the correct amounts for price (including unit prices used), sales tax, freight, and other variables that make up the amount invoiced? On what basis do I know that the prices are reasonable in the first place? What standard have I used in determining that the price charged is fair? How do I know that the quantities make sense? On what basis have we agreed to purchase the stated quantities? How do I know that the invoice and other documents are mathematically correct?

39 Anti-fraud techniques you can use Create and maintain an ethical culture of doing the right thing All employeesshouldbe encouragedto take vacations (40 consecutive hours at one time) Restrict authorization and access to assets (money, inventory, sensitive information, PHI, computer systems) Segregate duties to provide "checks and balances" no single individual should have control over two or more of the following responsibilities: authorization, custody, recordkeeping and reconciliation Check out first-time vendors Review supporting documentation for all disbursements and check requests see subsequent slide for tips on approving invoices Watch for "red flags" in employee behavior

40 What should each of us do? Be concerned and vigilant managers it's a part of our job responsibilities! Understand the fraud risks in our areas Manage the challenges and exposures that fraud and misconduct present Minimize the opportunities Immediately report suspected misconduct and dishonesty

41 What happens when someone is caught?

42 Criminal Prosecutions

43 Criminal Prosecutions

44 Recovery of Losses

45 Questions? Patrick V. Trotta CPA, CHC Partner direct Mark A. Steinberg CPA, CVA Partner direct 800 Red Brook Boulevard Suite 300 Owings Mills Maryland 21117