Protect Your Practice From Fraud

3 Sep 2014 11:42 AM -

January/February- Protecting your practice from fraud

Recent research indicates that whilst many practices believe that fraud is an issue, it is not an issue for them.

Sadly, this is not the reality with many frauds going undetected and post-Christmas can be a time of increased fraud as credit card statements and fees associated with schooling fall due. 

So how do you keep safe from predators in your practice?  By adopting strict administrative procedures for all of your accounting operations including invoicing, collections and payroll will help to minimise the threat from employees. 

The development and implementation of these procedures do not need to be an expensive or an onerous process.  Your accountant and banker can be a great resource to review your systems and establish internal controls.  Some suggestions to minimise fraud involve:

1.    Authorisation of internet transfers and credit card use.

The threat: paying personal expenses with funds from the practice and/or remitting fictitious invoices and disbursing funds to their own personal bank account.

Paying bills via internet banking or by way of credit card are generally the preferred method of payment over cheques.  Payments made by internet banking should be authorised by two people.  The ideal situation would be the office manager and the owner authorising payment.

Payment by credit card should be authorised by the owner prior to the payment of each bill.  Furthermore, the credit card should have a small credit limit.

2.    The invoicing system.

The threat: Removing the appointment entry (and invoice) after the event, and pocketing the cash from the patient/client. 

The system of invoicing and receipting is usually done through an accounting program. 

In most situations in a service orientated practice, patients or clients are invoiced after their consultation and payment is made at that point by way of credit card or Eftpos. 

We recommend a simple system of reconciling the daily appointment schedule and receipts with a report from your computerised practice management system to determine whether they match.  This procedure should be undertaken by a different person to the person collecting the money from the patient/client.

3.    Segregation of duties.

The threat:  Perception of opportunity to have complete access and control of the practice account for personal use.

Administrative staff should have distinct job functions.  Ensure that the handling of money from the stages of receipting, depositing and recording/tracking in your accounting system is not undertaken by one person.  

Where one staff member is solely responsible for controlling and recording deposits and payments from the business bank account, they may see an opportunity to use the funds, for their own personal needs.

4.    Job Rotation and Annual Leave.

The threat:  Remaining on the job to cover up fraudulent activities.

It is good practice for employees to take at least 5 consecutive days annual leave each year, and for another person to do that job in their absence. This ensures that you have someone trained to undertake those office procedures in the event of an emergency, and also helps to detect any inefficiencies or ongoing errors.  If an employee is not willing to take leave, this could be a tell-tale sign of fraud and should be investigated.

5.    Payroll

The threat: The alteration of pay rates, hours, or leave entitlements, even the creation of “ghost employees” i.e. employees that don’t exist whereby paycheques are deposited into their own account. 

The setting up, ongoing maintenance and termination of an employee on a payroll system should not be handled by the person processing the pays. 

Regardless of the size of your practice, do not rely on other people to solely manage the practice.  Be familiar with the daily procedural administrative operations, and get to know your employees to better detect potential fraud.  The implementation of a few necessary processes and controls will help to protect ongoing security.



Article 1 : September/October 2012

Service Entity Arrangements

 Service entities are a popular structure often used by the medical, legal and accounting industries to protect assets, minimise tax and to accumulate wealth independently.  They are used by a wide variety of business structures from sole traders to partnerships, companies and trusts.

In general, a service entity is established, usually a trust, to employ the staff and to own the premium plant and equipment used by a related-party professional practice.  The service entity charges a fee to the practice for those services which are “marked-up”.  The mark-up allows the service entity to make a profit which can be distributed to family beneficiaries of a trust or by dividend if a company is in place.

 In order for the “service fee” to be deductible in the professional practice against the professional’s income, the fee charged must be reasonable. 

 In 2006, the tax office released a tax ruling and published a guide which set out the ATO’s view on how the taxation laws apply to service entities.  The guide explains how service entity arrangements can be conducted to minimise the risk of audit.  Since that date, there has been very little reported by the tax office on this topic.

 What is the ATO’s current position?

 Although service entity arrangements are not the ATO’s main focus just now, doesn’t mean that it won’t be the case at some point in the future. Due to the 2006 ATO ruling, many professional practices would have addressed their service entity arrangement to ensure that it complies with the ATO’s standards.  Where practices have not already done so, they may be running the risk of an audit at some stage.

 In order to reduce the risk of an audit, practices should take steps to ensure that their service entity arrangement complies with the ATO guidelines.  In particular, you should be aware of:

 Ø  the ATO mark-up rates as outlined in the 2006 guidelines (generally allowing for a 10% net profit); and

Ø  where the indicative rates are used, no more than 30% of the combined net profits of the professional practice and service entity, are earned by the service entity. 

 Practices which will draw attention from the tax office are those where:

 Ø  there is doubt as to whether the services were actually provided;

Ø  the service arrangements involve multiple entities and are therefore complex;

Ø  details of the arrangement are not well documented; or

Ø  expenses of a private nature are being claimed.

 Are service entity arrangements still worthwhile?

 That depends on the size and the nature of the practice, asset protection requirements and the availability of income splitting through beneficiaries.  There are also obvious costs associated with the operation of a service entity as they can be costly to manage throughout the year and they increase accounting fees.  

 If you have a service entity arrangement in place, you should have detailed records of the agreement, and how fees have been set.  We also emphasise the importance of having a commercial justification for the use of the service entity.

 Legal profession alert

 The ATO announced in April this year that they are targeting the compliance levels of legal professionals.  The process will determine which legal professionals i.e. solicitors and barristers are not fully compliant with their taxation obligations, activity statement and tax return lodgements.  Interestingly, data matching on this profession has not taken place by the ATO since 2006.








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