Five controls to reduce fraud in senior living facilities

There are many scenarios in which employees at senior living facilities have stolen or misappropriated funds from their employers or even from the residents themselves. Sadly, it’s often a dedicated long-term employee that everyone trusts who’s behind the deception. The fraud can be as simple as taking cash payments received at the facility for payment on a resident’s account to something more complex such as adjusting accounts receivable balances in the accounting system to “cover their trail” for checks they’ve written to themselves.

High-risk areas

Where should facilities look for fraud? Accounts receivable and the resident trust account are two of the top areas ripe for fraud within senior living facilities.

Estimates are often used in recording accounts receivable, and this presents an ideal opportunity for misappropriation of funds to be covered up through write-offs or contractual adjustments.

The resident trust account, which holds designated funds for Medicaid residents to spend on their personal needs, typically has limited controls making it another ideal target for fraud. These accounts are designed to have minimal activity and a relatively low account balance, so they’re usually not reviewed in detail during a traditional financial statement audit.

Prevention

How can senior living facilities prevent fraud? While no method exists that guarantees the complete elimination of fraud, the following controls can significantly reduce opportunities for dishonest employees.

1. Adopt well-defined segregation of duties around use of bank accounts

This includes:

• Authorization of checks: Check signing shouldn’t be completed by anyone who has custody of the check stock or prepares the disbursements. Also consider physical safeguards for checks, including blank check stock without pre-printed check numbers. If a signature stamp is used, be sure the stamp is secured with limited access.
• Dual authorization for funds transfer: Dual authorization should be in place for transferring funds between bank accounts. The person who initiates a transfer also shouldn’t authorize the transfer. Consider this risk: Can money be transferred from the general account to the trust account, then diverted from the trust because it isn’t monitored? If your answer is yes, a more robust control is necessary.
• Timely reconciliation: The bank reconciliations should be completed and reviewed on a timely, recurring basis.

2. Periodically review bank statements

Bank statements should be reviewed regularly — perhaps on a quarterly basis — by someone other than the person who’s primarily responsible for managing the account. Cancelled check copies should be reviewed to understand who’s receiving payments from the account and, by comparing cancelled checks copies to the accounting system, to verify the payees are recorded accurately. A common scheme (depending on functionality of the accounting system) is to alter the check payees in the system to make a fraudulent disbursement appear legitimate. The reviewer should also pay attention to the volume of activity within the account, not just the ending account balance. This will verify that money isn’t deposited into and then diverted out of the account in order to make the ending balance appear low.

3. Review accounting of trust account funds

By law, a facility must maintain a complete accounting of each resident’s personal funds held in trust. Periodic statements should be sent to all residents or legal guardian of the trust account, and receipts and authorizations should be maintained for all expenses and withdrawals, including the resident’s signature for any withdrawal of funds. If a resident is unable to sign, they may sign with an “X,” with two persons serving as a witness. Not only do facilities have an obligation to properly account for residents’ personal funds, but residents have the right to be treated with dignity and respect — and this includes the management of their money.

4. Review adjustments and write-offs

Accounts receivable should be reviewed regularly to identify suspicious account activity and help with timely collection and reduction of bad debt. The individual who records the receipt of incoming payments also shouldn’t be able to record accounts receivable adjustments or bad debt write-offs. If this separation isn’t possible due to the size of the facility the adjustments and write-offs should be reviewed. High-level data analytics can be helpful in identifying issues. Examples include summarizing the amount outstanding by payor type, reviewing the percentage of payments received this period compared to prior periods, and assessing the percentages for allowances, contractual adjustments, and bad debt. If the controls are already in place, make sure employees aren’t overriding the controls.

5. Monitor petty cash and trust fund processes

Most facilities have an internal process to review petty cash and the resident trust fund, but often when staff are short on time, these internal audit processes aren’t completed. Ensure internal audit processes are robust and that regular audits are performed.

Adopting the foregoing controls may require adjustment of some current processes and procedures within your facility but are well worth the investment of time and resources for implementation. Remember: The focus should be on the processes you’re putting in place, not the level of trust the  facility has in the individuals performing these duties.

In summary

The impact of employee theft in a senior living facility can be devastating for victims, their families, and the facility at which the theft occurred. While insurance policies may cover some or all of the losses resulting from employee theft, adverse media coverage, fines, and undesirable scrutiny by authorities and regulators can be time-consuming and costly. For help implementing fraud controls in your facility, give us a call.