Question

The Med Inc. is a small heath care provider. It employs 2 salaried physicians, 3 nurses, 2 clerks, and one office manager. Most patients pay for services rendered by cash or check on the day of their visit. Sometimes, the physician who is perform the services approves credit based on an interview. When credit is approved, the physician files a memo with one of the clerks to set up the receivable using data the physician generates. The clerks take turns preparing and mailing monthly statements to patients with unpaid balances. One of the clerks writes off uncollectible accounts only after the physician who performed the respective services believes the account will not pay and communicates that belief to the office manager. The office manager then issues a credit memo to write off the account, which the clerk processes. The office manager supervises the clerks, issues write-off memos, schedules appointments for the doctors, makes bank deposits, reconciles bank statements, and performs general correspondence duties. Additional services are performed monthly by a local accountant who posts summaries prepared by the clerks to the general ledger, prepares income statements, and files the appropriate payroll forms and tax returns. Instruction: Identify control weaknesses at Med Inc. Describe the potential threat and exposure associated with each weakness, and recommend how to best correct them.

Answer 1

The Med Inc. is not following very good internal control system.

Due to weaknesses in control, entire company is susceptible to many financial and non-financial risks.

The company have some of the following potential threats and exposures associated with its weaknessess along with sugested remedies:

1. Involvement of physician in ascertaining the credit worthiness of the patient

The physician approves credit based on an interview with the patient.

This is not a good control system because ascertaining credit is not the job of a doctor. Over and above, such an additional task may put extra pressure on the doctor which may deteriorate his/her professional duties.

The office manager can be given the job of allowing credit and issuing memos which can be handed to one specific clerk responsible for making entry into the system.

2. Clerks taking turns for preparing and mailing monthly statements to patients

If the clerk take turns for preparing and mailing monthly statements to patients for unpaid balances then no one can be held responsible for the job.

One specific clerk other than who has put entry into the system of credit memo can be handed over the duty of preparing and mailing monthly statements each month, the report of which must be checked by the office manager. Such distribution of duties will put an internal check in the organisation.

3. Office manager issuing credit memos for writing off uncollectibles on the belief communicated by the physician

Physician can not be made incharge of making ascertainments that any patient's dues would be uncollectible, as this would hinder his/her professional competence. And also such ascertainment is made on believes, which can be based on physician's biases.

The office manager must be held responsible for determining whether any patient dues will be uncollectible or not. Before issuing any credit memo, the reason of such determination must be recorded otherwise undue advantage may be given to the related parties.

4. Burden of work on office manager from miscelleneous activities

The office manager is looking after many managerial and confidential duties of the company. In such case, scheduling physicians' appointments is a task which can put over burden of work on the office manager and affect his overall quality of work negatively.

The nurses remain most close to the doctor among all, they also mostly know about the upcoming activities and protocols of the doctor so they can be made responsible for making appointments for the physicians as this would work best for the organisation.

5. Availing additional services from the local accountant

Getting additional services such as postings of summaries to general ledger, preparation of income statements and filing of tax returns and payroll forms are confidential tasks, getting them done from an outsider who can't even be supervised such as a local accountant is risky for the company.

The company must hire a full time accountant who can look up to the requirements of the entity which are seen by the local accountant. Such an employee must also be supervised from the office manager from time to time.