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Instances of fraud and misconduct can happen in any industry or business sector, so long as there is an opportunity. Perpetrators do not recognize borders or discriminate against certain businesses. In fact, many target professional practices, particularly dental offices. When fraud strikes, the consequences are very real and the financial and professional damages can be severe. The 2010 Association of Certified Fraud Examiners Report to the Nations indicates that the average loss against professional practices from fraud schemes is $110,000 per year.
Several factors make a professional dental practice especially vulnerable to fraudulent and unethical behaviour. Dentists spend most of their time with patients. It is a necessary function of the business, and yet the result is that less time is spent actually running the business. Since much of their work day is spent helping patients and generating revenue, administrative duties and close supervision of financial matters are deferred or delegated to employees.
A profitable practice is a ripe target for fraud and the flow-through to insurance companies offers many opportunities for unethical behaviour, including overbilling and manipulation of patient records. Because the fraud is technically being perpetrated on the insurance companies, an employee may not feel as guilty or hesitant about it since the impression is that they aren’t stealing directly from their employer or patients.
Another factor affecting dental offices, like other small businesses, is a lack of segregation of duties. It is common for one employee to be in charge of the majority of financial activities of the business—from opening mail to depositing cheques, taking in credit card payments and handling the bank reconciliation.
“Dentists often work in what we call climates of care, or caring cultures,” explains Lisa Majeau Gordon, Senior Manager of Forensics at MNP. “What that means is you work in an environment where helping, caring and trust are the cultural norms.” The environment nurtures feelings of trust in employees, whether it is warranted or not. “They might be putting too much financial trust in someone just because of the environment. In addition to the opportunities for fraud that this can create, they may feel far more reluctant to act upon possible suspicions when they do arise.”
When fraud does happen, it can be both professionally and personally damaging. First, your client is going to be out a significant amount of funds in revenue. Without insurance against fraud, the dentist must cover the balance of the loss. Should they choose to pursue an investigation into the fraud, the cost would also be their responsibility in addition to legal fees. Liability is also an issue as insurance companies will hold the dentist responsible for frauds perpetrated by their employees.
“There is also reputational damage,” says Gordon, adding that practices which are known to have been defrauded in the past become targets for other serial defrauders. “In addition to that, you don’t have any deterrent to your other employees. But what often hits these business owners the hardest is the personal betrayal. When a person is defrauded, it means they have been working with someone in a trusting environment who has manipulated and deceived them right under their nose. It can throw an entire office into a crisis.”
The best form of protection is knowledge. By taking an honest look at the practices and policies in place and a dentist will be able to see where vulnerabilities lie. Performing a fraud risk assessment is not only a good way for your client to ensure they’re protected, but it can serve as an opportunity to improve efficiency and streamline business practices.
“We have a checklist of about 15 questions that we have dentists, or any small business owner, ask themselves, including questions about accounting practices, software controls and inventory tracking,” says Gordon. Even if a practice has anti-fraud controls and processes, they may not be effective. “It’s one thing to have policies in place and another to ensure they are being followed.”
A proper assessment will determine if the business is at high vulnerability for fraud or having unethical action taken against it. It will include a combination of walkthroughs, interviews, advisor input and assessment of current practices and controls. A summary will also provide recommendations on how your client can significantly mitigate and reduce their risk.
“Small business owners should have an assessment done every three years or so, or whenever there is a fundamental change in the business,” says Gordon. “If they’ve moved locations, sold some of the business, acquired new assets, lost old staff or gained new staff—all of these things will impact how the financial controls work.”
A forensic accountant will look for significant gaps in financial management and control that would allow an employee to defraud the business or conduct unethical behaviour. These gaps could include a lack of management oversight, poor record keeping, a lack of segregation of duties or lack of control or rigor to the accounting system. Having staff that may be under-qualified or hiring people without background checks would also be red flags in an assessment.
Unfortunately, many dental practitioners don’t worry about protecting themselves from fraud until it’s too late. If it happens, they must remember not to overreact. “They need to react, but can’t overreact,” explains Gordon. “Essentially, action needs to be taken to protect the business further, to control and contain the damage, but they shouldn’t start publicly accusing employees without any evidence.” It is important to contain the situation so that documents and evidence are not destroyed and steps are taken so there is an audit trail to follow.
If your client has been defrauded, advise them to get in touch with you so that a proper forensic investigation can be performed. “Every situation is different, nuanced in different ways, and it is important to get professional advice on what to do next,” says Gordon.
“The great irony is that dentists work so hard at what they do, that to let money go out the back door is ludicrous, but it happens all the time. If even a small percentage of the effort that went into the practice went into protecting it, they would be much better off,” says Gordon.
Calvin Carpenter, CA is the leader of MNP’s Professional Services team. Greg Draper, CGA, CFE, DIFA delivers investigative and forensic accounting services to MNP clients across Canada.
This article was originally featured in the March 2012 issue of Advisor's Edge Magazine.
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