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The 2010 Association of Certified Fraud Examiners’ (ACFE) Report to the Nations on Occupational Fraud and Abuse indicates that the average loss against professional practices from fraud is $110,000. As a professional and small business owner, you can’t afford the time, money, or reputational damage fraud will involve. So the best strategy is to try and avoid it altogether. But how should you go about doing so?
Internal controls can never entirely eliminate the risk of fraud occurring in your practice. Someone determined to commit fraud will most often find a way; however, you can make it much more difficult for them by following these steps.
As investigators, we often encounter situations where the perpetrator was the last person anyone ever suspected: the long-time trusted employee. While most employees will never commit fraud, you should ask yourself how well you really know your staff, and whether you would be able to recognize whether they are a risk. Any new employee should be subject to a thorough background check, including checking of employment and educational references, as well as credit and criminal background checks. You should note that the latter two require the consent of the prospective employee. While a bad credit report should not necessarily preclude you from hiring someone, it is a red flag, as someone subject to mounting financial pressures may be more inclined to commit fraud. Knowing the facts in advance will allow you to make more informed decisions.
Being aware of the potential signs of fraud, including the following, will help you react in a timely manner:
While these may not necessarily mean that fraud is occurring, they are all warning signs you should pay attention to. You should become more acquainted with the various types of frauds which can occur in your dental practice and the red flags which may be present.
The key to preventing fraud is understanding how it could occur in your practice. To do this, you should perform an assessment of your risks. For example:
Understanding your vulnerabilities will allow you to design more effective controls to prevent fraud and other wrongdoing.
First and foremost, you need to set the tone in your practice, and express zero tolerance to fraud and unethical behavior. Second, if you have not already done so, you should implement sound anti-fraud policies, including segregation of incompatible duties such as the receipt and recording of payments and management of receivables. This is not often an easy task for professionals with few staff members; as such, you should ensure that there are some detective controls in place such as the review of patient revenue reconciliations and receivable write-offs, countersigning of cheques, and system controls to prevent unauthorized deletion of records in your accounting and patient booking system.
Payables and procurement fraud is a common way for employees to misappropriate funds, either through fictitious invoices, phantom vendors, kickbacks or other schemes. Do you know who your suppliers are, and whether they are offering you the best value for money? As a practice owner, you should be familiar with your key suppliers, and how much you are paying them for the goods and services they provide. This will help you identify any unusual trends when you are approving invoices and payments, such as new suppliers or unexpected price increases.
We would argue that the single-most effective step to detecting fraud for dentists is the review of banking records including bank statements, cancelled cheques, and other supporting documentation. In doing so you should first ensure that the bank statements are sent directly to you, and remain untouched by your staff prior to your review. This will allow you to become intimately familiar with your suppliers, identify unusual activity, and understand your cash flow patterns. When you do come across unusual activity, ensure that you get answers. Other steps you should consider to protect your assets include, never pre-signing cheques, avoiding the use of automatic signatures, ensuring you secure unused cheques, and ideally minimizing the use of cheques and cash altogether.
Even though accounting may be more unpleasant to you than a root canal is to your patients, get involved in your practice’s finances. We already discussed the importance of reviewing bank statements. You can also implement focused oversight procedures which will not take up a significant amount of your time but will nonetheless send the message that you are on top of your business. For instance, you should periodically review you payroll reports to ensure there is no unusual activity (such as unauthorized bonuses or increases, or staff names you are unfamiliar with), review your receivables to ensure no unauthorized write-offs are occurring, ensure that you cash receipts are reconciled on a daily basis, and most importantly, ask questions when you think something is off. Remember – the perception of strong oversight acts as a powerful deterrent.
Technology fraud is rampant. Social engineering, identity theft, and malware can all wreak havoc on your practice and reputation, should patient data be compromised. If you are not familiar with these terms, get informed, and ensure your systems are as secure as possible.
Wikipedia defines social engineering as “the act of manipulating people into performing actions or divulging confidential information, rather than by breaking in or using technical cracking techniques.” Examples include emails purporting to be from your bank asking you to click on a link to update your account information. When you do, a malware program is installed on your computer to misappropriate your internet banking information, including passwords. This is only one example. Your employees should also be aware of the risk and be advised to delete unusual emails without opening them, and to not divulge any information over the phone unless they are certain of the caller’s identity, as your business and patient data could be at risk. You should enforce system controls such as regular password changes to help prevent unauthorized access to your systems.
According to the Association of Certified Fraud Examiners, fraud is most often discovered through tips. And the best way of obtaining such tips is through the use of an anonymous ethics hotline. Ethics hotlines allow employees to report a variety of concerns anonymously to their employers, including unethical behavior such as workplace harassment and abuse, unethical business practices, as well as fraud. Many organizations offer such services at minimal or no cost to your business.
We often reward hard work, and dedicated employees who work tirelessly without taking vacation or sick days. The truth is, committing and covering up fraud is very hard work and taking a day off may mean that whatever scheme is being perpetrated will be discovered. A simple deterrent is enforcing your vacation policy and making sure that another employee fills in while the other is away. With no exceptions.
Even if you implement all of the above measures, a fraud may still occur. If you have crime and fraud insurance in place, the impact can be a lot less painful. Such policies can compensate you for your loss, and most often, for the costs of investigating and quantifying that loss. If you have not already done so, consider exploring this option with your insurer.
Andrea Chan, CA is a Partner at MNP LLP who specializes in providing tax, consulting, accounting, and buy/sell advisory solutions to their dental professional clients. Ryna Ferlatte, CA•IFA, CPA, CFF is a Forensic & Investigative Specialist.
This article was featured in the Spring 2011 issue of Profitable Practice magazine.
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