Fraud in dental and other professional offices

Your business-owner clients may be at risk. Instances of fraud and misconduct happen in every industry or business sector. Many perpetrators target professional practices, particularly dental offices. The financial and professional damages from fraud can be severe—the 2010 Association of Certified Fraud Examiners’ Report to the Nations indicates the median loss against Canadian professional practices is $125,000 per year.

Why dentists?

Several factors make a professional dental practice especially vulnerable to fraudulent and unethical behaviour. As a necessary function of the business, dentists spend most of their time with patients.

Since much of their workday 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.

Who perpetrates the fraud?

In Canada,

• 46% of the time it was employees
• 36% of the time it was managers
• 18% of the time it was the owner/executive

Types of fraud

• Billing 21.2%
• Corruption 21.2%
• Expense reimbursements 20.2%
• Check tampering 17.2%
• Non-cash 15.2%
• Payroll 12.1%
• Skimming 12.1%
• Cash larceny 10.1%
• Cash on Hand 9.1%
• Register Disbursements 8.1%
• financial statement fraud 2.0%

Behavioural red flags

• Financial difficulties
• Control issues; unwillingness to share duties
• Living beyond means
• Wheeler-dealer attitude
• Irritability, suspiciousness or defensiveness
• Addiction problems

Source: 2010 Association of Certified Fraud Examiners’ Report to the Nations

Because the fraud is technically being perpetrated on the insurance companies, employees may not feel as guilty since they believe 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 caring cultures,” explains Lisa Majeau Gordon, senior manager of forensics at MNP. “[They] work in an environment where helping, caring and trust are the cultural norms.

“Dentists might be putting too much financial trust in someone just because of the environment. In addition to the opportunities for fraud 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 fraud insurance, the dentist must cover the balance of the loss.

Should she choose to pursue an investigation, the cost would also be her responsibility, in addition to legal fees. Liability is also an issue as insurance companies will hold the dentist responsible for fraud perpetrated by employees.

“There is also reputational damage,” says Gordon, adding that practices which are known to have been defrauded in the past become targets. “In addition, you don’t have any deterrent to your other employees. But what often hits these business owners the hardest is the personal betrayal. It can throw an entire office into a crisis.”

Help protect the business

The best form of protection is knowledge. By taking an honest look at the practices and policies in place, 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.” (For some example questions, see “How high is your client’s risk?”)

How high is your client’s risk?

Ask your clients if the following statements are true:

• I have created an internal culture that is intolerant to fraud. I follow up on suspicions or complaints that I hear of.
• I know the lifestyle, history and background of my employees and I require regular vacations to be taken.
• I monitor the banking, spending, payroll and accounting of my practice.
• I ensure duties are segregated and control is not unduly concentrated. I have access and security controls in my practice.
• I have implemented policies and procedures to mitigate fraud, and have made sure they are working.
• I spend time each month reviewing and monitoring my financial results.
• I rarely respond to questions from the insurance companies and payments are not delayed.

If they aren’t, your client may be at high risk for fraud and could benefit from a formal assessment.

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 walk throughs, 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.”

Who can help

A forensic accountant will look for significant gaps in financial management and control that would allow an employee to defraud then 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 rigour to the accounting system. Having staff who may be under qualified or hiring people without background checks would also be red flags.

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. “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,” says Gordon.

It’s important to contain the situation so documents and evidence are not destroyed and there is an audit trail to follow.

If your client has been defrauded, advise them to get in touch with you so a proper forensic investigation can be performed.

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.